I'm glad 2008 is over. But you must admit -- it was quite a trip.
Take the case of PotashCorp (NYSE: POT). Not content with tripling in value in 2007, "POT" kept on growing like a weed in 2008. Before the Great Commodities Bubble Burst this summer, the stock had already grown by another 60%, to cap a 700% price increase over the course of just two years. Meanwhile, peer potash producer Mosaic (NYSE: MOS) grew tenfold in value, to rise from about $15 in mid-2006 to better than $150 per share in June 2008.
Then came the plunge. The past six months have brought untold damage down on both stocks. PotashCorp today sits at half of where it started the year. Mosaic is down a good two-thirds -- and investors are understandably upset. They're confused. I know this for a fact, because for the past few months, I've received multiple emails from Fool.com readers asking me, basically, "What the heck is going on?"
Well, I'm far from a potash expert. If you want an educated opinion on where potash prices go from here, and what will happen to profits at the companies that produce the stuff, you'd be hard-pressed to find someone less knowledgeable than I.
But I do have three things necessary to noodle through the problem:
A passing familiarity with the laws of supply and demand, and the way cause and effect works. A modicum of common sense.
An unsurpassed command of the principles of fifth-grade mathematics.
With these tools at my disposal, I'm willing to tackle the problem, and to explain the rise, fall, and eventual resurgence of Mosaic and PotashCorp.
A cycle begins
Open your Economics 101 textbooks, and turn to the chapter on "Supply and Demand." When demand for food rises, but supply holds constant, the price rises. What's the logical reaction? You don't need to be an ExxonMobil oil exec or an OPEC oil baron to answer that: Producers see high prices for a commodity, and they react in their economic self-interest. They try to grab as much profit as possible by producing more goods.
How? By buying, leasing, and farming more land. And as prices keep rising, producers (farmers) try to maximize the yields on the land they already have. Monsanto (NYSE: MON) enjoys a seller's market in Incredible Hulk-brand mutant seeds. Mosaic shareholders cheer, too, as farmers try to maximize yields on these seeds by buying more fertilizer.
However, along about now, farmers notice an unintended side effect of chasing yield: While they've been rolling in fertilizer, the price has begun to stink. Potash and potassium futures are going through the roof -- and farmers raise their prices to compensate for the higher input costs.
Not long afterward, these higher prices begin making themselves felt in the supermarket aisles. General Mills (NYSE: GIS) feels pinched as the wheat it needs to make its Wheaties continues to rise in cost, while Coca-Cola (NYSE: KO) notices a disconcerting rise in the cost of high-fructose corn syrup ... and back in the kitchens of Suburbia, Dad observes to Mom that this week's grocery bill looks a tad high.
And then, a miracle happens
Or a disaster, depending on your perspective (and, specifically, whether you're a Coke shareholder or an investor in PotashCorp). We don't know precisely what it was. Only that it happened.
And it happened because the immutable law of economics remains: The cure to high prices is ... high prices. At some point, they get so high as to be unsustainable, and "something happens" to upset the balance.
At this point, all of the factors that drove Mosaic and PotashCorp to their dizzying heights of mid-June 2008 begin to work again ... in reverse. PepsiCo (NYSE: PEP) has finally raised prices on Fritos as far as it can, and consumers are beginning to pinch their wallets shut.
Demand begins to slide, and with it goes the price of corn. On one hand, Archer-Daniels-Midland (NYSE: ADM) breathes a sigh of relief, but on the other, PotashCorp finds it difficult to keep raising prices on its product, because the farmers aren't as eager to sell corn at $4 a bushel as they were at $7.50. Profits stagnate and then slide -- and before you know it, Wall Street analysts who saw no end to this cycle just months ago are now tumbling over one another in their rush to predict lower and lower estimates.
What next?
And now, the question my readers constantly ask me: Will PotashCorp ever get back to $200? Will Mosaic regain $150? My answer is yes. In time.
At some point, another miracle-disaster will occur, because just as the cure to high prices is high prices, the converse is also true: Low enough prices will create demand -- demand for food that exceeds a dwindling supply -- and prices will rise again.
That's why they call it a cycle.
Wednesday, December 31, 2008
Monday, December 29, 2008
Will Terra Industries Become a Leader in Clean Diesel Technology?
The following press release announces a distribution agreement between Terra Industries (TRA) and Brenntag North America for the exclusive distribution rights of Terra Industries’ Diesel Emission Fluid [DEF]. First, a little background on the use of DEF.
On January 1, 2010, EPA mandates that new on and off road Diesel powered vehicles will be required to comply with a new, lower level of emissions. To comply with the requirements vehicle manufacturers will be using a technology called selective catalytic reduction [SCR]. The SCR process requires a urea based substance be injected into the exhaust so the catalyst can capture nitrogen oxide [NOX]. DEF is the official urea based fluid that will be used in vehicles with SCR. NOX is the major pollution source from modern diesel engines (the 2007 emission rules eliminated the particulates) and SCR technology will remove over 90% of the NOX. All of the vehicle manufacturers offering Diesel engines will be using this technology.
Note: SCR technology has been used in European Diesel trucks for several years now with over 400,000 clean Diesel trucks currently on the road.
The new EPA rules will only apply to Diesel engines put in vehicles after 01/01/2001, so the initial use of DEF will be small and then grow as newer vehicles are purchased to replace older technology Diesels. Places like California will have mandates in place to force or encourage the retirement of older technology, higher polluting Diesel engines. Here are the projections for the amounts of DEF needed starting in 2010:
2010: 54 million gallons
2011: 172 million gallons
2012: 316 million gallons
2013: 463 million gallons
2014: 614 million gallons, and growing by 150 million gallons per year from there.
You can see the growth in demand will be there. What about supply? Terra Environmental Technologies is listed as one of the 5 manufacturers of DEF, along with Agrium Inc. (AGU), CF Industries (CF), Dyno Nobel, Potash Corp. (POT) and Yara North American, Inc. Brenntag is one of the 5 distributors of DEF I found listed. Brenntag is headquartered in Germany and is a global leader in the distribution of industrial and specialty chemicals.
Terra and Brenntag have a 2-way exclusive agreement for supply and distribution of DEF. It appears Terra’s penetration into this market depends on the depth of Brenntag’s sales connections. I know Terra management is high on this product as a growth market.
You probably noticed that the suppliers of DEF are all in the fertilizer business. DEF is a natural offshoot nitrogen based product from their nitrogen fertilizer production. Clean Diesel technology will be another growth area for some or all of these companies. I follow Terra Industries, but investors interested in this sector should get a warm fuzzy about another market for their product and start watching for DEF sales to determine which company will take the leadership in this product.
SCR and DEF information is from factsaboutscr.com.Tim Plaehn in seeking alpha
On January 1, 2010, EPA mandates that new on and off road Diesel powered vehicles will be required to comply with a new, lower level of emissions. To comply with the requirements vehicle manufacturers will be using a technology called selective catalytic reduction [SCR]. The SCR process requires a urea based substance be injected into the exhaust so the catalyst can capture nitrogen oxide [NOX]. DEF is the official urea based fluid that will be used in vehicles with SCR. NOX is the major pollution source from modern diesel engines (the 2007 emission rules eliminated the particulates) and SCR technology will remove over 90% of the NOX. All of the vehicle manufacturers offering Diesel engines will be using this technology.
Note: SCR technology has been used in European Diesel trucks for several years now with over 400,000 clean Diesel trucks currently on the road.
The new EPA rules will only apply to Diesel engines put in vehicles after 01/01/2001, so the initial use of DEF will be small and then grow as newer vehicles are purchased to replace older technology Diesels. Places like California will have mandates in place to force or encourage the retirement of older technology, higher polluting Diesel engines. Here are the projections for the amounts of DEF needed starting in 2010:
2010: 54 million gallons
2011: 172 million gallons
2012: 316 million gallons
2013: 463 million gallons
2014: 614 million gallons, and growing by 150 million gallons per year from there.
You can see the growth in demand will be there. What about supply? Terra Environmental Technologies is listed as one of the 5 manufacturers of DEF, along with Agrium Inc. (AGU), CF Industries (CF), Dyno Nobel, Potash Corp. (POT) and Yara North American, Inc. Brenntag is one of the 5 distributors of DEF I found listed. Brenntag is headquartered in Germany and is a global leader in the distribution of industrial and specialty chemicals.
Terra and Brenntag have a 2-way exclusive agreement for supply and distribution of DEF. It appears Terra’s penetration into this market depends on the depth of Brenntag’s sales connections. I know Terra management is high on this product as a growth market.
You probably noticed that the suppliers of DEF are all in the fertilizer business. DEF is a natural offshoot nitrogen based product from their nitrogen fertilizer production. Clean Diesel technology will be another growth area for some or all of these companies. I follow Terra Industries, but investors interested in this sector should get a warm fuzzy about another market for their product and start watching for DEF sales to determine which company will take the leadership in this product.
SCR and DEF information is from factsaboutscr.com.Tim Plaehn in seeking alpha
Tuesday, December 23, 2008
Adding Some Potash after Goldman Downgrade
Goldman is out with a note this morning against some of the major names in the agriculture space. What they write is effectively the reason we are going to have a commodity issue in the years to come; lack of investment now will cause shortages when the bulls dreamed-of recovery happens. We're seeing this across the spectrum of commodities. Specific to agriculture, this continues to build a case for coming food shortages and unrest in many 2nd and 3rd world countries. So once more, thank you regulators and NYC bank executives for the crisis not only that you created today, but the ones you will bring upon us in the future - in return for your great work, please take our tax dollars.
Goldman Sachs downgraded agricultural products maker Monsanto Co (MON) and Potash Corp of Saskatchewan (POT) , saying it expects a smaller crop in 2009 as falling grain prices delay planting decisions.
"The dramatic rise and fall of commodity prices, credit concerns and fertilizer costs have partially paralyzed fall buying activity," analyst Robert Koort wrote in a note in which he cut the companies to "neutral" from "buy."
In a typical year, 40 percent of annual fertilizer application occurs in the fall, but this year the rate could be half that level, he said. With the decline in crop prices and the financial crisis, farmers are reducing their fertilizer usage, shifting their focus to cost savings rather than profit or yield maximization, Koort said.
"Food demand is generally considered recession-resistant, but not quite recession-proof," the analyst wrote.
The analyst cut his six-month price target on the stock of Mosanto to $80 from $93, but raised that on Potash Corp shares to $73 from $60. In a separate note to clients, BMO Capital Markets cut its price target on Potash Corp to $115 from $145 on lower fertilizer demand. However, it maintained its "outperform" rating on the company saying it could weather the crisis.
Fertilizer demand has also been soft in other parts of the world and, coupled with the lackluster US demand, this has prompted widespread shutdowns and curtailments in the fertilizer space, the Goldman Sachs analyst said.
If the chart was not so horrid, I'd be a buyer of Monsanto here which we've been watching for a very long time for entry. Instead I added just a little Potash; again folk, the moves we are seeing used to take 5-6 weeks or indeed months to play out. We sold out of our entire stake (except 0.1%) in the middle of last week near $80 [Dec 17: Bookkeeping: Cutting Potash to "Holding" Stake] ; a few days later and we are already back in the $66s. This is a 17% drop in a few days.
I am going very slow since Potash could fall much farther, and increasing from a 0.1% stake to 0.6%. So we're just getting back about half of what we sold at $80 half a week later. I'd rather be an aggressive buyer back near the lows (low $50s) There is some weakness in the fundamental story [Dec 19: Potash Cuts Full Year Guidance; Intrepid Potash Falls off Cliff], but it's all relative; at this point I'm taking whatever analysts have for 2009 estimates and cutting it in half, and we still have some decent valuations - but it's a technical trading market, which is all we are doing.
The fertilizer companies keep saying the weakness is just a 1 quarter issue,but based on my assessment of the global slowdown, it will not just be 1 quarter but "all things being equal" food will be the least elastic of the commodities (citizenry tends to get P.O.'d when there is a lack of food and hence politicians - worst case scenario - will be "motivated" to make sure there is a decent supply of food). But that doesn't mean these stocks could not be down another 20% in a flash. We have >50% cash, so I'm tossing a few shekles to the long side - nothing more than that as we wait for the market to realize there are no quick fixes in 2009 that will be leading to a "2nd half 2009 recovery".
As for Monsanto, if it does not hold $64 on the chart, it could have much farther to fall.
The commodities and "global growth" I'm afraid, despite the Obama hype, are going to be trades and not investments for quite a while. It makes no sense that "late cycle" growth would rally before "early cycle" growth. Unless Ben Bernanke has not only stopped the economic cycle from happening, but reversed the order of it happening. But as the past few weeks have shown, you can have tremendous oversold rallies, so we want to have some exposure. (it's called hedge fund thesis, nothing else)
Goldman Sachs downgraded agricultural products maker Monsanto Co (MON) and Potash Corp of Saskatchewan (POT) , saying it expects a smaller crop in 2009 as falling grain prices delay planting decisions.
"The dramatic rise and fall of commodity prices, credit concerns and fertilizer costs have partially paralyzed fall buying activity," analyst Robert Koort wrote in a note in which he cut the companies to "neutral" from "buy."
In a typical year, 40 percent of annual fertilizer application occurs in the fall, but this year the rate could be half that level, he said. With the decline in crop prices and the financial crisis, farmers are reducing their fertilizer usage, shifting their focus to cost savings rather than profit or yield maximization, Koort said.
"Food demand is generally considered recession-resistant, but not quite recession-proof," the analyst wrote.
The analyst cut his six-month price target on the stock of Mosanto to $80 from $93, but raised that on Potash Corp shares to $73 from $60. In a separate note to clients, BMO Capital Markets cut its price target on Potash Corp to $115 from $145 on lower fertilizer demand. However, it maintained its "outperform" rating on the company saying it could weather the crisis.
Fertilizer demand has also been soft in other parts of the world and, coupled with the lackluster US demand, this has prompted widespread shutdowns and curtailments in the fertilizer space, the Goldman Sachs analyst said.
If the chart was not so horrid, I'd be a buyer of Monsanto here which we've been watching for a very long time for entry. Instead I added just a little Potash; again folk, the moves we are seeing used to take 5-6 weeks or indeed months to play out. We sold out of our entire stake (except 0.1%) in the middle of last week near $80 [Dec 17: Bookkeeping: Cutting Potash to "Holding" Stake] ; a few days later and we are already back in the $66s. This is a 17% drop in a few days.
I am going very slow since Potash could fall much farther, and increasing from a 0.1% stake to 0.6%. So we're just getting back about half of what we sold at $80 half a week later. I'd rather be an aggressive buyer back near the lows (low $50s) There is some weakness in the fundamental story [Dec 19: Potash Cuts Full Year Guidance; Intrepid Potash Falls off Cliff], but it's all relative; at this point I'm taking whatever analysts have for 2009 estimates and cutting it in half, and we still have some decent valuations - but it's a technical trading market, which is all we are doing.
