I’m calling an interim bottom, made yesterday on the US dollar index at 76.05 on the December contract. Prices gained 1% today, the first hurdle that must be overcome to confirm my feeling is a close above the 20 day moving average at 77.50. Our first target is 78.50, again on the December contract.
How we are trying to take advantage of this is short cocoa, short Euro-currency and short silver for clients. How did those work out today? Cocoa was lower by just shy of 3%, a move of $890 on a futures contract, the Euro gave up 1%, a move of $1875 on a futures contract, silver was lower by 3.5%, a move of $3000 on a futures contract.
We should have listened to our own advice on oil, as soon as $69 gave way more selling came into the market. We could see a trade down to $62 on this leg. We own December call spreads and will either use a powerful rally to cut losses or look to leg out, stay tuned. Natural gas continues to creep higher on what I believe as more short covering. We would like to see a 40 plus cent pullback to re-establish longs in December or January for clients.
Sugar could follow oil lower so we may suggest lightening up on longs if we get a pop in the next few sessions. Longer term we like being long but as we’ve suggested in past blogs, manage your trades… do not fall asleep at the wheel.
As seen above, the correction in metals we predicted appears to be underway. We’re not suggesting booking profits on shorts or getting long yet!
Treasuries were higher, some clients remain long 30-yr bonds. We expect a trade above 122′00 in coming weeks on the December contract.
Profit taking in live cattle, conservative traders may want to re-establish puts against their long December futures. Corn and wheat traded higher, that makes 3 higher days in a row for corn and 2 on wheat. We suggest long exposure via futures and options for clients. The KCBOT/CBOT wheat spread has yet to develop, keep profit objective at 20 cents premium to KCBOT.
Key reversal in the stock market yesterday as we see the S&P making its way to 990 and the Dow to 9150. Perhaps some speculators bought puts or hedged off their portfolio??
Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.
Friday, September 25, 2009
Potash: Suffering from an Unrelenting Price Squeeze
We have been watching as Potash (POT) and other fertilizer suppliers are having a hard time negotiating with some of the world’s most influential customers. The problem started earlier this year when India pressed hard and negotiated a deal way below market for the products. Demand was so low that Potash and others had no choice.
In their recent conference call after the abysmal earnings report, management expected prices to come down and predicted a soft market. That was reinforced after the market close last Friday when they again lower estimates. Now it looks like other customers have the idea that bargaining will work as demand is weak. This is not a good sign for companies in this industry.
From the looks of it, prices are falling fast for potash and other fertilizer products through at least the end of 2010. Obviously the sharp decline in prices will erase any hopes for top line earnings growth. We continue to maintain a SELL for the sector and in particular Potash (POT).
From Bloomberg News
Sept. 22 (Bloomberg) — China may skip price negotiations to buy potash supplies this year on weak domestic demand, an analyst at Scotia Capital Inc. said. Buyers may instead start talks for 2010 contracts in the next two months, wrote analyst Na Liu in a report dated yesterday. Liu forecast contract prices for next year at $395 a metric ton, FOB. China is the world’s biggest potash importer.
China has not concluded annual negotiations on prices this year as demand has weakened with farmers replacing potash with other compound or organic fertilizers. Prices of the nutrient tumbled from a record last year as farmers around the world cut purchases because of slumping grain prices.
“Domestic potash sales remain very sluggish and real transaction prices keep slipping,” Liu wrote in the report. The country was a net exporter of potash in July, she said.
China’s consumption of the crop nutrient has declined following a rally in prices and it will take more time for demand to recover, Liu said. “Demand can only revive from the current level into next spring’s planting season,” Liu said. Producers including BPC and Canpotex, a trader representing North American potash suppliers, last year raised the price for Chinese customers to $567 a ton, excluding freight costs.
Potash Corp. of Saskatchewan Inc. and other producers agreed in July to sell to India for $460 a ton, or about 26 percent below last year’s price. Still, contracts to supply potash to China are likely to be signed before the year-end and may spur demand in Europe and other markets, Russian producer OAO Uralkali said Sept 8. It’s “reasonable” to expect a cut compared with last year’s price given market conditions, Acting President Mikhail Antonov said.
