TORONTO (miningweekly.com) – Fertiliser producer Potash Corporation of Saskatchewan is prepared to further reduce its potash production levels, if market conditions warrant, president and CEO Bill Doyle said on Thursday.

Demand for potash surged in early 2008, boosting prices, but has since softened, as farmers, squeezed by the economic downturn and credit crisis, defer their use of fertiliser.

Potash demand has declined worldwide over the last six months, and in North America potash fertiliser sales “ground to a virtual halt” in the first three months of this year, Doyle said.

Potash producers responded quickly to reduce production levels, and Potash Corporation has already reduced output by a rate of 3,5-million tons a year so far in 2009.

The company has the ability to “shift gears quickly” and remains able to match production to meet changes in demand.

“We have seen these conditions before...when it's time to gear down, we know how to do that,” Doyle said.

“We will continue to reduce production by as many tons as it takes.”

'PAIN BEHIND US'

However, Doyle believes that the worst of the downturn is behind the potash sector.

Farmers have reduced their fertiliser stocks significantly, and will likely now start returning to the market.

The company expects a strong second half of 2009, and an “exceptional” 2010.

“We've got the pain largely behind us with this downturn,” Doyle said.

There are signs that some overseas markets are starting to return to buying, and although China and India are still without contracts, new agreements are expected to be sealed by the end of the second quarter, he said.

Negotiations for the Chinese and Indian contracts will begin in earnest in late May.

DANGEROUS GAME

In a conference call with analysts and investors on Thursday, Doyle warned that the low levels of fertiliser use by farmers, which results in declining crop yields, could lead to a "grain crisis".

Food shortages around the world were making headlines just a year ago, before they were supplanted by the financial crisis and its effects, but the problem still remains, he said.

“A dangerous game is now unfolding around the world.”

Fertiliser applications are being reduced at “unprecedented levels”, with fertiliser application levels in the US this year expected to be similar to levels seen in the 1983 growing season, Doyle said.

“But farmers need to produce 90% more this year than in 1983.”

“This level of reduction has never been seen before; no one can state precisely what the impact will be on the world's food supply,” he commented.

Despite curtailing production in order to shore up potash prices in the short-to-medium term, Potash Corporation will continue to invest in its growth projects, Doyle said, in preparation for when demand rebounds.

Capital expenditure for this year has been budgeted at $1,8-billion.

Shares in the company declined 2,9% on Thursday, to C$97,49 apiece by 16:50 in Toronto.