The fertilizer companies keep saying the weakness is just a 1 quarter issue,but based on my assessment of the global slowdown, it will not just be 1 quarter but "all things being equal" food will be the least elastic of the commodities (citizenry tends to get P.O.'d when there is a lack of food and hence politicians - worst case scenario - will be "motivated" to make sure there is a decent supply of food). But that doesn't mean these stocks could not be down another 20% in a flash. We have >50% cash, so I'm tossing a few shekles to the long side - nothing more than that as we wait for the market to realize there are no quick fixes in 2009 that will be leading to a "2nd half 2009 recovery".
As for Monsanto, if it does not hold $64 on the chart, it could have much farther to fall.
The commodities and "global growth" I'm afraid, despite the Obama hype, are going to be trades and not investments for quite a while. It makes no sense that "late cycle" growth would rally before "early cycle" growth. Unless Ben Bernanke has not only stopped the economic cycle from happening, but reversed the order of it happening. But as the past few weeks have shown, you can have tremendous oversold rallies, so we want to have some exposure. (it's called hedge fund thesis, nothing else)
Wednesday, December 17, 2008
Monsanto Co. (MON): Zacks Rank Buy
Monsanto Co.(NYSE: MON - News) is heading into its next earnings announcement with estimates on the rise. Shares are trading at solid valuations and the chart is showing a nice level of support.
Company Description
Monsanto is a leading global provider of technology-based solutions and agricultural products for growers and downstream customers, such as grain processors and consumers, in the agricultural markets. The combination of its herbicides, seeds and related genetic trait products provides growers with integrated solutions to more efficiently and cost effectively produce crops at higher yields, while controlling weeds, insects and diseases.
Its base business, led by Roundup and coupled with the latest tools in biotechnology, genomics and molecular breeding. Monsanto is based in St. Louis, has 21,700 employees, and carries a market cap. of $41 billions.
Estimates Climbing As Earnings Report Nears
Monsanto's is ready to announce its first-quarter results for fiscal 2009 on Jan 7. The full-year consensus estimates have been rising consistently over the past 3 months.
Currently the average estimate is expecting earnings of $4.58 during 2009, up from $4.49 over the past 90 days. The consensus for 2010 is now $5.43, up from $5.16 over the same period of time.
These forecasts are calling for year-over-growth of 26% in 2008 and 19% in 2010.
Valuing the Growth
Shares of Monsanto are trading at fair valuations. The P/E of just over 19 times earnings seems on the high side, but with a 19% growth rate factored in, the PEG is 0.8. The industry average for PEG ratio is 0.6.
Acquisitions Completed
On Dec 2 Monsanto announced the completion of a proposed deal to acquired several Brazilian companies. The sugarcane and technology companies are operated by Aly Participacoes, which Monsanto purchased for $290 million in cash.
Carl Casale, EVP of global strategy and operations said 'We look forward to working with our new colleagues at CanaVialis and Alellyx to combine our areas of breeding expertise to enhance yields in sugarcane, a crop that is vital to addressing growing global food and fuel demands.' ..zacks.com
Company Description
Monsanto is a leading global provider of technology-based solutions and agricultural products for growers and downstream customers, such as grain processors and consumers, in the agricultural markets. The combination of its herbicides, seeds and related genetic trait products provides growers with integrated solutions to more efficiently and cost effectively produce crops at higher yields, while controlling weeds, insects and diseases.
Its base business, led by Roundup and coupled with the latest tools in biotechnology, genomics and molecular breeding. Monsanto is based in St. Louis, has 21,700 employees, and carries a market cap. of $41 billions.
Estimates Climbing As Earnings Report Nears
Monsanto's is ready to announce its first-quarter results for fiscal 2009 on Jan 7. The full-year consensus estimates have been rising consistently over the past 3 months.
Currently the average estimate is expecting earnings of $4.58 during 2009, up from $4.49 over the past 90 days. The consensus for 2010 is now $5.43, up from $5.16 over the same period of time.
These forecasts are calling for year-over-growth of 26% in 2008 and 19% in 2010.
Valuing the Growth
Shares of Monsanto are trading at fair valuations. The P/E of just over 19 times earnings seems on the high side, but with a 19% growth rate factored in, the PEG is 0.8. The industry average for PEG ratio is 0.6.
Acquisitions Completed
On Dec 2 Monsanto announced the completion of a proposed deal to acquired several Brazilian companies. The sugarcane and technology companies are operated by Aly Participacoes, which Monsanto purchased for $290 million in cash.
Carl Casale, EVP of global strategy and operations said 'We look forward to working with our new colleagues at CanaVialis and Alellyx to combine our areas of breeding expertise to enhance yields in sugarcane, a crop that is vital to addressing growing global food and fuel demands.' ..zacks.com
Analyst Upgrade Seeds Potash Rally
Though the market has entered its usual pre-Fed heel-cooling period, the fertilizer stocks have been a spark today, gaining after an upgrade from Merrill Lynch analysts.
Steve Byrne upgraded shares of several names, saying that “fertilizer fundamentals are nearing a bottom, given nitrogen and phosphate prices have already plunged through breakeven margins for marginal producers, triggering significant shuttered global capacity.”
Among those upgraded, shares of Mosaic Co. gained 8.8%, while Potash Co. of Saskatchewan was higher by 6.5%, Intrepid Potash rose 5.4%, and Terra Industries gained 11.6%. Those stocks were all raised to buy recommendations by Merrill, citing the longer-term supply-and-demand outlook, the sharp decline in valuation as a result of the share sell-offs this year, and “attractive acquisition opportunities.”
Mr. Byrne believes, however, that fertilizer prices could continue to sag in the near-term, due to larger-than-anticipated inventories after demand dried up. He also notes that Terra and CF Industries (which was upgraded to neutral) are both more than 10% owned by hedge funds, and while deleveraging has been responsible for some of the decline in these shares, they could be further impacted by more selling from those investors.
Steve Byrne upgraded shares of several names, saying that “fertilizer fundamentals are nearing a bottom, given nitrogen and phosphate prices have already plunged through breakeven margins for marginal producers, triggering significant shuttered global capacity.”
Among those upgraded, shares of Mosaic Co. gained 8.8%, while Potash Co. of Saskatchewan was higher by 6.5%, Intrepid Potash rose 5.4%, and Terra Industries gained 11.6%. Those stocks were all raised to buy recommendations by Merrill, citing the longer-term supply-and-demand outlook, the sharp decline in valuation as a result of the share sell-offs this year, and “attractive acquisition opportunities.”
Mr. Byrne believes, however, that fertilizer prices could continue to sag in the near-term, due to larger-than-anticipated inventories after demand dried up. He also notes that Terra and CF Industries (which was upgraded to neutral) are both more than 10% owned by hedge funds, and while deleveraging has been responsible for some of the decline in these shares, they could be further impacted by more selling from those investors.
Tuesday, December 16, 2008
Agrium and CF Industries: Bright Spots in the Materials Sector
The industry is divided into commodity chemicals (45%) and specialty chemicals (55%). The commodity segment tends to be more concentrated; cost reductions, improving yield from better technology and economies of scale are important. In the specialty segment, margins are higher due to better pricing and more efficient operations.
OPPORTUNITIES
Demand for fertilizers is driven by crop prices that are currently at high levels. At these levels, fertilizer demand should be steady at worst, and with reduced capacity, prices should stay firm. The use of ethanol as fuel is also keeping prices high.
The chemical industry is a large consumer of oil, natural gas and energy. Raw material costs have been at historically high levels, which was a very serious challenge for the chemical industry. However, oil and gas prices are falling, and this could provide a temporary windfall for the next 6-9 months.
Many chemical and fertilizer companies have excellent balance sheets and cash flows. This bodes well for the industry in this time of tightened credit and financial instability. Among our Buy-rated stocks in this space are Agrium, Inc. (AGU) and CF Industries Holdings, Inc. (CF).
WEAKNESSES
Demand growth is near 0% currently. Demand for chemicals tracks global industrial production and global GDP very closely. Housing and auto markets could continue to weaken. Nearly 10% of chemical demand is directly tied to the housing sector, and an additional 10% is tied to the auto sector. The global slowdown in economic growth will directly affect the chemical industry.
Prices may fall in this industry. Pricing power is a function of three variables: inflation, capacity utilization and raw material price changes. Inflation is low (but could increase with aggressive monetary policy), capacity utilization levels are weakening, and oil prices are falling. This suggests a high probability of falling prices.
There is the chance of accelerating capacity growth in 2009-2011, assuming that projects do not get cancelled. This is at a time when demand is slowing and operating rates are falling.
Within this space, we do have a Sell recommendation. It is on Georgia Gulf Corporation (GGC)...zacks.com
OPPORTUNITIES
Demand for fertilizers is driven by crop prices that are currently at high levels. At these levels, fertilizer demand should be steady at worst, and with reduced capacity, prices should stay firm. The use of ethanol as fuel is also keeping prices high.
The chemical industry is a large consumer of oil, natural gas and energy. Raw material costs have been at historically high levels, which was a very serious challenge for the chemical industry. However, oil and gas prices are falling, and this could provide a temporary windfall for the next 6-9 months.
Many chemical and fertilizer companies have excellent balance sheets and cash flows. This bodes well for the industry in this time of tightened credit and financial instability. Among our Buy-rated stocks in this space are Agrium, Inc. (AGU) and CF Industries Holdings, Inc. (CF).
WEAKNESSES
Demand growth is near 0% currently. Demand for chemicals tracks global industrial production and global GDP very closely. Housing and auto markets could continue to weaken. Nearly 10% of chemical demand is directly tied to the housing sector, and an additional 10% is tied to the auto sector. The global slowdown in economic growth will directly affect the chemical industry.
Prices may fall in this industry. Pricing power is a function of three variables: inflation, capacity utilization and raw material price changes. Inflation is low (but could increase with aggressive monetary policy), capacity utilization levels are weakening, and oil prices are falling. This suggests a high probability of falling prices.
There is the chance of accelerating capacity growth in 2009-2011, assuming that projects do not get cancelled. This is at a time when demand is slowing and operating rates are falling.
Within this space, we do have a Sell recommendation. It is on Georgia Gulf Corporation (GGC)...zacks.com
CF Industries a Buy Up to $65
CF Industries Holdings Inc. (NYSE: CF - News) has leading market shares in many key fertilizers. Strong domestic and international grain markets have produced an exceptionally high global demand for fertilizer, translating into substantially higher selling prices for all the products
The company is optimistic about its phosphate business where the market is expected to remain tight near term due to healthy offshore demand growth in India and Brazil, as well as higher application rates in the U.S. This is likely to lead to higher prices and cash margins for various fertilizers.
In addition, the company is likely to benefit from the proposed nitrogen facility in Peru, which will address the nitrogen demand on the west coast of Central and South America as well as Mexico, which does not have any nitrogen facility.
As a result, we rate the shares a Buy with a target of $65.00.
Read the full analyst report on CF
Zacks Investment Research
The company is optimistic about its phosphate business where the market is expected to remain tight near term due to healthy offshore demand growth in India and Brazil, as well as higher application rates in the U.S. This is likely to lead to higher prices and cash margins for various fertilizers.
In addition, the company is likely to benefit from the proposed nitrogen facility in Peru, which will address the nitrogen demand on the west coast of Central and South America as well as Mexico, which does not have any nitrogen facility.
As a result, we rate the shares a Buy with a target of $65.00.
Read the full analyst report on CF
Zacks Investment Research
Chemicals & Fertilizers
In the following outlook on the chemicals & fertilizer industry, we cite these stocks: Agrium, Inc. (AGU), CF Industries Holdings, Inc. (CF) and Georgia Gulf Corporation (GGC).
The industry is divided into commodity chemicals (45%) and specialty chemicals (55%). The commodity segment tends to be more concentrated; cost reductions, improving yield from better technology and economies of scale are important. In the specialty segment, margins are higher due to better pricing and more efficient operations.
OPPORTUNITIES
Demand for fertilizers is driven by crop prices that are currently at high levels. At these levels, fertilizer demand should be steady at worst, and with reduced capacity, prices should stay firm. The use of ethanol is fuel is also keeping prices high.
The chemical industry is a large consumer of oil, natural gas and energy. Raw material costs have been at historically high levels, which was a very serious challenge for the chemical industry. However, oil and gas prices are falling, and this could provide a temporary windfall for the next 6-9 months.
Many chemical and fertilizer companies have excellent balance sheets and cash flows. This bodes well for the industry in this time of tightened credit and financial instability. Among our Buy-rated stocks in this space are Agrium, Inc. (NYSE: AGU - News) and CF Industries Holdings, Inc. (NYSE: CF - News).
WEAKNESSES
Demand growth is near 0% currently. Demand for chemicals tracks global industrial production and global GDP very closely. Housing and auto markets could continue to weaken. Nearly 10% of chemical demand is directly tied to the housing sector, and an additional 10% is tied to the auto sector. The global slowdown in economic growth will directly affect the chemical industry.
Prices may fall in this industry. Pricing power is a function of three variables: inflation, capacity utilization and raw material price changes. Inflation is low (but could increase with aggressive monetary policy), capacity utilization levels are weakening, and oil prices are falling. This suggests a high probability of falling prices.
There is the chance of accelerating capacity growth in 2009-2011, assuming that projects do not get cancelled. This is at a time when demand is slowing and operating rates are falling.
Within this space, we do have a Sell recommendation. It is on Georgia Gulf Corporation (NYSE: GGC - News).
Zacks Investment Research
The industry is divided into commodity chemicals (45%) and specialty chemicals (55%). The commodity segment tends to be more concentrated; cost reductions, improving yield from better technology and economies of scale are important. In the specialty segment, margins are higher due to better pricing and more efficient operations.
OPPORTUNITIES
Demand for fertilizers is driven by crop prices that are currently at high levels. At these levels, fertilizer demand should be steady at worst, and with reduced capacity, prices should stay firm. The use of ethanol is fuel is also keeping prices high.
The chemical industry is a large consumer of oil, natural gas and energy. Raw material costs have been at historically high levels, which was a very serious challenge for the chemical industry. However, oil and gas prices are falling, and this could provide a temporary windfall for the next 6-9 months.
Many chemical and fertilizer companies have excellent balance sheets and cash flows. This bodes well for the industry in this time of tightened credit and financial instability. Among our Buy-rated stocks in this space are Agrium, Inc. (NYSE: AGU - News) and CF Industries Holdings, Inc. (NYSE: CF - News).
WEAKNESSES
Demand growth is near 0% currently. Demand for chemicals tracks global industrial production and global GDP very closely. Housing and auto markets could continue to weaken. Nearly 10% of chemical demand is directly tied to the housing sector, and an additional 10% is tied to the auto sector. The global slowdown in economic growth will directly affect the chemical industry.