In their recent conference call after the abysmal earnings report, management expected prices to come down and predicted a soft market. That was reinforced after the market close last Friday when they again lower estimates. Now it looks like other customers have the idea that bargaining will work as demand is weak. This is not a good sign for companies in this industry.
From the looks of it, prices are falling fast for potash and other fertilizer products through at least the end of 2010. Obviously the sharp decline in prices will erase any hopes for top line earnings growth. We continue to maintain a SELL for the sector and in particular Potash (POT).
From Bloomberg News
Sept. 22 (Bloomberg) — China may skip price negotiations to buy potash supplies this year on weak domestic demand, an analyst at Scotia Capital Inc. said. Buyers may instead start talks for 2010 contracts in the next two months, wrote analyst Na Liu in a report dated yesterday. Liu forecast contract prices for next year at $395 a metric ton, FOB. China is the world’s biggest potash importer.
China has not concluded annual negotiations on prices this year as demand has weakened with farmers replacing potash with other compound or organic fertilizers. Prices of the nutrient tumbled from a record last year as farmers around the world cut purchases because of slumping grain prices.
“Domestic potash sales remain very sluggish and real transaction prices keep slipping,” Liu wrote in the report. The country was a net exporter of potash in July, she said.
China’s consumption of the crop nutrient has declined following a rally in prices and it will take more time for demand to recover, Liu said. “Demand can only revive from the current level into next spring’s planting season,” Liu said. Producers including BPC and Canpotex, a trader representing North American potash suppliers, last year raised the price for Chinese customers to $567 a ton, excluding freight costs.
Potash Corp. of Saskatchewan Inc. and other producers agreed in July to sell to India for $460 a ton, or about 26 percent below last year’s price. Still, contracts to supply potash to China are likely to be signed before the year-end and may spur demand in Europe and other markets, Russian producer OAO Uralkali said Sept 8. It’s “reasonable” to expect a cut compared with last year’s price given market conditions, Acting President Mikhail Antonov said.
Saturday, September 19, 2009
PotashCorp Reduces 2009 Earnings Guidance
Listed: TSX, NYSE Symbol: POT
SASKATOON, Sept. 18 /CNW/ - Potash Corporation of Saskatchewan Inc. (PotashCorp) today announced revised earnings guidance of $3.25-$3.75 per share for full-year 2009, shifting from a range of $4.00-$5.00 per share(1) provided in July 2009. The change primarily reflects lower than forecasted potash sales volumes due to continued slow demand and limited restocking by fertilizer distributors around the world. Over the past 12 months, nearly 20 million tonnes of potash production has been curtailed by global producers. PotashCorp will continue to keep a tight rein on our production until demand returns in the new year. Our 2009 earnings are still expected to be among the best in company history, despite an anticipated decrease of 60 percent in year-over-year potash volumes and an 85 percent decline in our combined phosphate and nitrogen gross margin. Earnings for third-quarter 2009 are expected to be at the low-end of the $0.80-$1.20 per share guidance range previously provided.
Potash inventories that can be measured in the retail chain - this excludes less easily identified inventories in China - have been largely eliminated and potash levels in soils around the world have been significantly reduced. This creates a progressively higher risk to crop yields as soil fertility is continually diminished. While the immediate impact has been masked by good weather and residual soil nutrient levels in markets with healthy long-term fertilization and agronomic practices, such as the US and Australia, yields for key crops in several other major growing regions are expected to be substantially below 2008 levels. A significant rebound is required to address this situation and we expect 2010 global potash demand to be in the range of 50-55 million tonnes.
"Food production is an unending and long-term business," said PotashCorp President and Chief Executive Officer Bill Doyle. "Decisions related to fertilizer use today inevitably impact crop yields - and soil needs - for years to come. Although there are fluctuations in fertilizer demand, there is an essential need for our products that is based on science. The potash, phosphate and nitrogen being mined from the soil by current crops must be replaced to protect the world's future food production. As farmers around the world begin the lengthy process of replenishing nutrients in the soil, we anticipate a new wave of demand growth that will allow us to once again demonstrate the full potential of our company."
