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China agrees to pay triple for potash fertilizer

WINNIPEG, Manitoba (Reuters) - Chinese fertilizer importers agreed on Wednesday to pay more than triple what they did a year ago to get hold of tight supplies of potash, sending the shares of global fertilizer makers to record levels.

China, the world’s biggest import market for the nutrient, which is used to boost crop yields, will pay $650 to $670 a tonne for product delivered to its ports, analysts estimated.

"With the intense pressure on global food production and continued growth in potash demand, this is the reality for our industry for the foreseeable future," Bill Doyle, chief executive of Canada's Potash Corp POT.TO, the world's top producer, said in a statement.

Potash producers have found it hard to keep up with demand as farmers around the world, flush with returns from record grain prices, rush to produce more grain to feed people, livestock and the burgeoning biofuel sector.

The 2008 contract prices were higher than expected, and volumes were far below last year’s levels, said Mikhail Stiskin, an analyst at Moscow-based brokerage Troika Dialog.

“China will be kept on a short leash by producers that are keen not to allow for a possible restocking,” Stiskin said.

Major producers from Russia and Canada said they each sold China only 1 million tonnes of potash. The market typically imports at least 8.5 million tonnes, David Silver, an analyst with JP Morgan, said in a research note.

“Just given the scarcity right now, it doesn’t matter how much clout you have in terms of volumes purchased. There is just simply not enough to go around,” said Morningstar analyst Ben Johnson.

“There is nothing near term for solace for buyers,” said another analyst, who spoke on condition of anonymity. “You’ve got a high fertilizer price environment, period. We’re talking at least a couple of years.”

The news pushed stock of Potash Corp to a record C$199.32 on the Toronto Stock Exchange. It closed up 5.5 percent, or C$10.35, at C$198.50.

Shares of U.S.-based producer Mosaic Co MOS.N and Canada's Agrium Inc AGU.TO also set records, as did Russian producers Uralkali URKAq.L and Silvinit SILV.RTS, German producer K+S SDFG.DE, and Israel Chemicals ICL.TA.

In the past year, stocks of Mosaic, Potash Corp and Agrium on the New York Stock Exchange have gained 353 percent, 228 percent and 123 percent, respectively.

CHINA LOSES LEVERAGE

Chinese importers normally negotiate a hefty discount to other large buyers such as India and Brazil because of their volume purchases.

But this year, China lost some of its pricing leverage as Indian importers, who normally price potash contracts after China, jumped ahead in the queue to book supplies at a delivered price of $625 a tonne.

“This would be the first time in memory that China has paid a higher price than that paid by Indian buyers,” wrote JP Morgan analyst David Silver.

Since India’s move, spot market prices have climbed to $750, and Uralkali’s chief executive has said prices could climb even higher by the third quarter.

Canadian potash producers are not certain whether China will have enough supplies to last through 2008, said Richard Downey, a spokesman for Agrium.

“We don’t have a whole lot more to supply them anyway,” Downey said in an interview.

Major producers and junior players are assessing potash deposits, but new mines cost more than $2.5 billion and take at least five years to develop, according to industry data.

($1=$1 Canadian)

(Additional reporting by Euan Rocha in New York, Robin Paxton in Moscow and Mantik Kusjanto in Frankfurt)

Reporting by Roberta Rampton and Euan Rocha, editing by Mark Porter and Peter Galloway

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