Prices may fall in this industry. Pricing power is a function of three variables: inflation, capacity utilization and raw material price changes. Inflation is low (but could increase with aggressive monetary policy), capacity utilization levels are weakening, and oil prices are falling. This suggests a high probability of falling prices.
There is the chance of accelerating capacity growth in 2009-2011, assuming that projects do not get cancelled. This is at a time when demand is slowing and operating rates are falling.
Within this space, we do have a Sell recommendation. It is on Georgia Gulf Corporation (NYSE: GGC - News).
Zacks Investment Research
Thursday, December 11, 2008
How Much Value in Terra Industries?
I was scanning through some data on Terra Industries (TRA) and an interesting fact caught my eye. TRA has a current market capitalization of $1.4 billion. TRA is the general partner and holds 75.1% of the common units of Terra Nitrogen Holdings LP (TNH). TNH has a market cap of $1.7 billion. As GP, Terra Industries currently receives about 40% of Terra Nitrogen’s net income plus its 75% share of the regular distributions.
TNH has been popular with investors due to its high quarterly distributions. The company is a limited partnership that pays out the majority of the earnings of a single nitrogen plant in Verdigris, OK. Earlier this year, I wrote an article on the changes in TNH’s income payout that were of increased benefit to the GP and decreased the cash available to the common unit holders. The market has paid little attention to my analysis as TRA stock has fallen by 65% from when the article was written and TNH is off only 35% and shareholders have picked up $10.63 in dividends.
Let us look at the value divergence between the two Terras. Terra Industry’s 75% stake of TNH is worth $1.27 billion at current values. If the GP (wholly owned by TRA) collects 40% of Terra Nitrogen’s income before any distributions are made, let us value the general partnership of TNH at, say, $430 million (40% times $1.7 billion with a 1/3 knocked off as a fudge factor). This gives Terra Industry’s holdings in Terra Nitrogen a total value of $1.7 billion, $300 million more than TRA’s entire market cap.
TNH revenues are consolidated into the TRA income sheet and for the 3rd quarter TNH generated 31% of Terra Nitrogen’s total revenues. So the market is giving 69% of Terra Industry’s business a value of negative $300 million. Oh, and did I mention, TRA is sitting on $680 million in cash, half of the current market cap.
I know the short term future of fertilizer companies is considered bleak by many, but this current valuation of TRA is ridiculous. A couple of points to consider: Currently, Terra’s cost of natural gas is $4 to $5 less than its international competitors in Europe and the Ukraine. Low natural gas prices (the main component of nitrogen production) will allow TRA to maintain excellent margins even at significantly lower fertilizer prices. U.S. farmers will still plant a minimum of 85 million acres of corn next year and world demand for grains will continue to grow as populations increase. The dollar strength argument against grain exports seems a little weak since corn prices have fallen by 60% from their springtime peak and the dollar has rallied only 25% to 30%.
I am not sure the market will give up on the beating up of fertilizer stocks soon. I just wanted to point out that the current belief as reflected in the share price of Terra Industries may be very misguided.-- Tim Plaehn in Seeking Alpha
TNH has been popular with investors due to its high quarterly distributions. The company is a limited partnership that pays out the majority of the earnings of a single nitrogen plant in Verdigris, OK. Earlier this year, I wrote an article on the changes in TNH’s income payout that were of increased benefit to the GP and decreased the cash available to the common unit holders. The market has paid little attention to my analysis as TRA stock has fallen by 65% from when the article was written and TNH is off only 35% and shareholders have picked up $10.63 in dividends.
Let us look at the value divergence between the two Terras. Terra Industry’s 75% stake of TNH is worth $1.27 billion at current values. If the GP (wholly owned by TRA) collects 40% of Terra Nitrogen’s income before any distributions are made, let us value the general partnership of TNH at, say, $430 million (40% times $1.7 billion with a 1/3 knocked off as a fudge factor). This gives Terra Industry’s holdings in Terra Nitrogen a total value of $1.7 billion, $300 million more than TRA’s entire market cap.
TNH revenues are consolidated into the TRA income sheet and for the 3rd quarter TNH generated 31% of Terra Nitrogen’s total revenues. So the market is giving 69% of Terra Industry’s business a value of negative $300 million. Oh, and did I mention, TRA is sitting on $680 million in cash, half of the current market cap.
I know the short term future of fertilizer companies is considered bleak by many, but this current valuation of TRA is ridiculous. A couple of points to consider: Currently, Terra’s cost of natural gas is $4 to $5 less than its international competitors in Europe and the Ukraine. Low natural gas prices (the main component of nitrogen production) will allow TRA to maintain excellent margins even at significantly lower fertilizer prices. U.S. farmers will still plant a minimum of 85 million acres of corn next year and world demand for grains will continue to grow as populations increase. The dollar strength argument against grain exports seems a little weak since corn prices have fallen by 60% from their springtime peak and the dollar has rallied only 25% to 30%.
I am not sure the market will give up on the beating up of fertilizer stocks soon. I just wanted to point out that the current belief as reflected in the share price of Terra Industries may be very misguided.-- Tim Plaehn in Seeking Alpha
Potash Cuts Back Production, Plenty of Profit Remains
Potash Corp. of Saskatchewan Inc.'s (POT) decision to cut back potash production will hit the bottom line but analysts say there will still be plenty of profit left to help drive the stock higher in 2009.
Shares in Potash were up 7% to C$84.25 in Wednesday's mid-afternoon trading.
"PotashCorp's production announcement is consistent with its strategy to match supply to market demand," said RBC Capital Markets analyst Fai Lee, following the news that Potash will cut potash output by 2 million tonnes in 2009.
He said PotashCorp will have about 11 to 11.5-million tonnes of effective production capacity in 2009 and potash sales volumes in the year will be around 9 million tonnes versus the previous estimate of 9.7 million tonnes.
The analyst wrote:
Based on an assumed realized potash price of C$800/tonne, a reduction in potash sales volumes of 700,000 tonnes has an estimated 2009 EPS impact of approximately C$1.00.
He reduced his 2009 EPS estimate from C$18.13 to C$15.02 to reflect the lower forecast potash sales volumes and his lower estimate for phosphate prices next year. Mr. Lee dropped his price target on the stock from C$175 to C$145 and maintained his "buy" rating.
Canaccord Adams analyst Keith Carpenter also maintained his "buy" rating and left his $130 price target unchanged.
Just a little over two weeks ago, Mr. Carpenter called for a potash output reduction of just 1 million tonnes to 10.2-million. While the cut was larger than he expected, Mr. Carpenter said he was not surprised by the announcement, remaining bullish on the prospects for Potash Corp., particularly in the second half of this year.
The analyst said:
With 70% exposure to potash and their growth profile beyond 2009, we remain constructive on Potash Corp. going forward. We reiterate that catalysts will remain absent from the fertilizer producers until March 2009, when we expect Chinese potash negotiation to be completed and the demand for fertilizers in the northern hemisphere to begin to pick up.
Shares in Potash were up 7% to C$84.25 in Wednesday's mid-afternoon trading.
"PotashCorp's production announcement is consistent with its strategy to match supply to market demand," said RBC Capital Markets analyst Fai Lee, following the news that Potash will cut potash output by 2 million tonnes in 2009.
He said PotashCorp will have about 11 to 11.5-million tonnes of effective production capacity in 2009 and potash sales volumes in the year will be around 9 million tonnes versus the previous estimate of 9.7 million tonnes.
The analyst wrote:
Based on an assumed realized potash price of C$800/tonne, a reduction in potash sales volumes of 700,000 tonnes has an estimated 2009 EPS impact of approximately C$1.00.
He reduced his 2009 EPS estimate from C$18.13 to C$15.02 to reflect the lower forecast potash sales volumes and his lower estimate for phosphate prices next year. Mr. Lee dropped his price target on the stock from C$175 to C$145 and maintained his "buy" rating.
Canaccord Adams analyst Keith Carpenter also maintained his "buy" rating and left his $130 price target unchanged.
Just a little over two weeks ago, Mr. Carpenter called for a potash output reduction of just 1 million tonnes to 10.2-million. While the cut was larger than he expected, Mr. Carpenter said he was not surprised by the announcement, remaining bullish on the prospects for Potash Corp., particularly in the second half of this year.
The analyst said:
With 70% exposure to potash and their growth profile beyond 2009, we remain constructive on Potash Corp. going forward. We reiterate that catalysts will remain absent from the fertilizer producers until March 2009, when we expect Chinese potash negotiation to be completed and the demand for fertilizers in the northern hemisphere to begin to pick up.
Wednesday, December 3, 2008
Potash Says Everything's Coming Up Roses
The Canadian fertilizer company says expansion plans add value since demand exceeds supply
It's prime time for expansion, Potash Corp of Saskatchewan said on Wednesday, saying that demand will likely outpace supply in the next few years.
Chief Executive Bill Doyle told attendees of an industry conference in New York that Potash Corp. of Saskatchewan (nyse: POT - news - people ) is well-positioned to capitalize on increasing fertilizer demand by moving forward with expansion plans.
Although crop and grain prices have fallen from record prices reached this summer as investors bet that growing global populations and increased ethanol production would pressure limited world food supplies, the agribusiness sector contends that it won't be as hurt by the global economic slowdown and credit crisis as other industries since consumers won't stop eating. (See "U.S. Farms: Fecund In '09.") Fertilizer companies, supported by high food prices, bolstered product prices and reported staggering earnings in recent quarters. (See "Bountiful Times For Fertilizer Sector.") Although tightened credit conditions may delay fertilizer sales in the short term, farmers aren't likely to cancel orders since fertilizer is vital to achieving optimal crop yields. (See "Bleak Fall For Mosaic.")
Potash acknowledged that some of its rivals are also aiming to ramp up capacity in response to a supply that's expected to remain steady or fall short in the coming years but Doyle said, "global potash supply from other producers will not grow as quickly as consumption forecasts and weak credit markets are expected to pressure competitors' growth plans.
Shares of the Canadian fertilizer and feed products company closed Wednesday's session down by $2.39, or 4.3%, at $52.81.
Also during the conference, Agrium (nyse: AGU - news - people ), another Canadian fertilizer company, said cost savings from its UAP Holdings acquisition are slated to be higher and quicker than previously expected, although the company didn't issue new estimates. Agrium previously forecast savings of $115.0 million by 2010
It's prime time for expansion, Potash Corp of Saskatchewan said on Wednesday, saying that demand will likely outpace supply in the next few years.
Chief Executive Bill Doyle told attendees of an industry conference in New York that Potash Corp. of Saskatchewan (nyse: POT - news - people ) is well-positioned to capitalize on increasing fertilizer demand by moving forward with expansion plans.
Although crop and grain prices have fallen from record prices reached this summer as investors bet that growing global populations and increased ethanol production would pressure limited world food supplies, the agribusiness sector contends that it won't be as hurt by the global economic slowdown and credit crisis as other industries since consumers won't stop eating. (See "U.S. Farms: Fecund In '09.") Fertilizer companies, supported by high food prices, bolstered product prices and reported staggering earnings in recent quarters. (See "Bountiful Times For Fertilizer Sector.") Although tightened credit conditions may delay fertilizer sales in the short term, farmers aren't likely to cancel orders since fertilizer is vital to achieving optimal crop yields. (See "Bleak Fall For Mosaic.")
Potash acknowledged that some of its rivals are also aiming to ramp up capacity in response to a supply that's expected to remain steady or fall short in the coming years but Doyle said, "global potash supply from other producers will not grow as quickly as consumption forecasts and weak credit markets are expected to pressure competitors' growth plans.
Shares of the Canadian fertilizer and feed products company closed Wednesday's session down by $2.39, or 4.3%, at $52.81.
Also during the conference, Agrium (nyse: AGU - news - people ), another Canadian fertilizer company, said cost savings from its UAP Holdings acquisition are slated to be higher and quicker than previously expected, although the company didn't issue new estimates. Agrium previously forecast savings of $115.0 million by 2010
Mosaic Warns, Stock Is Up
This is the type of action we need to see market-wide to begin to return to "investing", rather than putting chips down for a 2-48 hour trade. Mosaic (MOS) warned on sales yesterday, and today the stock is up. When this happens, we begin to believe all sellers are finally done and bad news is finally starting to become priced into stocks. At this point, so many global growth/commodity stocks have fallen 80-90% from peak (which was this summer), at some point the problems that still lie ahead have to become priced in.
From my end, I'm taking a hatchet to future earnings estimates, cutting them mentally in half, and then seeing dirt cheap stocks even on that Armageddon scenario. For example, take Mosaic's (MOS) $10 EPS, chop it in half and you have $5. Then the stock trades at 5x earnings. Do I really think earnings will drop by 50%? No. But even with my worst case scenarios, I have about 100 stocks out there I see trading in 2-6x PE ratios. Not that it matters, because fundamentals mean nothing....
Mosaic also said soft market conditions drove down second-quarter phosphate sales volumes to about 1.3 million tons for the period ended Nov. 30 -- about 800,000 tons lower than the volume sold in the prior quarter. The company expects third-quarter sales volumes to remain soft, although it expects a strong recovery in the fiscal fourth quarter.
Potash sales volumes for the second quarter were approximately 1.7 million tonnes down from 1.9 million tonnes in the first quarter. The average selling price was $525 per tonne, below company's forecast range of $560 to $620 per tonne.
Mosaic also withdrew its fiscal 2009 sales volume guidance for phosphates and potash, citing the "uncertainties in the global economy."
"Several factors have impacted worldwide crop nutrient demand, including lower grain and oilseed prices, a late North American harvest, congested distribution supply chains, and the unprecedented global economic and credit downturn which has seen business moderate in nearly all sectors," Jim Prokopanko, chief executive officer, said.
This is some serious weakening and we have to rethink our exposure - the phosphates weakness is one thing but we are even seeing weakness now in potash. The negotiations with China and India this year should be interesting. We are seeing "withdrawal of guidance" everywhere across this market which makes the future that more cloudy; how can you tell where a fair value is for the market when earnings are now a complete guess?
I did cut some of this name yesterday (along with a few other names) once the S&P broke 840. As we said coming into the week, we moved a lot of our long exposure from individual names to an index ETF since we do not have stop losses available to us. Therefore it was easy to parachute out of the index ETF once the market began breaking down. Specific to Mosaic, the chart is abysmal with a series of lower highs, and it appears until the market changes from a mindset of deflation to future inflation commodities remain nothing but an area to try to game for a quick 25% game if you time it perfectly for a 2-48 hour trade.
This remains one of my favorite long term sectors but seeing such weakening here, it reminds me that the only safe area might be those few companies whose sole customer is the US government.