Potash Corporation of Saskatchewan Inc. is the world's largest fertilizer enterprise by capacity producing the three primary plant nutrients and a leading supplier to three distinct market categories: agriculture, with the largest capacity in the world in potash and third largest in phosphate and nitrogen; animal nutrition, with the world's largest capacity in phosphate feed ingredients; and industrial chemicals, as the largest global producer of industrial nitrogen products and the world's largest capacity for production of purified industrial phosphoric acid.
SASKATOON, Sept. 18 /CNW/ - Potash Corporation of Saskatchewan Inc. (PotashCorp) today announced revised earnings guidance of $3.25-$3.75 per share for full-year 2009, shifting from a range of $4.00-$5.00 per share(1) provided in July 2009. The change primarily reflects lower than forecasted potash sales volumes due to continued slow demand and limited restocking by fertilizer distributors around the world. Over the past 12 months, nearly 20 million tonnes of potash production has been curtailed by global producers. PotashCorp will continue to keep a tight rein on our production until demand returns in the new year. Our 2009 earnings are still expected to be among the best in company history, despite an anticipated decrease of 60 percent in year-over-year potash volumes and an 85 percent decline in our combined phosphate and nitrogen gross margin. Earnings for third-quarter 2009 are expected to be at the low-end of the $0.80-$1.20 per share guidance range previously provided.
Potash inventories that can be measured in the retail chain - this excludes less easily identified inventories in China - have been largely eliminated and potash levels in soils around the world have been significantly reduced. This creates a progressively higher risk to crop yields as soil fertility is continually diminished. While the immediate impact has been masked by good weather and residual soil nutrient levels in markets with healthy long-term fertilization and agronomic practices, such as the US and Australia, yields for key crops in several other major growing regions are expected to be substantially below 2008 levels. A significant rebound is required to address this situation and we expect 2010 global potash demand to be in the range of 50-55 million tonnes.
"Food production is an unending and long-term business," said PotashCorp President and Chief Executive Officer Bill Doyle. "Decisions related to fertilizer use today inevitably impact crop yields - and soil needs - for years to come. Although there are fluctuations in fertilizer demand, there is an essential need for our products that is based on science. The potash, phosphate and nitrogen being mined from the soil by current crops must be replaced to protect the world's future food production. As farmers around the world begin the lengthy process of replenishing nutrients in the soil, we anticipate a new wave of demand growth that will allow us to once again demonstrate the full potential of our company."
Potash Corporation of Saskatchewan Inc. is the world's largest fertilizer enterprise by capacity producing the three primary plant nutrients and a leading supplier to three distinct market categories: agriculture, with the largest capacity in the world in potash and third largest in phosphate and nitrogen; animal nutrition, with the world's largest capacity in phosphate feed ingredients; and industrial chemicals, as the largest global producer of industrial nitrogen products and the world's largest capacity for production of purified industrial phosphoric acid.
Citigroup Analyst Pessimistic on Fertilizer Industry
After holding off from buying fertilizers last year, industry analysts have expected farmers to return to their potash-buying ways this fall, but a recent survey among growers and distributors has Citigroup Global Markets less than confident this will happen any time soon.
P.J. Juvekar, analyst with Citigroup, recently conducted a survey, talked to fertilizer distributors, and even went to a farming convention in Illinois.
"Based on our discussions it seems that the fall fertilizer application season is likely to be weaker than expected," he said in a note to clients. "Our earlier thesis that farmers could not skip application indefinitely ... still stands, but application may be delayed past fall."
Several factors concern Mr. Juvekar, including the fact that farmers may be harvesting their crops two to four weeks later than usual, delaying and limiting the fall fertilizer application window.
"Every month that passes without normal volumes increases the risk a producer will break in price, which is what happened in July when Silvinit lowered price sto US$460 a tonne," he said. Silvinit agreed to a contract with India earlier this summer.
As well, while most expected China to agree to terms with producers shortly after India did, so far that has not happened. There is definite risk that China will also use volume as an incentive for lower prices.
