3 Reasons to Avoid Potash Corp./Saskatchewan Inc. and 1 Stock to Buy Instead

It could be tough going for Potash Corp./Saskatchewan Inc. (TSX:POT)(NYSE:POT) for the next little while.

The Motley Fool

It’s easy to be a long-term fan of the business of farming.

It comes down to one undeniable fact: The world’s population is going to grow, and we need to find a way to make sure everyone gets fed. When the number of potential customers for your product goes up from 6 billion to a projected total of about 9 billion by 2050, that’s generally a good thing.

With that in mind, I am a long-term bull on the future of farming. There’s little doubt that, overall, Canadian farmers are going to have a good next century. There will be ups and downs along the way, but overall it’ll be a good business.

But that doesn’t mean I can’t be bearish on the sector in the short to medium term. Here are three reasons why, and how they’ll affect Potash Corp./Saskatchewan Inc. (TSX: POT)(NYSE: POT).

Wheat prices

I’m amazed this doesn’t get more attention, but the price of wheat has gotten absolutely hammered over the last six months.

After reaching a high of more than $750 per bushel back in May, prices have been steadily heading down, reaching a low of below $500 per bushel in September. Prices have improved somewhat, but the commodity is still just barely above $500.

This is because crops in most parts of North America have been pretty good. The latest numbers out of the U.S. say this year’s wheat harvest should be approximately 2 billion bushels, a new record. Canada’s harvest is down from last year, but 2013 was the best in our history. Harvests in other parts of the world are looking pretty good as well.

At this point last year, farmers were getting $700 per bushel for wheat. The number is down to a little more than $500 now. That’s bound to cut into their bottom line, and, consequently, the amount of money available to buy fertilizer next year.

Wheat delays

Last year, both Canadian National Railway and Canadian Pacific Railway let down Canadian farmers, focusing their attention on the more lucrative oil-by-rail business. This resulted in last year’s crop waiting months to be shipped to the coasts to be exported. It got so bad that the federal government had to get involved, essentially forcing the railways to comply.

This led to delays in farmers getting paid. When you’re sitting on a record crop, these sorts of delays aren’t so bad. But when your crop is 30%-50% worse than last year and prices are down, suddenly these delays start to matter. If farmers are forced to wait, again, it could lead to less money being available for Potash Corp.’s products at the beginning of the year.

High land prices

It’s been a good few years to be a farmer, which has attracted new farmers to the business. These newbies, the established farmers who keep buying, and low interest rates keep pushing up the value of land. Consequently, many farmers are sitting on a lot of debt.

Most of these new farmers haven’t experienced a year of mediocre crops. Depending on their location and how the rest of harvest goes, many could find themselves in a situation where they’re got too many payments and not enough cash flow to make them all.

What happens if Canada’s economy slows down at the same time? Suddenly, access to credit will start to go away, since that’s usually the first thing that banks do when times get tough. In that situation, cost-cutting will be the first thing on a lot of farmers’ minds, and Potash Corp. will likely be forced to join in on the pain.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith has no position in any stocks mentioned. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of Canadian National Railway and Potash Corp. Canadian National Railway is a recommendation of Stock Advisor Canada.

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