As a side note, the portfolio weightings found in the right margin no longer reflect how we are positioned although I just updated it this weekend; as I said, once we break S&P 840 we have to become bearish again, so I adjusted accordingly. One has to be so very nimble in this market as conditions can change dramatically in 4 hours. Of course, like clockwork today we broke right back above S&P 840, which is worrisome because if this pattern begins again we lose the one thing working: technical analysis. And we return to the early October 2008 scenario where nothing works except throwing darts and guessing. Not that we are too far off from that right now. But in theory, once we break S&P 840, we "should" continue down. I've adjusted the portfolio to take advantage of that scenario.
We're currently at S&P 825 after flirting with 850 just over an hour ago? Volatility remains wicked. With gaming hour (3 PM) not far off, this means we could close up at S&P 900 or 800 - who knows. The textbook however, would point downward.
What remains troubling is that the S&P chart mimics Mosaic above - a total inability to break over the 20 day moving average... this is the weakest of resistance areas and even in a typical bear market you retrac back upwards to the 50 day moving average before selling back off. Since late summer we do not even make the attempt on the 50 day moving average and falter at the 20 day... that level of weakness is really telling..Trader Mark in seeking alpha
From my end, I'm taking a hatchet to future earnings estimates, cutting them mentally in half, and then seeing dirt cheap stocks even on that Armageddon scenario. For example, take Mosaic's (MOS) $10 EPS, chop it in half and you have $5. Then the stock trades at 5x earnings. Do I really think earnings will drop by 50%? No. But even with my worst case scenarios, I have about 100 stocks out there I see trading in 2-6x PE ratios. Not that it matters, because fundamentals mean nothing....
Mosaic also said soft market conditions drove down second-quarter phosphate sales volumes to about 1.3 million tons for the period ended Nov. 30 -- about 800,000 tons lower than the volume sold in the prior quarter. The company expects third-quarter sales volumes to remain soft, although it expects a strong recovery in the fiscal fourth quarter.
Potash sales volumes for the second quarter were approximately 1.7 million tonnes down from 1.9 million tonnes in the first quarter. The average selling price was $525 per tonne, below company's forecast range of $560 to $620 per tonne.
Mosaic also withdrew its fiscal 2009 sales volume guidance for phosphates and potash, citing the "uncertainties in the global economy."
"Several factors have impacted worldwide crop nutrient demand, including lower grain and oilseed prices, a late North American harvest, congested distribution supply chains, and the unprecedented global economic and credit downturn which has seen business moderate in nearly all sectors," Jim Prokopanko, chief executive officer, said.
This is some serious weakening and we have to rethink our exposure - the phosphates weakness is one thing but we are even seeing weakness now in potash. The negotiations with China and India this year should be interesting. We are seeing "withdrawal of guidance" everywhere across this market which makes the future that more cloudy; how can you tell where a fair value is for the market when earnings are now a complete guess?
I did cut some of this name yesterday (along with a few other names) once the S&P broke 840. As we said coming into the week, we moved a lot of our long exposure from individual names to an index ETF since we do not have stop losses available to us. Therefore it was easy to parachute out of the index ETF once the market began breaking down. Specific to Mosaic, the chart is abysmal with a series of lower highs, and it appears until the market changes from a mindset of deflation to future inflation commodities remain nothing but an area to try to game for a quick 25% game if you time it perfectly for a 2-48 hour trade.
This remains one of my favorite long term sectors but seeing such weakening here, it reminds me that the only safe area might be those few companies whose sole customer is the US government.
As a side note, the portfolio weightings found in the right margin no longer reflect how we are positioned although I just updated it this weekend; as I said, once we break S&P 840 we have to become bearish again, so I adjusted accordingly. One has to be so very nimble in this market as conditions can change dramatically in 4 hours. Of course, like clockwork today we broke right back above S&P 840, which is worrisome because if this pattern begins again we lose the one thing working: technical analysis. And we return to the early October 2008 scenario where nothing works except throwing darts and guessing. Not that we are too far off from that right now. But in theory, once we break S&P 840, we "should" continue down. I've adjusted the portfolio to take advantage of that scenario.
We're currently at S&P 825 after flirting with 850 just over an hour ago? Volatility remains wicked. With gaming hour (3 PM) not far off, this means we could close up at S&P 900 or 800 - who knows. The textbook however, would point downward.
What remains troubling is that the S&P chart mimics Mosaic above - a total inability to break over the 20 day moving average... this is the weakest of resistance areas and even in a typical bear market you retrac back upwards to the 50 day moving average before selling back off. Since late summer we do not even make the attempt on the 50 day moving average and falter at the 20 day... that level of weakness is really telling..Trader Mark in seeking alpha
Fertilizer Stocks Having Trouble With Growth
Shares of fertilizer companies were the rage for a good part of 2008. Lately they’re just another kind of fertilizer.
Those stocks are among the weaker names in the equity markets Tuesday, while the broader market recovers from Monday’s devastating selloff. The catalyst was bad news out of Mosaic Co., which said fiscal second-quarter phosphate sales dropped due to soft market conditions, and phosphate gross margins were hurt by high raw material costs. That stock was down 73% in 2008 headed into Tuesday’s action.
Analysts say the potash companies are going to have issues for some time with high inventories as a result of over-production during the strong 2007 and early part of 2008. “High grain and input prices in the summer, combined with the global economic recession, grower uncertainty, and the late harvest drove Mosaic’s sobering EPS pre-release on several fronts,” writes Mark Gulley, analyst at Soleil Securities.
Mosaic shares declined by 5.9%, while Potash Corp. of Saskatchewan dropped 3%, Intrepid Potash was off by 7%, and Agrium Inc. lost 6.3%. Mosaic said sales volumes are expected to remain soft in its fiscal third quarter but should recover after that.
Some analysts expressed a similar view, with Citigroup saying that a “fertilizer demand decline may translate into a grain supply shortfall, further tightening the global grain markets and propelling spot prices.” Were this to occur, demand for fertilizer should increase.
However, if grain prices remain low, the demand for fertilizer is going to remain soft, because margins have declined for farmers. Merrill Lynch estimates the projected 2009 corn margins at $179 per acre, lower than the trailing five-year average of $215.
Those stocks are among the weaker names in the equity markets Tuesday, while the broader market recovers from Monday’s devastating selloff. The catalyst was bad news out of Mosaic Co., which said fiscal second-quarter phosphate sales dropped due to soft market conditions, and phosphate gross margins were hurt by high raw material costs. That stock was down 73% in 2008 headed into Tuesday’s action.
Analysts say the potash companies are going to have issues for some time with high inventories as a result of over-production during the strong 2007 and early part of 2008. “High grain and input prices in the summer, combined with the global economic recession, grower uncertainty, and the late harvest drove Mosaic’s sobering EPS pre-release on several fronts,” writes Mark Gulley, analyst at Soleil Securities.
Mosaic shares declined by 5.9%, while Potash Corp. of Saskatchewan dropped 3%, Intrepid Potash was off by 7%, and Agrium Inc. lost 6.3%. Mosaic said sales volumes are expected to remain soft in its fiscal third quarter but should recover after that.
Some analysts expressed a similar view, with Citigroup saying that a “fertilizer demand decline may translate into a grain supply shortfall, further tightening the global grain markets and propelling spot prices.” Were this to occur, demand for fertilizer should increase.
However, if grain prices remain low, the demand for fertilizer is going to remain soft, because margins have declined for farmers. Merrill Lynch estimates the projected 2009 corn margins at $179 per acre, lower than the trailing five-year average of $215.
Monday, December 1, 2008
The Ag Industry: Another Credit Crisis Casualty?
I came across this article in the Wall Street Journal last week which revealed another casualty of the credit crisis. The core finding of this article is reprinted below, in its entirety:
In the past several years, amid surging global demand for grain, farmers plowed up land at a feverish pace to plant soybeans, and roads were carved into the countryside to move the goods. Climbing grain prices through the first half of 2008 accelerated the growth.
Now, growers are finding it harder to get loans sufficient to cover the rising costs of fertilizer, pesticides and seed. For those borrowings, growers rely heavily on a handful of multinational grain companies, including Archer-Daniels-Midland Co., Bunge Ltd. and Cargill Inc.
Unlike in the U.S., where farmers depend on loans from private banks and the government, Brazilian farmers get as much as 40% of their financing from agriculture companies. That could drop to as low as 25% this year, according to M.V. Pratini de Moraes, a former Brazil agriculture secretary.
As the volatile commodities market and the global financial crisis have increased the risk and expense of doing business in Brazil, big grain companies are reining in lending.
"Every company is trying to secure as much cash as it can [to withstand] the longer-term effects of the credit crisis," says Stefano Rettore, general manager at CHS Brazil, a major grain-trading company. "That's leaving less cash available to finance Brazilian agriculture."
The squeeze is expected to contribute to a 2% drop in Brazilian soybean production for the 2008-2009 crop year, according to the U.S. Agriculture Department. Steve Cachia, a commodities analyst at Brazilian consultancy Cerealpar, says next year's crop could be smaller than this year's if credit continues to tighten.
That explains a lot of the problems with EWZ, we think to ourselves after reading this article. What does that tell us about the hurdles facing the physical commodities market in 2009?
Let's think about the state of the Western farming industry as shaped by Deere (DE), Monsanto (MON), Potash Corp. (POT), Archer Daniels Midland (ADM), Bunge (BG) and, to a lesser extent, Dow Chemicals (DOW). If you are holding a bushel of soybeans in your warehouse, it probably came from a big farm which depends on highly specialized farm equipment for tillage, seeding, cultivation, fertilization and livestock control. The seeds were genetically bred to resist the weeds and insects which were raiding the local crops at the moment. The crop was given insecticide, fungicide, micronutrients and tested for PH levels to maximize yield.
This is all without mentioning your normal risks associated with a harvest which is achieving high yields in a flood or drought environment with temperature fluctuations. We're talking thin or non-existent margins when things are operating normally.
This past summer, worldwide investors had the pleasant experience of witnessing the prop desks of every trading institution with a five thousand dollar margin account driving up the price of every commodity, in anticipation of an emerging market growth spurt fueled in part by . . . easy credit.
And with that, the removal of the last two words of the previous statement, there has been a significant change of circumstances from last summer to today.
On the futures and equity market end of things, the prop trading desks of the investment banks, hedge funds and institutional investors have yanked their fingers off the hot stove of a volatile commodities markets. These are players who would never take physical delivery and got burned when the market reversed itself. Even the successful players were forced to get out of long winning positions in order to meet margin calls on other losing bets.
But on the actual producer end of the market - and to their suppliers - the reversal of prices has been horrible on business. If we can assume that farm subsidies will kick in, the Western farmer will not plant and will instead collect a check from their government. This means no more upgrading farm equipment, fertilizer, insecticide, et cetera, for at least this growing season. You can turn on any program on RFD TV and you can see that if you are an overleveraged farmer, the cost of producing wheat outweighs the current market prices. Which means, if you are a supplier of the farming industry through equipment, chemicals, seed technology or fertilizer, you are looking at a dismal Western market forecast. This is exacerbated by the market shakeout, but it is still fundamentally poor.
This is the core issue between Europe's farmers and advocates to fight to prevent genetically modified seeds into the EU. Many biologists and agricultural professionals agreed that Darwinian adaptation eventually overcomes the marginal benefits that GM and advanced pesticides have on crop development. If you utilize native seeds with native predators, you can use your own seed banks to create pest resistant crops, but once you get hooked on some good old Monsanto seed products, you will never be able to go back to the old ways because the fragile ecosystem will never recover from the alien invasion of a new seed or a flame-thrower insecticide like Round Up.
Now, with credit drying up, farmers who can't afford to stay ahead of Darwin's inexorable march are turning to their accountants to get the subsidy from their goverment. The farmers who fought against genetically modified products can be proud that they were on the right side of history, but low prices of wheat, corn, soybeans and rice affect every farmer regardless of their ideological bent.
Your average large farming enterprise dependent on seed resistant products can't draw water from their own well at this point of the year. By clearing acreage used for livestock to make way for the flash-in-the-pan cash crops of this summer, they are short natural fertilizer. By introducing credit into the cycle of farming, the freezing of credit has frozen the farms. The farms are made whole by injection of farming subsidies, which will carry farms into the next year. The don't need to have credit extended to them by banks or their suppliers, they can always collect a subsidy and let their fields lay fallow.
The survival of the farm suppliers to weather a domestic downturn will be to embrace the emerging markets instead of turning away from them, because the emerging market nations will not subsidize their farmers to the level where they will not grow. They will fill in the capacity left by domestic producers in this bear price market.
The last item to take from the article is to reflect on the matter of easy credit expanding agricultural markets. I mean, let's be frank here: not all credit is evil. If you were going to short an agricultural ETF in the short to medium term, you could easily say that market distortions are weighing on all classes of physical commodities in the near term. But that would be a little simplistic and obvious. A more sophisticated approach would argue that the physical commodities market is experiencing a contraction from overcapacity, but price levels will not rise as the decrease of supply of products driven by Western farmers will be offset by the natural loosening of credit to the emerging market producers keeping output steady.
Where's the optimism in that? Well, in pure economic theory, supply and demand should even out creating a true price, but we know that the usual market manipulation, trade protectionism, leveraged speculation and natural catastrophes can create many opportunities to take advantage of market imbalances in the medium term...Jimmy Lathrop in seeking alpha
In the past several years, amid surging global demand for grain, farmers plowed up land at a feverish pace to plant soybeans, and roads were carved into the countryside to move the goods. Climbing grain prices through the first half of 2008 accelerated the growth.
Now, growers are finding it harder to get loans sufficient to cover the rising costs of fertilizer, pesticides and seed. For those borrowings, growers rely heavily on a handful of multinational grain companies, including Archer-Daniels-Midland Co., Bunge Ltd. and Cargill Inc.
Unlike in the U.S., where farmers depend on loans from private banks and the government, Brazilian farmers get as much as 40% of their financing from agriculture companies. That could drop to as low as 25% this year, according to M.V. Pratini de Moraes, a former Brazil agriculture secretary.
As the volatile commodities market and the global financial crisis have increased the risk and expense of doing business in Brazil, big grain companies are reining in lending.
"Every company is trying to secure as much cash as it can [to withstand] the longer-term effects of the credit crisis," says Stefano Rettore, general manager at CHS Brazil, a major grain-trading company. "That's leaving less cash available to finance Brazilian agriculture."
The squeeze is expected to contribute to a 2% drop in Brazilian soybean production for the 2008-2009 crop year, according to the U.S. Agriculture Department. Steve Cachia, a commodities analyst at Brazilian consultancy Cerealpar, says next year's crop could be smaller than this year's if credit continues to tighten.
That explains a lot of the problems with EWZ, we think to ourselves after reading this article. What does that tell us about the hurdles facing the physical commodities market in 2009?