At the same time, while producers have historically been able to hold rank on pricing, the recent Silvinit deal shows there are cracks in the facade.
"In the recent weak demand environment, some producers have shown a willingness to place volume over price to generate cash. Potash is a global commodity and pricing resolve is only as strong as the weakest link in the chain," he said.
Yet another problem is shrinking income for many farmers as corn prices have plummeted 25% year-to-date, with the U.S. Deparment of Agriculture forecasting farmer net income to fall 38% to US$54-billion. The current price of US$3.15 a bushel is also not enough, as one Illinoisian farmer claimed to need prices at US$4 a bushel to break even.
All of this has left Mr. Juvekar with a rather pessimistic view of the industry in the short term. He has cut the forecasted potash export price in for 2010-2011 to US$400 a tonne from US$450.
He is also dropping ratings on both Potash Corp. of Saskatchewan Inc. (POT) and Mosaic Co. (MOS) to Hold from Buy while slashing target prices to US$98 and US$54 from US$115 and US$62 respectively.
P.J. Juvekar, analyst with Citigroup, recently conducted a survey, talked to fertilizer distributors, and even went to a farming convention in Illinois.
"Based on our discussions it seems that the fall fertilizer application season is likely to be weaker than expected," he said in a note to clients. "Our earlier thesis that farmers could not skip application indefinitely ... still stands, but application may be delayed past fall."
Several factors concern Mr. Juvekar, including the fact that farmers may be harvesting their crops two to four weeks later than usual, delaying and limiting the fall fertilizer application window.
"Every month that passes without normal volumes increases the risk a producer will break in price, which is what happened in July when Silvinit lowered price sto US$460 a tonne," he said. Silvinit agreed to a contract with India earlier this summer.
As well, while most expected China to agree to terms with producers shortly after India did, so far that has not happened. There is definite risk that China will also use volume as an incentive for lower prices.
At the same time, while producers have historically been able to hold rank on pricing, the recent Silvinit deal shows there are cracks in the facade.
"In the recent weak demand environment, some producers have shown a willingness to place volume over price to generate cash. Potash is a global commodity and pricing resolve is only as strong as the weakest link in the chain," he said.
Yet another problem is shrinking income for many farmers as corn prices have plummeted 25% year-to-date, with the U.S. Deparment of Agriculture forecasting farmer net income to fall 38% to US$54-billion. The current price of US$3.15 a bushel is also not enough, as one Illinoisian farmer claimed to need prices at US$4 a bushel to break even.
All of this has left Mr. Juvekar with a rather pessimistic view of the industry in the short term. He has cut the forecasted potash export price in for 2010-2011 to US$400 a tonne from US$450.
He is also dropping ratings on both Potash Corp. of Saskatchewan Inc. (POT) and Mosaic Co. (MOS) to Hold from Buy while slashing target prices to US$98 and US$54 from US$115 and US$62 respectively.
Dow Keep Agri Business
EI DuPont De Nemours Co. (NYSE: DD - News) recently said it expects the performance of its seed business, Pioneer Hi-Bred, to grow more than 15% year over year in 2009. The company’s seed business has gained more than 2% of share in the North American seed corn market, which is the largest industry gain in the current year. It gained 3% in the North American soybean market and 5% in the Canadian canola seed market.
Considering a 15% growth, the seed division should generate revenue of $4.6 billion, compared with $4 billion in 2008. The business had accounted for roughly 13% of Du Pont’s total sales of $30.5 billion last year.
DuPont is the world’s second-largest chemical company. While its Agricultural and Nutrition segment is expected to be the key performance driver, continued weakness in demand across most of US markets offsets overall growth for the company. DuPont’s second-quarter profit of $417 million, or 46 cents per share, missed the Zacks Consensus Estimate of 53 cents, due to lower sales volumes and adverse currency impact.
Meanwhile, rival Dow Chemical Co. (NYSE: DOW - News) also said it does not plan to divest Dow AgroSciences in the near term. Rumors were rife earlier this year that Dow might spin off this fast-growing agricultural unit or team it up with another agricultural company in order to reduce its over $16 billion debt from the Rohm & Haas acquisition.
