Fears that potash producers would finally have to cave in to consumer demands to lower prices prompted a roughly 25% price drop in potash company shares during June. Recent evidence that price discounting may not have to be as drastic as previously feared has stabilized share prices and could prompt a continuation of the industry's uptrend. IN PICTURES: Seven Ways To Position Yourself For Recovery

A Unique Market
The potash market is somewhat unique because it operates with just a handful of buyers and producers. The prospects for potash prices and demand hinges on terms that producers can extract from three major agricultural nations, China, India and Brazil, which account for about 42% of total world demand. Companies in major producing countries Canada, including Potash Corp. (NYSE:POT), Mosaic (NYSE:MOS) and Agrium (NYSE:AGU), and Russia/Belarus have traditionally marketed their production through two export organizations that together control 70% of global production.

This arrangement has been a good one for producers. Despite a 14% decline in sales, and with inventory levels at roughly double their five-year average, potash prices have remained surprisingly high as producers have responded quickly to rising supplies by cutting about 40% of production capacity since late 2008.

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Firming Prices
It's against this backdrop that the all-important negotiations with key buyers China and India are now underway. Success will come in the form of a price that isn't so high that it chokes off demand, and not so low that it fails to motivate producers to re-invest in badly aging infrastructure.

Over the last few weeks, there's been a tantalizing trickle of data that suggests that the outcome of negotiations with China and India, set to conclude in mid-August, could result in materially smaller discounts than had been feared. Traditionally, China tends to secure a substantial discount to the spot price.

Recent optimistic comments by one Russian producer, Uralkali, that the potash market would be the first to recover, was quickly followed by a 20% price jump for its domestic customers. Sales of Canadian potash to the Japanese, which were $200 a ton below last year's record price levels, still came in above $700 a ton, ahead of recent European price indications. A recent forecast by the fertilizer industry association that a recovery in demand could occur as early as the next six months due to stabilization in the agricultural sector, suggests that downward pressure on prices may now be dissipating.


Takeover Rumors Still Persist
It may be the industry's enviable ability to manage price and supply with apparent ease that has attracted a measure of takeover speculation. Operators like Mosaic and Potash, given their existing mines, have been seen as attractive buyout targets, with Australian mining giant BHP Billiton (NYSE:BHP) cited as a possible buyer. (Learn more about some tips that can lead you to takeover targets in our article, Trademarks of a Takeover Target.)

The Bottom Line
Given the industry's unique structure, which enables strong price and supply discipline, the threat of price collapse now appears to be behind us. Given last month's sell off, prices for this group now appear to be below intrinsic value. (Take a look at How To Invest In Commodities if you want to get involved in crude oil, corn and natural gas.)