Let's think about the state of the Western farming industry as shaped by Deere (DE), Monsanto (MON), Potash Corp. (POT), Archer Daniels Midland (ADM), Bunge (BG) and, to a lesser extent, Dow Chemicals (DOW). If you are holding a bushel of soybeans in your warehouse, it probably came from a big farm which depends on highly specialized farm equipment for tillage, seeding, cultivation, fertilization and livestock control. The seeds were genetically bred to resist the weeds and insects which were raiding the local crops at the moment. The crop was given insecticide, fungicide, micronutrients and tested for PH levels to maximize yield.
This is all without mentioning your normal risks associated with a harvest which is achieving high yields in a flood or drought environment with temperature fluctuations. We're talking thin or non-existent margins when things are operating normally.
This past summer, worldwide investors had the pleasant experience of witnessing the prop desks of every trading institution with a five thousand dollar margin account driving up the price of every commodity, in anticipation of an emerging market growth spurt fueled in part by . . . easy credit.
And with that, the removal of the last two words of the previous statement, there has been a significant change of circumstances from last summer to today.
On the futures and equity market end of things, the prop trading desks of the investment banks, hedge funds and institutional investors have yanked their fingers off the hot stove of a volatile commodities markets. These are players who would never take physical delivery and got burned when the market reversed itself. Even the successful players were forced to get out of long winning positions in order to meet margin calls on other losing bets.
But on the actual producer end of the market - and to their suppliers - the reversal of prices has been horrible on business. If we can assume that farm subsidies will kick in, the Western farmer will not plant and will instead collect a check from their government. This means no more upgrading farm equipment, fertilizer, insecticide, et cetera, for at least this growing season. You can turn on any program on RFD TV and you can see that if you are an overleveraged farmer, the cost of producing wheat outweighs the current market prices. Which means, if you are a supplier of the farming industry through equipment, chemicals, seed technology or fertilizer, you are looking at a dismal Western market forecast. This is exacerbated by the market shakeout, but it is still fundamentally poor.
This is the core issue between Europe's farmers and advocates to fight to prevent genetically modified seeds into the EU. Many biologists and agricultural professionals agreed that Darwinian adaptation eventually overcomes the marginal benefits that GM and advanced pesticides have on crop development. If you utilize native seeds with native predators, you can use your own seed banks to create pest resistant crops, but once you get hooked on some good old Monsanto seed products, you will never be able to go back to the old ways because the fragile ecosystem will never recover from the alien invasion of a new seed or a flame-thrower insecticide like Round Up.
Now, with credit drying up, farmers who can't afford to stay ahead of Darwin's inexorable march are turning to their accountants to get the subsidy from their goverment. The farmers who fought against genetically modified products can be proud that they were on the right side of history, but low prices of wheat, corn, soybeans and rice affect every farmer regardless of their ideological bent.
Your average large farming enterprise dependent on seed resistant products can't draw water from their own well at this point of the year. By clearing acreage used for livestock to make way for the flash-in-the-pan cash crops of this summer, they are short natural fertilizer. By introducing credit into the cycle of farming, the freezing of credit has frozen the farms. The farms are made whole by injection of farming subsidies, which will carry farms into the next year. The don't need to have credit extended to them by banks or their suppliers, they can always collect a subsidy and let their fields lay fallow.
The survival of the farm suppliers to weather a domestic downturn will be to embrace the emerging markets instead of turning away from them, because the emerging market nations will not subsidize their farmers to the level where they will not grow. They will fill in the capacity left by domestic producers in this bear price market.
The last item to take from the article is to reflect on the matter of easy credit expanding agricultural markets. I mean, let's be frank here: not all credit is evil. If you were going to short an agricultural ETF in the short to medium term, you could easily say that market distortions are weighing on all classes of physical commodities in the near term. But that would be a little simplistic and obvious. A more sophisticated approach would argue that the physical commodities market is experiencing a contraction from overcapacity, but price levels will not rise as the decrease of supply of products driven by Western farmers will be offset by the natural loosening of credit to the emerging market producers keeping output steady.
Where's the optimism in that? Well, in pure economic theory, supply and demand should even out creating a true price, but we know that the usual market manipulation, trade protectionism, leveraged speculation and natural catastrophes can create many opportunities to take advantage of market imbalances in the medium term...Jimmy Lathrop in seeking alpha
Mosaic says sales suffer in downturn
Fertilizer company Mosaic says sales hurt by global downturn
PLYMOUTH, Minn. (AP) -- Fertilizer maker Mosaic Co. said Monday that second- and third-quarter sales will be down on lower demand due to factors such as the global economic downturn and lower grain prices.
Mosaic also said it was withdrawing its 2009 fiscal year guidance for sales of phosphates and potash, citing the "uncertainties in the global economy."
In October, Mosaic said it expected phosphate sales of between 8 million to 9 million tons and potash sales of 8.2 million to 8.6 million tons. But it also announced plans to reduce phosphate production by 1 million tons through this month.
In a preview of results from the fiscal 2009 second quarter ended Nov. 30, Mosaic said sales volumes of phosphate for the quarter stood at 1.3 million tons, down 800,000 tons from the volume of the fiscal first quarter. Potash sales came in at 1.7 million tons.
Mosaic said it expected third-quarter sales volumes will also be soft, although it expects a strong recovery in the fiscal fourth quarter.
Shares of Mosaic fell $4.95, or 16 percent, to close at $25.40 Monday.
PLYMOUTH, Minn. (AP) -- Fertilizer maker Mosaic Co. said Monday that second- and third-quarter sales will be down on lower demand due to factors such as the global economic downturn and lower grain prices.
Mosaic also said it was withdrawing its 2009 fiscal year guidance for sales of phosphates and potash, citing the "uncertainties in the global economy."
In October, Mosaic said it expected phosphate sales of between 8 million to 9 million tons and potash sales of 8.2 million to 8.6 million tons. But it also announced plans to reduce phosphate production by 1 million tons through this month.
In a preview of results from the fiscal 2009 second quarter ended Nov. 30, Mosaic said sales volumes of phosphate for the quarter stood at 1.3 million tons, down 800,000 tons from the volume of the fiscal first quarter. Potash sales came in at 1.7 million tons.
Mosaic said it expected third-quarter sales volumes will also be soft, although it expects a strong recovery in the fiscal fourth quarter.
Shares of Mosaic fell $4.95, or 16 percent, to close at $25.40 Monday.
Tuesday, November 25, 2008
Chemicals & Fertilizers
POSITIVES
The industry is divided into commodity chemicals (45%) and specialty chemicals (55%). The commodity segment tends to be more concentrated. In the commodity segment, cost reductions, improving yield from better technology and economies of scale are important. In the specialty segment, margins are higher due to better pricing and more efficient operations. Demand for fertilizers is driven by crop plantings and crop prices, both of which are favorable. Economies of scale are important to keeping costs low.
Prices are improving by 7-8% in this industry. Pricing power is a function of three variables: inflation, capacity utilization and raw material price changes. Inflation is low (but likely to increase with aggressive monetary policy), capacity utilization levels are improving but still in the low 80s, and oil prices are elevated, but falling.
NEGATIVES
The chemical industry is a large consumer of oil, natural gas and energy. Raw material costs have been at historically high levels, which is a very serious challenge for the chemical industry. However, oil and gas prices are falling.
Demand growth is near 0% currently. Demand for chemicals tracks global industrial production and global GDP very closely. Housing and auto markets could continue to weaken. Nearly 10% of chemical demand is directly tied to the housing sector, and an additional 10% is tied to the auto sector.
BUY/SELL RATINGS
Agrium Inc. (NYSE: AGU - News) -- BUY; CF Industries Holdings, Inc. (NYSE: CF - News) -- BUY; Georgia Gulf Corporation (NYSE: GGC - News) -- SELL...zacks.com
The industry is divided into commodity chemicals (45%) and specialty chemicals (55%). The commodity segment tends to be more concentrated. In the commodity segment, cost reductions, improving yield from better technology and economies of scale are important. In the specialty segment, margins are higher due to better pricing and more efficient operations. Demand for fertilizers is driven by crop plantings and crop prices, both of which are favorable. Economies of scale are important to keeping costs low.
Prices are improving by 7-8% in this industry. Pricing power is a function of three variables: inflation, capacity utilization and raw material price changes. Inflation is low (but likely to increase with aggressive monetary policy), capacity utilization levels are improving but still in the low 80s, and oil prices are elevated, but falling.
NEGATIVES
The chemical industry is a large consumer of oil, natural gas and energy. Raw material costs have been at historically high levels, which is a very serious challenge for the chemical industry. However, oil and gas prices are falling.
Demand growth is near 0% currently. Demand for chemicals tracks global industrial production and global GDP very closely. Housing and auto markets could continue to weaken. Nearly 10% of chemical demand is directly tied to the housing sector, and an additional 10% is tied to the auto sector.
BUY/SELL RATINGS
Agrium Inc. (NYSE: AGU - News) -- BUY; CF Industries Holdings, Inc. (NYSE: CF - News) -- BUY; Georgia Gulf Corporation (NYSE: GGC - News) -- SELL...zacks.com
Tuesday, November 18, 2008
Agriculture Opportunity Worth Cultivating
As investors survey the landscape of beaten-down ETFs, different methods come into play. Some are looking for value. Some seek sectors with rebound potential. Others look for news-driven potential.
When we examine ETF charts and our model output, we see the results of this analysis. We see factors like Trends and Cycles and try to Anticipate the best opportunities. It is an interpretation of how the market is reacting to fundamental considerations. Each week we choose a sector for a more detailed focus. (For new readers, there is a more complete description of our methods at the end of the article.)
Spotlight on Agriculture
We follow the Ag sector via the Market Vectors Agribusiness ETF (MOO). The security is based upon the DAXglobal® Agribusiness Index. MOO is down about 36% YTD. The current P/E ratio is about 17 with a price-to-book ratio of about 2. The top five holdings constitute over 40% of the fund. It is a mixture of agriculture and fertilizer companies with about 40% in chemicals, 30% in operations, and 20% in chemicals. About half of the group is US based.
Tom Lydon picked up this connection right after the election. Citing Aaron Task who interviewed James Altucher, Lydon points out the Obama support for ethanol and infrastructure spending.
Jordan Kahn, a colleague at TheStreet.com's Real Money site, noted the post-election bounce in MOO, and is adding to positions.
We expect to see other analysts picking up this theme.
Rising in the Ratings
We note with interest the rapid rise in our ratings of the Market Vectors Gold Index, (GDX). This sector moved from #53 to #7 in the rankings (click on chart to enlarge).
Weekly TCA-ETF Rankings
Performance in the S&P 500 last week was very poor, down over 6%. Our portfolio was a little worse, more in line with the Q's, down almost 8%.
It remains a time of great opportunity, but the market activity also shows great risk. We missed much of the downside by getting out of the market in September, and we are sticking with our signal to act in sectors where prices are much lower.
We are looking for a better way to tabulate and report results. This includes an updated report on the weekly trading program focusing on the top six ETFs in our rankings. Accredited investors are eligible for our daily trading model, which also includes some discretionary choices. We are reporting the exact days of trading signals in our weekly updates. Those interested can see how this would have played out in a weekly trading program covering the entire period where we have revealed the ratings, as well as earlier extensive testing.
Based upon the current ratings, we have continued our recent bullish vote in the Ticker Sense Blogger Sentiment poll. Last week was the first time that we have had a bullish stance since August 18th.
We are very happy with the model signals, and especially the long period of safety during a slow-moving market crash. For readers interested in our program, we have a long-only method and one that embraces more market timing.
Note for New Readers
Our weekly ETF Update is designed to assist both investors and traders interested in ETFs and Sector Rotation. Before turning to the current rankings, let us undertake a review for readers new to this series.
Our Method. In this past article, we described our basic methodology and why we believe the rankings are useful for fundamental traders and technical traders alike. While we urge readers to check out the entire article, the key point is that ETFs pose challenges and opportunities different from investment in individual stocks. The fundamentals may be more difficult to assess. Even with a good grasp on fundamental trends, there is a lot of technically-based trading in ETFs. This means that those trading with a fundamental approach (and we do this as well) want to monitor the "hot money" moves. Here is an article on that point.
The system synopsis. We look at Trending sectors, Cyclical Sectors, and build in an element of Anticipation for both entry and exit -- thus the name of the model, TCA-ETF. While we do not reveal the exact methodology for spotting trends and cycles, the system is not a "black box." The basic elements are used by many, and widely reported. We even discuss the need for human analysis as opposed to black box trading.
We report the rankings each week, now on the weekend with a one-day delay, using the Thursday output from the model. We monitor and trade this daily, and offer a free report (request via the 'Contact Jeff' button on the left of the page) for those interested in our weekly trading program
When we examine ETF charts and our model output, we see the results of this analysis. We see factors like Trends and Cycles and try to Anticipate the best opportunities. It is an interpretation of how the market is reacting to fundamental considerations. Each week we choose a sector for a more detailed focus. (For new readers, there is a more complete description of our methods at the end of the article.)
Spotlight on Agriculture
We follow the Ag sector via the Market Vectors Agribusiness ETF (MOO). The security is based upon the DAXglobal® Agribusiness Index. MOO is down about 36% YTD. The current P/E ratio is about 17 with a price-to-book ratio of about 2. The top five holdings constitute over 40% of the fund. It is a mixture of agriculture and fertilizer companies with about 40% in chemicals, 30% in operations, and 20% in chemicals. About half of the group is US based.
Tom Lydon picked up this connection right after the election. Citing Aaron Task who interviewed James Altucher, Lydon points out the Obama support for ethanol and infrastructure spending.
Jordan Kahn, a colleague at TheStreet.com's Real Money site, noted the post-election bounce in MOO, and is adding to positions.
We expect to see other analysts picking up this theme.
Rising in the Ratings
We note with interest the rapid rise in our ratings of the Market Vectors Gold Index, (GDX). This sector moved from #53 to #7 in the rankings (click on chart to enlarge).
Weekly TCA-ETF Rankings
Performance in the S&P 500 last week was very poor, down over 6%. Our portfolio was a little worse, more in line with the Q's, down almost 8%.
It remains a time of great opportunity, but the market activity also shows great risk. We missed much of the downside by getting out of the market in September, and we are sticking with our signal to act in sectors where prices are much lower.
We are looking for a better way to tabulate and report results. This includes an updated report on the weekly trading program focusing on the top six ETFs in our rankings. Accredited investors are eligible for our daily trading model, which also includes some discretionary choices. We are reporting the exact days of trading signals in our weekly updates. Those interested can see how this would have played out in a weekly trading program covering the entire period where we have revealed the ratings, as well as earlier extensive testing.
Based upon the current ratings, we have continued our recent bullish vote in the Ticker Sense Blogger Sentiment poll. Last week was the first time that we have had a bullish stance since August 18th.