Dow AgroSciences, which makes genetically modified seeds, herbicides and pesticides, has seen robust growth in recent years and added to the parent company’s first-quarter profit. Currently, the unit is facing tough competition from the industry leader Monsanto Co. (NYSE: MON - News). Dow is also planning to pay off the loan from the sale of its Morton Salt and Optimal businesses. The deal is expected to close by the end of the year.
We maintain our Neutral recommendation on Du Pont and Dow Chemical.
zacks.com
Considering a 15% growth, the seed division should generate revenue of $4.6 billion, compared with $4 billion in 2008. The business had accounted for roughly 13% of Du Pont’s total sales of $30.5 billion last year.
DuPont is the world’s second-largest chemical company. While its Agricultural and Nutrition segment is expected to be the key performance driver, continued weakness in demand across most of US markets offsets overall growth for the company. DuPont’s second-quarter profit of $417 million, or 46 cents per share, missed the Zacks Consensus Estimate of 53 cents, due to lower sales volumes and adverse currency impact.
Meanwhile, rival Dow Chemical Co. (NYSE: DOW - News) also said it does not plan to divest Dow AgroSciences in the near term. Rumors were rife earlier this year that Dow might spin off this fast-growing agricultural unit or team it up with another agricultural company in order to reduce its over $16 billion debt from the Rohm & Haas acquisition.
Dow AgroSciences, which makes genetically modified seeds, herbicides and pesticides, has seen robust growth in recent years and added to the parent company’s first-quarter profit. Currently, the unit is facing tough competition from the industry leader Monsanto Co. (NYSE: MON - News). Dow is also planning to pay off the loan from the sale of its Morton Salt and Optimal businesses. The deal is expected to close by the end of the year.
We maintain our Neutral recommendation on Du Pont and Dow Chemical.
zacks.com
Monday, September 7, 2009
Thumbs Up for Agrium - Desjardins
Agrium Inc. (AGU) got the thumbs up this week from Desjardins Securities analyst John Redstone, who initiated coverage on the fertilizer company, with a BUY rating and C$75.80 price target.
"Agrium is well positioned to benefit from improving fertilizer markets through its current operations and from its acquisition of CF Industries," said Mr. Redstone in a note to clients.
On the macro front, he said fertilizer markets should recover in the short term because of curtailed production, low soil nutrient levels and rising foodstuff prices. Longer term, they will benefit from rising demand from developing countries, low inventories and a limited supply-side response.
Mr. Redstone said Agrium has several key advantages to help it benefit from improving fertilizer markets, including a long potash reserve life, in-house production of ammonia, and low sulphur and natural gas costs.
"Furthermore, Agrium continues to demonstrate its determination and ability to grow by acquisition," he wrote.
As part of his bullish valuation, the analyst has included Agrium's hostile and yet unresolved bid for CF Industries (CF).
Our valuation of AGU assumes this transaction is successful, and that AGU acquires all the outstanding shares of CF for US$40.00/share (US$2.008b total through debt financing) and issues an additional 49.2m shares (on top of its existing 158.1m fully diluted shares outstanding).
We have also assumed that AGU’s estimate of US$150m/year in operational synergies is realized.
As of late June, roughly 62% of the outstanding shares of CF had been tendered to the AGU offer, but CF remains unwilling to engage in dialogue with Agrium.
"Agrium is well positioned to benefit from improving fertilizer markets through its current operations and from its acquisition of CF Industries," said Mr. Redstone in a note to clients.
On the macro front, he said fertilizer markets should recover in the short term because of curtailed production, low soil nutrient levels and rising foodstuff prices. Longer term, they will benefit from rising demand from developing countries, low inventories and a limited supply-side response.
Mr. Redstone said Agrium has several key advantages to help it benefit from improving fertilizer markets, including a long potash reserve life, in-house production of ammonia, and low sulphur and natural gas costs.
"Furthermore, Agrium continues to demonstrate its determination and ability to grow by acquisition," he wrote.
