Why There's Caution with Potash (NYSE:POT) from Companies

When thinking in terms of potash, Potash Corp. (NYSE:POT) is considered the crown jewel of the industry. But the recent offer from BHP Billiton(NYSE:BHP) to take control of the company does come with its challenges from other potential suitors.

It's not as simple as just making a higher offer in order to own the asset, as the offer itself could severely damage the company making it.

There's the leverage involved and ratings which follow, that could cause the rates of borrowing for a company to skyrocket.

Just as important, is if a bunch of companies get in a bidding war, which would be a win for Potash shareholders, but a huge loss for the combined entity going forward.

With the coming demand for meat from emerging markets with growing middle classes who can now afford it, and the general demand for food which will grow around the world, potash and other fertilizers will eventually shoot up in price as farmers fight to get access to it.

Some have attempted to make potash fertilizer as a commodity business, but I don't think that's the case, as there's a limited amount, and even though there will be competition which has the possibility of driving down margins, the demand is going to grow so great, it's doubtful any company supplying potash will have to cut prices and margins to be able to sell there product.

There of course could be pockets of time and unforeseen periods of economic frailty which could arise, but over time, it's pretty clear demand for potash and fertilizers in general will have difficulty in being met.

Even with all that though, there must be caution by companies looking to acquire Potash, as the deal itself will determine future success, and if the price rises to unsustainable levels, there won't be much room left for profits in the future.