We are very happy with the model signals, and especially the long period of safety during a slow-moving market crash. For readers interested in our program, we have a long-only method and one that embraces more market timing.
Note for New Readers
Our weekly ETF Update is designed to assist both investors and traders interested in ETFs and Sector Rotation. Before turning to the current rankings, let us undertake a review for readers new to this series.
Our Method. In this past article, we described our basic methodology and why we believe the rankings are useful for fundamental traders and technical traders alike. While we urge readers to check out the entire article, the key point is that ETFs pose challenges and opportunities different from investment in individual stocks. The fundamentals may be more difficult to assess. Even with a good grasp on fundamental trends, there is a lot of technically-based trading in ETFs. This means that those trading with a fundamental approach (and we do this as well) want to monitor the "hot money" moves. Here is an article on that point.
The system synopsis. We look at Trending sectors, Cyclical Sectors, and build in an element of Anticipation for both entry and exit -- thus the name of the model, TCA-ETF. While we do not reveal the exact methodology for spotting trends and cycles, the system is not a "black box." The basic elements are used by many, and widely reported. We even discuss the need for human analysis as opposed to black box trading.
We report the rankings each week, now on the weekend with a one-day delay, using the Thursday output from the model. We monitor and trade this daily, and offer a free report (request via the 'Contact Jeff' button on the left of the page) for those interested in our weekly trading program
Wednesday, November 12, 2008
Agrium outlook brightens for fourth quarter
TORONTO, Nov 12 (Reuters) - Agrium Inc (AGU.TO: Quote, Profile, Research, Stock Buzz) (AGU.N: Quote, Profile, Research, Stock Buzz) said on Wednesday it could have another round of record results in the fourth quarter as crop supply fundamentals remain strong, the company's CFO told Reuters on Wednesday.
The outlook marks a shift in the company's guidance from earlier this month when it signaled that the end of the year could be slow if farmers defer fertilizer applications until early in 2009.
"We have had some tail-offs in pricing for some of our products, but we just announced a record third quarter and we're going to have a very good fourth quarter," CFO Bruce Waterman said on the sidelines of a conference in Toronto. "Our guidance would indicate it could be another record quarter."
The world's third-largest nitrogen producer and the top U.S. retailer of crop supplies reported Nov. 5 a higher third-quarter profit that topped analyst expectations, but it had warned of the possibility of a slower fourth quarter.
"We're obviously watching the commodity prices but the fundamentals are very strong for our business," Waterman said on Wednesday.
Commodity prices have fallen sharply from record peaks since summer on deepening worries about the health of the global economy, undermining the outlooks and stock prices of big agricultural companies.
Waterman said Agrium was well-placed to weather the global financial crisis and added that the company remained on the lookout for potential acquisitions.
"We look at things all the time and as I said we're going to be very prudent," he said. "There are opportunities and hopefully we'll have a chance to take advantage of those opportunities."
Waterman said Agrium was well-buffered against the financial crisis because it expanded its credit lines and trimmed its debt "before things got tight." (Reporting by John McCrank; Writing by Richard Valdmanis; Editing by Frank McGurty)
The outlook marks a shift in the company's guidance from earlier this month when it signaled that the end of the year could be slow if farmers defer fertilizer applications until early in 2009.
"We have had some tail-offs in pricing for some of our products, but we just announced a record third quarter and we're going to have a very good fourth quarter," CFO Bruce Waterman said on the sidelines of a conference in Toronto. "Our guidance would indicate it could be another record quarter."
The world's third-largest nitrogen producer and the top U.S. retailer of crop supplies reported Nov. 5 a higher third-quarter profit that topped analyst expectations, but it had warned of the possibility of a slower fourth quarter.
"We're obviously watching the commodity prices but the fundamentals are very strong for our business," Waterman said on Wednesday.
Commodity prices have fallen sharply from record peaks since summer on deepening worries about the health of the global economy, undermining the outlooks and stock prices of big agricultural companies.
Waterman said Agrium was well-placed to weather the global financial crisis and added that the company remained on the lookout for potential acquisitions.
"We look at things all the time and as I said we're going to be very prudent," he said. "There are opportunities and hopefully we'll have a chance to take advantage of those opportunities."
Waterman said Agrium was well-buffered against the financial crisis because it expanded its credit lines and trimmed its debt "before things got tight." (Reporting by John McCrank; Writing by Richard Valdmanis; Editing by Frank McGurty)
Intrepid 3Q profit surges on fertilizer demand
Intrepid 3rd-quarter profit surges as fertilizer demand sends revenue, pricing higher
DENVER (AP) -- Fertilizer maker Intrepid Potash Inc. said Wednesday its third-quarter profit soared on growing demand for fertilizer products.
Intrepid posted a profit of $49.7 million, or 66 cents per share, for the quarter ended Sept. 30, up ninefold from $5.4 million, or 7 cents per share, in the same quarter last year. Revenue nearly tripled to $146.3 million from $52.9 million.
The results fell short of Wall Street estimates, however. Analysts polled by Thomson Reuters expected 73 cents per share $143.3 million in revenue.
The company said it was helped by rising potash prices during the quarter. Average net sales price increased to $623 from $193 per short ton during the quarter, although production declined slightly.
"Our realized potash price further widened relative to our North American competitors as we focused on our regional markets and on paying close attention to the opportunities in the spot market for potash," Chief Executive Bob Jornayvaz said in a statement.
Shares of Intrepid Potash closed Tuesday at $19.46. The stock has declined 61 percent since its initial public offering price of $50.40 in April.
DENVER (AP) -- Fertilizer maker Intrepid Potash Inc. said Wednesday its third-quarter profit soared on growing demand for fertilizer products.
Intrepid posted a profit of $49.7 million, or 66 cents per share, for the quarter ended Sept. 30, up ninefold from $5.4 million, or 7 cents per share, in the same quarter last year. Revenue nearly tripled to $146.3 million from $52.9 million.
The results fell short of Wall Street estimates, however. Analysts polled by Thomson Reuters expected 73 cents per share $143.3 million in revenue.
The company said it was helped by rising potash prices during the quarter. Average net sales price increased to $623 from $193 per short ton during the quarter, although production declined slightly.
"Our realized potash price further widened relative to our North American competitors as we focused on our regional markets and on paying close attention to the opportunities in the spot market for potash," Chief Executive Bob Jornayvaz said in a statement.
Shares of Intrepid Potash closed Tuesday at $19.46. The stock has declined 61 percent since its initial public offering price of $50.40 in April.
Monday, November 10, 2008
No Bull: Fertilizers Staying Strong
When we sat down recently with Zacks senior equities analyst Paul Raman, CFA, we were interested in finding out how the chemicals & fertilizer industry is doing. Is it fostering growth, or something to be wary of stepping in?
How are you viewing the chemicals & fertilizer industry at the present time?
Our outlook for the industry is positive. The industry is divided into commodity chemicals (45%) and specialty chemicals (55%). The commodity segment tends to be more concentrated.
In the commodity segment, cost reductions, improving yield from better technology and economies of scale are important. In the specialty segment, margins are higher due to better pricing and more efficient operations. Demand for fertilizers is driven by crop plantings and crop prices, both of which are favorable. Economies of scale are important to keeping costs low.
What's a good rule-of-thumb for investors who may be looking to increase exposure to this group?
Investors should neutral-weight chemical stocks now. The group is likely to track the S&P in the next six months. The chemical industry is a large consumer of oil, natural gas and energy. Raw material costs have been at historically high levels, which is a very serious challenge for the industry.
However, oil and gas prices will fall. Demand growth is near 0% currently. Demand for chemicals tracks global industrial production and global GDP very closely. Nearly 10% of chemical demand is directly tied to the housing sector, and housing and auto markets could continue to weaken. An additional 10% of demand is tied to the auto sector.
Prices are improving by 7-8% in this industry. Pricing power is a function of three variables: inflation, capacity utilization and raw material price changes. Inflation is low (but likely to increase with aggressive monetary policy), capacity utilization levels are improving but still in the low 80s, and oil prices are elevated, but falling.
Which companies under coverage are your top Buy recommendations at this time?
With this backdrop, two companies we recommend are Agrium (NYSE: AGU - News) and CF Industries (NYSE: CF - News). Demand for fertilizers is driven by population growth, and demand has been exceptionally strong in China and India.
Any caveats and/or Sell ratings for investors to take note of?
Capacity growth is minimal in this segment. Fertilizers are needed to improve the yield of crops. These companies are highly leveraged to rising global prices for nitrogen, potash and phosphate due to strong demand from China and India. Operating rates of 90-100% should hold until 2010/2011.
One company to avoid is Georgia Gulf (NYSE: GGC - News), as we expect them to file for bankruptcy. This is due to excessive housing market exposure along with high financial leverage.
Paul Raman, CFA is a senior analyst covering the chemicals & fertilizer industry for Zacks Equity Research.
How are you viewing the chemicals & fertilizer industry at the present time?
Our outlook for the industry is positive. The industry is divided into commodity chemicals (45%) and specialty chemicals (55%). The commodity segment tends to be more concentrated.
In the commodity segment, cost reductions, improving yield from better technology and economies of scale are important. In the specialty segment, margins are higher due to better pricing and more efficient operations. Demand for fertilizers is driven by crop plantings and crop prices, both of which are favorable. Economies of scale are important to keeping costs low.
What's a good rule-of-thumb for investors who may be looking to increase exposure to this group?
Investors should neutral-weight chemical stocks now. The group is likely to track the S&P in the next six months. The chemical industry is a large consumer of oil, natural gas and energy. Raw material costs have been at historically high levels, which is a very serious challenge for the industry.
However, oil and gas prices will fall. Demand growth is near 0% currently. Demand for chemicals tracks global industrial production and global GDP very closely. Nearly 10% of chemical demand is directly tied to the housing sector, and housing and auto markets could continue to weaken. An additional 10% of demand is tied to the auto sector.
Prices are improving by 7-8% in this industry. Pricing power is a function of three variables: inflation, capacity utilization and raw material price changes. Inflation is low (but likely to increase with aggressive monetary policy), capacity utilization levels are improving but still in the low 80s, and oil prices are elevated, but falling.
Which companies under coverage are your top Buy recommendations at this time?
With this backdrop, two companies we recommend are Agrium (NYSE: AGU - News) and CF Industries (NYSE: CF - News). Demand for fertilizers is driven by population growth, and demand has been exceptionally strong in China and India.
Any caveats and/or Sell ratings for investors to take note of?
Capacity growth is minimal in this segment. Fertilizers are needed to improve the yield of crops. These companies are highly leveraged to rising global prices for nitrogen, potash and phosphate due to strong demand from China and India. Operating rates of 90-100% should hold until 2010/2011.
One company to avoid is Georgia Gulf (NYSE: GGC - News), as we expect them to file for bankruptcy. This is due to excessive housing market exposure along with high financial leverage.
Paul Raman, CFA is a senior analyst covering the chemicals & fertilizer industry for Zacks Equity Research.
Agrium a Play on Agri-Business
Agrium Inc. (NYSE: AGU - News) is growing through acquisition and organic expansion. The acquisition of United Agri-Products (UAP) is driving revenues and profits supported by an expanded product line in the major business segment.
Agrium announced record results for third quarter earnings, with net earnings for the third quarter of 2008 of $367-million ($2.31 diluted earnings per share) more than four times the previous third quarter record achieved in 2004 and more than seven times above the $51-million ($0.38 diluted earnings per share) in the third quarter of 2007.
The third quarter results include non-qualifying natural gas and power hedge losses of $171-million ($0.73 diluted earnings per share) and a recovery in stock-based compensation of $99-million ($0.42 diluted earnings per share). Retail results are not directly comparable to the same period last year due to the inclusion of UAP which was acquired in May of 2008.
Rising global prices for nitrogen, potash and phosphate leveraged by strong demand augur well for AGU. The company also has a significant free cash flow. Therefore, we rate the shares a Buy with a target of $40.
Agrium announced record results for third quarter earnings, with net earnings for the third quarter of 2008 of $367-million ($2.31 diluted earnings per share) more than four times the previous third quarter record achieved in 2004 and more than seven times above the $51-million ($0.38 diluted earnings per share) in the third quarter of 2007.
The third quarter results include non-qualifying natural gas and power hedge losses of $171-million ($0.73 diluted earnings per share) and a recovery in stock-based compensation of $99-million ($0.42 diluted earnings per share). Retail results are not directly comparable to the same period last year due to the inclusion of UAP which was acquired in May of 2008.
Rising global prices for nitrogen, potash and phosphate leveraged by strong demand augur well for AGU. The company also has a significant free cash flow. Therefore, we rate the shares a Buy with a target of $40.
Monday, November 3, 2008
Fertilizer Stocks Should Rise Again
Stocks like Mosaic and Potash were among the worst performers in recent months but now possess both good value and technical merit.
AS SEASONED INVESTORS KNOW, the leaders of the last bull market are typically not going to be the leaders of the next one. But that doesn't mean they can never do so and fertilizer stocks are presenting a rather attractive risk/reward scenario once again.
Before looking more closely at this sector, I must say upfront that we are far from being in a bull market. However, as the market heals and transitions from bear to something more positive, there are going to be tradable rallies -- and declines -- along the way.
If last week's positive action marked the start of one of those rallies then the goal for chart watchers is to identify emerging leadership areas. And it turns out that one of the superstar groups of the last bull market - fertilizer stocks - happens to be among them.
As a sector, fertilizer stocks have gotten absolutely crushed during this year's market debacle. And while the broad market peaked just over one year ago, these stocks continued to move significantly higher until peaking in June. But as the saying goes, the bigger they come, the harder they fall and these once high-flying stocks fell very hard, indeed.
Potash Corp of Saskatchewan (POT) is an example of just how far they fell (see Chart 1). From its closing high of 240 on June 17 to its lowest close under 64 last week, this stock was pummeled for a 73% loss. Contrast that to the Standard & Poor's 500 and its top to bottom loss of 46%.
Of course, just because something is so far down in price does not mean it is cheap. But Potash has been showing several areas of improvement from a change in momentum to a change in its supply/demand picture.
For example, as it was setting lower lows over the past two months, such momentum indicators as the relative strength index (RSI) were setting higher lows. When price action and momentum readings diverge like this it is often a sign that the decline has run out of power. That sets the stage for a rebound.
Volume readings have also shown quite a change in recent weeks with average volume doubling from roughly 10 million to 20 million shares traded daily. Such a surge is often a precursor to a change in trend, as well.
To be sure, the major trend here remains down so conservative investors have no real impetus to jump back in here. However, its fundamental story remains sound (see Weekday Trader, "A Wilted Fertilizer Stock Can Sprout Again," October 28) and its technical underpinnings are greatly improved to make this a top candidate to run in whatever short-term rally the market gives us.