As part of his bullish valuation, the analyst has included Agrium's hostile and yet unresolved bid for CF Industries (CF).
Our valuation of AGU assumes this transaction is successful, and that AGU acquires all the outstanding shares of CF for US$40.00/share (US$2.008b total through debt financing) and issues an additional 49.2m shares (on top of its existing 158.1m fully diluted shares outstanding).
We have also assumed that AGU’s estimate of US$150m/year in operational synergies is realized.
As of late June, roughly 62% of the outstanding shares of CF had been tendered to the AGU offer, but CF remains unwilling to engage in dialogue with Agrium.
Ways to Trade the Ag Space
A reader asked in an email, "if one wanted to invest in Grains, what symbols [do] you recommend?"
I don't know if I would necessarily recommend any symbol. The two stocks that I am most familiar with in this arena are the Rogers Agricultural Index (RJA) and the PowerShares DB Agriculture Fund (DBA). I once owned RJA so let's start with that one first.
RJA is an ETN designed to track the (Jim) Rogers Agricultural Index, which itself is a blend of a whole slew of soft commodities in various weights. You can get more information from its prospectus. The important item to note on RJA is that it is basically a promissory note, not an ETF, and does not hold any actual commodities or contracts. It is a liability of the bank or organization that sponsors it. In light of the financial crisis, this is an important consideration. Also, while RJA promises exposure to a wide range of commodities, the weighting may dampen any price run-up. For instance, when rice made its huge run, RJA barely moved as rice was less than 5% of the index at the time.
DBA is an actual ETF that is basically equal-weighted in four commodities: wheat, corn, soybeans and sugar. Obviously, this leaves investors out in the cold if rice or orange juice makes a big run but conversely, sugar is on a tear and the 25% (actually 31% according to ETFConnect) weighting gives investors better exposure to price moves. I would advise interested readers to read the prospectus to find out more about how the fund buys its contracts and how that might affect investor returns.
My inclination at this point would be to play the ag space via companies in the supply chain which can range from equipment suppliers like Caterpillar (CAT) to fertilizer producers like Mosaic (MOS) to seed companies like Monsanto. I feel more comfortable making buy/sell decisions on companies, where I can estimate intrinsic values, than with commodities where I have less of a base to judge fundamental value.
Keep in mind that each investor should determine the appropriate strategy for his own portfolio. What works for me may not be right for you and vice versa..seeking alpha
I don't know if I would necessarily recommend any symbol. The two stocks that I am most familiar with in this arena are the Rogers Agricultural Index (RJA) and the PowerShares DB Agriculture Fund (DBA). I once owned RJA so let's start with that one first.
RJA is an ETN designed to track the (Jim) Rogers Agricultural Index, which itself is a blend of a whole slew of soft commodities in various weights. You can get more information from its prospectus. The important item to note on RJA is that it is basically a promissory note, not an ETF, and does not hold any actual commodities or contracts. It is a liability of the bank or organization that sponsors it. In light of the financial crisis, this is an important consideration. Also, while RJA promises exposure to a wide range of commodities, the weighting may dampen any price run-up. For instance, when rice made its huge run, RJA barely moved as rice was less than 5% of the index at the time.
DBA is an actual ETF that is basically equal-weighted in four commodities: wheat, corn, soybeans and sugar. Obviously, this leaves investors out in the cold if rice or orange juice makes a big run but conversely, sugar is on a tear and the 25% (actually 31% according to ETFConnect) weighting gives investors better exposure to price moves. I would advise interested readers to read the prospectus to find out more about how the fund buys its contracts and how that might affect investor returns.
My inclination at this point would be to play the ag space via companies in the supply chain which can range from equipment suppliers like Caterpillar (CAT) to fertilizer producers like Mosaic (MOS) to seed companies like Monsanto. I feel more comfortable making buy/sell decisions on companies, where I can estimate intrinsic values, than with commodities where I have less of a base to judge fundamental value.
Keep in mind that each investor should determine the appropriate strategy for his own portfolio. What works for me may not be right for you and vice versa..seeking alpha
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