We can substitute almost any peer stocks for Potash, including CF Industries Holdings (CF), Mosaic (MOS), Sygenta (SYT) and several others as all have very similar charts.
Another fertilizer stock that looks interesting is Scotts Miracle Gro (SMG), although this company does not operate in the same circles as the others. Scotts makes lawn and garden fertilizer and care products so its story is not the same as Potash and the agribusiness group. Regardless, the stock has several characteristics that make it a good leadership candidate.
The most important feature on the chart is the fact that the stock did not set a lower low in October when the market cracked (see Chart 2). This is an important point as we can say that investors did not dump shares in a panic as they were selling almost everything else last month.
A higher low is the first step in changing the trend from down to up. A move above the longterm declining trendline drawn from the February 2007 alltime high would be the second. Currently, that trendline is near 28, where not so coincidently sits it's widely watched 200-day moving average.
Scotts is well on its way towards recovery, but as with any stock in the current environment general market turmoil can kill a fledgling rally. But if the market does indeed embark on a multiweek rally, Scotts looks as if it can be among the leaders.
AS SEASONED INVESTORS KNOW, the leaders of the last bull market are typically not going to be the leaders of the next one. But that doesn't mean they can never do so and fertilizer stocks are presenting a rather attractive risk/reward scenario once again.
Before looking more closely at this sector, I must say upfront that we are far from being in a bull market. However, as the market heals and transitions from bear to something more positive, there are going to be tradable rallies -- and declines -- along the way.
If last week's positive action marked the start of one of those rallies then the goal for chart watchers is to identify emerging leadership areas. And it turns out that one of the superstar groups of the last bull market - fertilizer stocks - happens to be among them.
As a sector, fertilizer stocks have gotten absolutely crushed during this year's market debacle. And while the broad market peaked just over one year ago, these stocks continued to move significantly higher until peaking in June. But as the saying goes, the bigger they come, the harder they fall and these once high-flying stocks fell very hard, indeed.
Potash Corp of Saskatchewan (POT) is an example of just how far they fell (see Chart 1). From its closing high of 240 on June 17 to its lowest close under 64 last week, this stock was pummeled for a 73% loss. Contrast that to the Standard & Poor's 500 and its top to bottom loss of 46%.
Of course, just because something is so far down in price does not mean it is cheap. But Potash has been showing several areas of improvement from a change in momentum to a change in its supply/demand picture.
For example, as it was setting lower lows over the past two months, such momentum indicators as the relative strength index (RSI) were setting higher lows. When price action and momentum readings diverge like this it is often a sign that the decline has run out of power. That sets the stage for a rebound.
Volume readings have also shown quite a change in recent weeks with average volume doubling from roughly 10 million to 20 million shares traded daily. Such a surge is often a precursor to a change in trend, as well.
To be sure, the major trend here remains down so conservative investors have no real impetus to jump back in here. However, its fundamental story remains sound (see Weekday Trader, "A Wilted Fertilizer Stock Can Sprout Again," October 28) and its technical underpinnings are greatly improved to make this a top candidate to run in whatever short-term rally the market gives us.
We can substitute almost any peer stocks for Potash, including CF Industries Holdings (CF), Mosaic (MOS), Sygenta (SYT) and several others as all have very similar charts.
Another fertilizer stock that looks interesting is Scotts Miracle Gro (SMG), although this company does not operate in the same circles as the others. Scotts makes lawn and garden fertilizer and care products so its story is not the same as Potash and the agribusiness group. Regardless, the stock has several characteristics that make it a good leadership candidate.
The most important feature on the chart is the fact that the stock did not set a lower low in October when the market cracked (see Chart 2). This is an important point as we can say that investors did not dump shares in a panic as they were selling almost everything else last month.
A higher low is the first step in changing the trend from down to up. A move above the longterm declining trendline drawn from the February 2007 alltime high would be the second. Currently, that trendline is near 28, where not so coincidently sits it's widely watched 200-day moving average.
Scotts is well on its way towards recovery, but as with any stock in the current environment general market turmoil can kill a fledgling rally. But if the market does indeed embark on a multiweek rally, Scotts looks as if it can be among the leaders.
CF Industries Brings About Growth
CF Industries Holdings Inc. (NYSE: CF - News) has leading market shares in many key fertilizers. Strong domestic and international grain markets have produced an exceptionally high global demand for fertilizer, translating into substantially higher selling prices for all the products.
The company is optimistic about its phosphate business where the market is expected to remain tight near term due to healthy offshore demand growth in India and Brazil as well as higher application rates in the U.S. This is likely to lead to higher prices and cash margins for various fertilizers.
In addition, the company is likely to benefit from the proposed nitrogen facility in Peru, which will address the nitrogen demand on the west coast of Central and South America as well as Mexico, which does not have any nitrogen facility. As a result, we rate the shares a Buy with a target of $60.00.
The company is optimistic about its phosphate business where the market is expected to remain tight near term due to healthy offshore demand growth in India and Brazil as well as higher application rates in the U.S. This is likely to lead to higher prices and cash margins for various fertilizers.
In addition, the company is likely to benefit from the proposed nitrogen facility in Peru, which will address the nitrogen demand on the west coast of Central and South America as well as Mexico, which does not have any nitrogen facility. As a result, we rate the shares a Buy with a target of $60.00.
Corn and Its Industry: The Next Tobacco
Summary
Corn-based ethanol, which always was a mistake, is finally out of favor, and the crop price has fallen to $4/bu.
This is just the beginning of a long-term secular decline in corn’s fortunes. First, the US fiscal wreckage will put pressure on its subsidy payments.
Far more important, the cost of US health care will turn the debate to the causes of poor health itself, and the fact of our underlying poor diet.
The corn-driven American diet is acting like a slow poison on us. With a lot of education, this will become better known, producing a profound change in habits, similar to the smoking cessation phenomenon.
The resulting drop in demand for corn will mean a big retrenchment in the corn-related industries, negatively affecting:
Stocks
Potash Corp (POT) ($68.52), Fertilizers
Mosaic Co. (MOS) ($27.78), Fertilizers
Archer Daniels Midland (ADM) ($17.53 ), Corn refining
Corn Products International (CPO) ($22.99), Corn refining
E.I. duPont (DD) ($29.33), Corn seed, crop protection
Monsanto Co. (MON) ($71.95), Corn seed, crop protection
Syngenta (SYT) ($29.28), Corn seed, crop protection
Deere & Co. (DE) ($30.36), Farm machinery
CNH Global (CNH) ($12.22), Farm machinery
Our thesis is long term by nature, and will take years to prove out. In the short run, both corn itself and the industry participants (e.g., Deere) may have been oversold, caught up in the forced hedge fund liquidations. So, our present recommendation would be to watch for a recovery, and see it as a selling opportunity in what will become a troubled situation down the road.
Research Perspective
On October 1, this analyst wrote of the dubious merits of the bailout:--
Nothing actually changes, except that financials are bailed out and the national debt goes up. We are at the end of a huge credit upcycle. The bailout plan is a very expensive and futile effort to extend it.........a wealth transfer from the public to financials, with no assurance of new lending as a result.
Naturally, the plan was passed. Almost immediately afterward, its central strategy was abandoned, the one on which the government had staked so much of its credibility, and replaced with a completely different one. Neither the previous one nor the current one involves any commitment by the recipients to lend, so there will be no impact other than the wealth transfer we expected. Our institutions and processes are now almost out of control, and the crisis of confidence in them is finally upon us.
For years, America listened to, and went along with, big, forceful assertions about war, deficits, low interest rates, trickle down, deregulation, low savings rates, executive compensation, job creation, incentives, and now bailout plans. We must by now realize that none of it was true, and have started to pay the price. We are now living through Act I, Scene 1 of the payback phase.
If there is any good news in all this, it must be that by now it should be possible to say something not patently false, and not be shouted down. From crisis comes the possibility of reform, maybe even the necessity for it. Six months ago, this analyst wrote up an eight-point economic plan. We said then that no aspect of it would happen. Now, the chances have improved. In particular, our fourth point:--
Cut health care costs in half by getting the massive amounts of corn out of the American food supply. Corn is junk, whose only dietary uses are in fattening up livestock or in milling into junk food or processing into corn fructose. As such, its contributions, uniquely American, are heart disease, obesity, and diabetes.
The corn growers and refiners, and their whole support group infrastructure, have had a stranglehold on US government policy that rivals the military establishment. Their grip may be weakening. The first chink may be corn for fuel, the many bizarre aspects of which were obvious all along. But that is just the start. Corn itself, not just corn-based ethanol, will come under increasing scrutiny and pressure.
The Economy, Heath Care, and Public Policy
Pressure for change in national priorities will come from two directions, accelerated by a progressively weaker economy. First, government spending generally will get refocused on necessary programs, and away from those that are simply corrupt. Second, the cost of health care, not just how to pay for it, will get more attention.
Grower subsidies have been a sore point for years. The Farm Bill is a transfer payment to growers, an entitlement. It typically does not even go to the operators, the ones riding in tractor cabs, but to people living in New York and Beverly Hills. As the legislation makes its way through Congress, it picks up more and more unrelated amendments to buy off critics, some of which are actually good (food stamps, school lunch), making it more and more expensive. Meanwhile, the commodity title survives, with no caps or even a pretense of being downside protection, even when crop prices and farm income are through the roof.
These transfer payments have had a profound effect on industry practices. The subsidies have made corn in particular a huge phenomenon it would not otherwise be. Federal payments made corn so universal by stimulating production and letting the grain be bought, until very recently, for less than the cost of growing it.
Pre-fuel ethanol, corn was made artificially cheap by taxpayer support. This economic distortion in turn drove down the prices of foods that could incorporate it, thus substituting processed food for unprocessed.
Subsidized grain also meant animals being fed corn at feedlots that could buy it cheaply, below grower cost, so beef cattle, poultry, swine, and dairy cows could all be fattened at animal feedlots, instead of on range and pasture grasses. This factory feeding produced animals diseased by fecal bacteria, and deprived of all manner of nutrition, but these problems were addressed by a big animal antibiotic and vitamin industry.
Corn growing itself is not the only subsidy beneficiary -- there is also corn refining. Sugar import tariffs into the US have for decades supported an otherwise uneconomic market for high fructose corn syrup. HFCS is in pastries and baked goods, ketchup, jams and jellies, syrup, and candy, but most of all sodas. When it comes to effective lobbying, the pharmaceutical companies, oil companies, et al -- Archer Daniels Midland taught them everything they know.
Even in a weak economy, all this nonsense would probably be sustained, if it were not for the pressure coming from a second direction -- health care cost and the imperative need to reduce it.
The US ratio of health care cost to health is high. America spends one-sixth of its national income on health care, and yet enjoys no special benefit from all this spending, compared to other developed nations. The reason for this is not bad doctors, hospitals, or care. The reason is the uniquely high prevalence of chronic, preventable disease, especially heart disease, diabetes, obesity, etc. One-third of US adults are seriously overweight or obese. The Center for Disease Control says that an alarming one in three American children born in 2000 will become diabetic.
It is this analyst’s opinion that the whole tragedy is diet-driven, and that the main problem is corn, which is discussed in detail below. Sweet corn, the kind people eat, is not a particularly good food. It is high-starch, glycemic, empty calories, compared to green vegetables. Milled corn becomes junk food and corn fructose, leading causes of diabetes and obesity. About 10% of American calorie intake comes from corn fructose alone.
Feed grain corn is used to fatten up US beef, swine, and poultry, making American meat a uniquely high-risk food, promoting heart disease and cancers compared to grass-fed. (See detail below.) A corn-based animal diet, vs. grass-fed, elevates saturated fats and triglycerides, and lowers antioxidants.
One reading of the literature leads to the conclusion that, post-smoking, corn is the single worst offender when it comes to boosting health care cost. Therefore, an enlightened health care proposal will not only address issues of who pays how much and by what means. It will also address corn, which imposes huge, unnecessary costs on the nation.
It appears to this analyst that corn is why our health is so poor, relative to what we spend on health care. If this is the case, and it becomes better known, corn will be pressured from two directions. First, if only for reasons of fiscal necessity, the Farm Bill’s grower subsidies will be cut. It will become broadly understood that these payments only lower the cost of low-quality calories of fat, sweetener, and feedlot-fed meat, thereby encouraging chronic diseases.
Second, health care proposals may address corn and identify it as the new tobacco, and the corn lobby go the way of the tobacco lobby. If so, over the next several years, an important investment theme will come along and track policy developments, namely, the decline of corn and the whole corn-driven industry.
Our thesis is long term: It will take a matter of many quarters, even years, to prove out, although we have confidence that it will. In the meantime, we are not making a call on the short-term direction of either the industry or corn itself. In fact, the commodity, on a near-term basis, may be oversold below $4/bu., a consequence of forced hedge fund liquidations.
As shown below, the corn carryover going into the 2009 planting could be only one billion bushels or a touch more, compared to 2 billion bushels going into the 2005 and 2006 plantings, a record low. In 2009, either a harvest below 12 billion bushels, or a recovery in demand ex-ethanol, which dropped by 900 mm bu this year, could produce visible tightness, even if ethanol demand plateaus.
Corn-based ethanol, which always was a mistake, is finally out of favor, and the crop price has fallen to $4/bu.
This is just the beginning of a long-term secular decline in corn’s fortunes. First, the US fiscal wreckage will put pressure on its subsidy payments.
Far more important, the cost of US health care will turn the debate to the causes of poor health itself, and the fact of our underlying poor diet.
The corn-driven American diet is acting like a slow poison on us. With a lot of education, this will become better known, producing a profound change in habits, similar to the smoking cessation phenomenon.
The resulting drop in demand for corn will mean a big retrenchment in the corn-related industries, negatively affecting:
Stocks
Potash Corp (POT) ($68.52), Fertilizers
Mosaic Co. (MOS) ($27.78), Fertilizers
Archer Daniels Midland (ADM) ($17.53 ), Corn refining
Corn Products International (CPO) ($22.99), Corn refining
E.I. duPont (DD) ($29.33), Corn seed, crop protection
Monsanto Co. (MON) ($71.95), Corn seed, crop protection
Syngenta (SYT) ($29.28), Corn seed, crop protection
Deere & Co. (DE) ($30.36), Farm machinery
CNH Global (CNH) ($12.22), Farm machinery
Our thesis is long term by nature, and will take years to prove out. In the short run, both corn itself and the industry participants (e.g., Deere) may have been oversold, caught up in the forced hedge fund liquidations. So, our present recommendation would be to watch for a recovery, and see it as a selling opportunity in what will become a troubled situation down the road.
Research Perspective
On October 1, this analyst wrote of the dubious merits of the bailout:--
Nothing actually changes, except that financials are bailed out and the national debt goes up. We are at the end of a huge credit upcycle. The bailout plan is a very expensive and futile effort to extend it.........a wealth transfer from the public to financials, with no assurance of new lending as a result.
Naturally, the plan was passed. Almost immediately afterward, its central strategy was abandoned, the one on which the government had staked so much of its credibility, and replaced with a completely different one. Neither the previous one nor the current one involves any commitment by the recipients to lend, so there will be no impact other than the wealth transfer we expected. Our institutions and processes are now almost out of control, and the crisis of confidence in them is finally upon us.
For years, America listened to, and went along with, big, forceful assertions about war, deficits, low interest rates, trickle down, deregulation, low savings rates, executive compensation, job creation, incentives, and now bailout plans. We must by now realize that none of it was true, and have started to pay the price. We are now living through Act I, Scene 1 of the payback phase.
If there is any good news in all this, it must be that by now it should be possible to say something not patently false, and not be shouted down. From crisis comes the possibility of reform, maybe even the necessity for it. Six months ago, this analyst wrote up an eight-point economic plan. We said then that no aspect of it would happen. Now, the chances have improved. In particular, our fourth point:--
Cut health care costs in half by getting the massive amounts of corn out of the American food supply. Corn is junk, whose only dietary uses are in fattening up livestock or in milling into junk food or processing into corn fructose. As such, its contributions, uniquely American, are heart disease, obesity, and diabetes.
The corn growers and refiners, and their whole support group infrastructure, have had a stranglehold on US government policy that rivals the military establishment. Their grip may be weakening. The first chink may be corn for fuel, the many bizarre aspects of which were obvious all along. But that is just the start. Corn itself, not just corn-based ethanol, will come under increasing scrutiny and pressure.
The Economy, Heath Care, and Public Policy
Pressure for change in national priorities will come from two directions, accelerated by a progressively weaker economy. First, government spending generally will get refocused on necessary programs, and away from those that are simply corrupt. Second, the cost of health care, not just how to pay for it, will get more attention.
Grower subsidies have been a sore point for years. The Farm Bill is a transfer payment to growers, an entitlement. It typically does not even go to the operators, the ones riding in tractor cabs, but to people living in New York and Beverly Hills. As the legislation makes its way through Congress, it picks up more and more unrelated amendments to buy off critics, some of which are actually good (food stamps, school lunch), making it more and more expensive. Meanwhile, the commodity title survives, with no caps or even a pretense of being downside protection, even when crop prices and farm income are through the roof.
These transfer payments have had a profound effect on industry practices. The subsidies have made corn in particular a huge phenomenon it would not otherwise be. Federal payments made corn so universal by stimulating production and letting the grain be bought, until very recently, for less than the cost of growing it.
Pre-fuel ethanol, corn was made artificially cheap by taxpayer support. This economic distortion in turn drove down the prices of foods that could incorporate it, thus substituting processed food for unprocessed.
Subsidized grain also meant animals being fed corn at feedlots that could buy it cheaply, below grower cost, so beef cattle, poultry, swine, and dairy cows could all be fattened at animal feedlots, instead of on range and pasture grasses. This factory feeding produced animals diseased by fecal bacteria, and deprived of all manner of nutrition, but these problems were addressed by a big animal antibiotic and vitamin industry.
Corn growing itself is not the only subsidy beneficiary -- there is also corn refining. Sugar import tariffs into the US have for decades supported an otherwise uneconomic market for high fructose corn syrup. HFCS is in pastries and baked goods, ketchup, jams and jellies, syrup, and candy, but most of all sodas. When it comes to effective lobbying, the pharmaceutical companies, oil companies, et al -- Archer Daniels Midland taught them everything they know.
Even in a weak economy, all this nonsense would probably be sustained, if it were not for the pressure coming from a second direction -- health care cost and the imperative need to reduce it.
The US ratio of health care cost to health is high. America spends one-sixth of its national income on health care, and yet enjoys no special benefit from all this spending, compared to other developed nations. The reason for this is not bad doctors, hospitals, or care. The reason is the uniquely high prevalence of chronic, preventable disease, especially heart disease, diabetes, obesity, etc. One-third of US adults are seriously overweight or obese. The Center for Disease Control says that an alarming one in three American children born in 2000 will become diabetic.
It is this analyst’s opinion that the whole tragedy is diet-driven, and that the main problem is corn, which is discussed in detail below. Sweet corn, the kind people eat, is not a particularly good food. It is high-starch, glycemic, empty calories, compared to green vegetables. Milled corn becomes junk food and corn fructose, leading causes of diabetes and obesity. About 10% of American calorie intake comes from corn fructose alone.
Feed grain corn is used to fatten up US beef, swine, and poultry, making American meat a uniquely high-risk food, promoting heart disease and cancers compared to grass-fed. (See detail below.) A corn-based animal diet, vs. grass-fed, elevates saturated fats and triglycerides, and lowers antioxidants.
One reading of the literature leads to the conclusion that, post-smoking, corn is the single worst offender when it comes to boosting health care cost. Therefore, an enlightened health care proposal will not only address issues of who pays how much and by what means. It will also address corn, which imposes huge, unnecessary costs on the nation.
It appears to this analyst that corn is why our health is so poor, relative to what we spend on health care. If this is the case, and it becomes better known, corn will be pressured from two directions. First, if only for reasons of fiscal necessity, the Farm Bill’s grower subsidies will be cut. It will become broadly understood that these payments only lower the cost of low-quality calories of fat, sweetener, and feedlot-fed meat, thereby encouraging chronic diseases.
Second, health care proposals may address corn and identify it as the new tobacco, and the corn lobby go the way of the tobacco lobby. If so, over the next several years, an important investment theme will come along and track policy developments, namely, the decline of corn and the whole corn-driven industry.
Our thesis is long term: It will take a matter of many quarters, even years, to prove out, although we have confidence that it will. In the meantime, we are not making a call on the short-term direction of either the industry or corn itself. In fact, the commodity, on a near-term basis, may be oversold below $4/bu., a consequence of forced hedge fund liquidations.
As shown below, the corn carryover going into the 2009 planting could be only one billion bushels or a touch more, compared to 2 billion bushels going into the 2005 and 2006 plantings, a record low. In 2009, either a harvest below 12 billion bushels, or a recovery in demand ex-ethanol, which dropped by 900 mm bu this year, could produce visible tightness, even if ethanol demand plateaus.
Agrochemical Sector a Bright Spot in Slowing
Agrochemical companies are expected to hold up better than the overall chemicals industry in the current global economic slowdown, with credit ratings remaining stable through the end of 2008 and 2009, according to Standard and Poor’s Ratings Services.
Thanks to continuing world population growth, improving standards of living, energy diversification into biofuels, and a cap on the amount of arable land available, the outlook for agrochemicals companies..remains favorable.
Record U.S. farm income is forecast for 2008, which should boost farmers’ purchasing power of fertilizer, as well as the latest state-of-the-art seed varieties. In addition, fertilizer prices should remain high because of tight supplies and strong demand globally, S and P said.
As a result, companies such as Monsanto Co. (MON) and Potash Corp. (POT) have seen their credit ratings upgraded in 2008, with the entire sector seeing S and P ratings improvements over the past 18 months
Thanks to continuing world population growth, improving standards of living, energy diversification into biofuels, and a cap on the amount of arable land available, the outlook for agrochemicals companies..remains favorable.
Record U.S. farm income is forecast for 2008, which should boost farmers’ purchasing power of fertilizer, as well as the latest state-of-the-art seed varieties. In addition, fertilizer prices should remain high because of tight supplies and strong demand globally, S and P said.
As a result, companies such as Monsanto Co. (MON) and Potash Corp. (POT) have seen their credit ratings upgraded in 2008, with the entire sector seeing S and P ratings improvements over the past 18 months
Monday, October 13, 2008
Deere shares rise as analyst reports higher demand
Deere shares jump as analyst reports robust demand for large agricultural equipment in Sept.
PITTSBURGH (AP) -- Shares of Deere & Co., the world's largest of maker of farm machinery, ticked higher Monday as an analyst reported surging sales of large agricultural equipment in September.
Shares of the Moline, Ill.-based company shot up $4.33, or 11.4 percent, to $42.45. Deere shares have traded between $34 and $94.89 over the past year, and are off 54 percent since January.
In an investor note, Robert W. Baird & Co. analyst Robert McCarthy wrote that row crop tractor sales jumped 60 percent in September compared with the same month last year, while 4WD tractor sales more than doubled.
Sales of combines, or harvesters, grew 58 percent in September, the most important month of the year for sales of the machines, he wrote.
Deere reported it had not seen significant order cancellations for fiscal 2009, "suggesting the current economic turmoil and recent crop price softening have yet to impact demand for large agricultural equipment," McCarthy wrote.
The analyst rates the stock a "Neutral."
PITTSBURGH (AP) -- Shares of Deere & Co., the world's largest of maker of farm machinery, ticked higher Monday as an analyst reported surging sales of large agricultural equipment in September.
Shares of the Moline, Ill.-based company shot up $4.33, or 11.4 percent, to $42.45. Deere shares have traded between $34 and $94.89 over the past year, and are off 54 percent since January.
In an investor note, Robert W. Baird & Co. analyst Robert McCarthy wrote that row crop tractor sales jumped 60 percent in September compared with the same month last year, while 4WD tractor sales more than doubled.
Sales of combines, or harvesters, grew 58 percent in September, the most important month of the year for sales of the machines, he wrote.
Deere reported it had not seen significant order cancellations for fiscal 2009, "suggesting the current economic turmoil and recent crop price softening have yet to impact demand for large agricultural equipment," McCarthy wrote.
The analyst rates the stock a "Neutral."
Saturday, October 11, 2008
Potash Corp.: No Liquidity Problems Here
The problem with some analysts these days is that they have no clue of financials, accounting, financing decisions, investment decisions, dividend policies, buybacks.....they are simply analysts who call out a target based on what other analysts have concluded.
Being an accountant by profession, a banker by day and university finance professor by night, I can safely say that Andrew Snyder's liquidity analysis is completely out of line, although his ratios are correct.
Potash Corp. (POT), on the surface, has a negative current ratio, negative working capital as of June 30, 2008. This is a major shift from December 31, 2007 and due entirely to the repurchase of close to $1.5 billion of company shares which consumed cash. They did this as they thought this was the best investment with a positive net present value. Their cashflow will quickly replenish this situation and we should not be alarmed with this situation.
To say that the company has a liquidity problem is like saying an individual has a liquidity problem; although he is making $900,000 per year, his house is paid off, he has $5,000 in his bank account and owes $8,000 on his credit card.....yes, he is illiquid, but he can quickly offset this situation with his earnings or new long term debt on his house.
The stock is trading based on a $450 per tonne while the current price is $1,000 per tonne, and the company's President recently said he could get $5,000 per tonne, but did not want to go this route due to the possibility of killing demand.
I suggest that analysts like Snyder understand the full situation prior to publishing these types of articles.
Being an accountant by profession, a banker by day and university finance professor by night, I can safely say that Andrew Snyder's liquidity analysis is completely out of line, although his ratios are correct.
Potash Corp. (POT), on the surface, has a negative current ratio, negative working capital as of June 30, 2008. This is a major shift from December 31, 2007 and due entirely to the repurchase of close to $1.5 billion of company shares which consumed cash. They did this as they thought this was the best investment with a positive net present value. Their cashflow will quickly replenish this situation and we should not be alarmed with this situation.
To say that the company has a liquidity problem is like saying an individual has a liquidity problem; although he is making $900,000 per year, his house is paid off, he has $5,000 in his bank account and owes $8,000 on his credit card.....yes, he is illiquid, but he can quickly offset this situation with his earnings or new long term debt on his house.
The stock is trading based on a $450 per tonne while the current price is $1,000 per tonne, and the company's President recently said he could get $5,000 per tonne, but did not want to go this route due to the possibility of killing demand.
I suggest that analysts like Snyder understand the full situation prior to publishing these types of articles.
Terra Industries Inc.: Zacks Rank Buy
Terra Industries Inc. (NYSE: TRA - News) has seen its stock crushed in the market downturn as the fertilizers moved out of favor on fears of a commodities crash. The company is now incredibly cheap, trading at only 2.8x projected earnings, yet fundamentals remain intact.
TRA has surprised on estimates the prior 2 quarters by an average of 30.11%. Analysts still expect year over year earnings growth of 152.49%. Terra is expected to report third-quarter earnings on Oct 23.
Company Description
Terra Industries produces nitrogen products for agricultural, industrial and environmental customers. TRA owns 6 North American manufacturing facilities and owns a 50% interest in joint ventures in the UK and The Republic of Trinidad and Tobago.
The company's product line includes ammonia, urea ammonium nitrate solutions (UAN), ammonium nitrate and urea.
Terra Industries Crushed Second Quarter Estimates by 51.22%
On July 24, TRA reported second quarter earnings that easily beat Wall Street estimates by 63 cents a share. Earnings per share were $1.85 compared to analysts' estimates of $1.23 per share. Net income soared to $202.2 million from $69.4 million in the second quarter of 2007.
Revenues jumped 22% to $843.1 million from $692.5 million in the year ago period mainly due to higher nitrogen product pricing. Ammonia rose 48%, UAN increased 48% and ammonium nitrate gained 25% over a year ago prices.
There was strong nitrogen product demand resulting from low grain inventories and high grain prices.
Outlook
Terra saw record earnings in the second quarter but can it repeat its performance? In July, the company expected strong demand to continue for the remainder of the year as customers would need to fill their storage capacity in anticipation of the spring 2009 planting and application season.
At the end of the second quarter, the company expected tight supplies to continue to support higher prices. However, with the commodities downturn and the credit crisis, the outlook for some of the nitrogen products has changed. Urea prices, for instance, have fallen over the last few weeks.
Consensus Estimates Still Rising
Despite uncertainty in the nitrogen fertilizer market, covering analysts have been raising estimates for the third quarter and the full year. Third-quarter estimates are up 10 cents to $1.52 in the last 30 days.
For the full year, estimates jumped 9% to $5.98 from $5.49 per share in the last month.
Value Fundamentals
Terra Industries is a Zacks #1 Rank (Strong Buy) stock. TRA is dirt cheap. It is trading at only 2.8x forward earnings and has a price-to-book of 1.79.
TRA has an excellent five year average return on equity (ROE) of 16.45%. Additionally, the company pays a dividend with a current yield of 2.00%.
TRA has surprised on estimates the prior 2 quarters by an average of 30.11%. Analysts still expect year over year earnings growth of 152.49%. Terra is expected to report third-quarter earnings on Oct 23.
Company Description
Terra Industries produces nitrogen products for agricultural, industrial and environmental customers. TRA owns 6 North American manufacturing facilities and owns a 50% interest in joint ventures in the UK and The Republic of Trinidad and Tobago.
The company's product line includes ammonia, urea ammonium nitrate solutions (UAN), ammonium nitrate and urea.
Terra Industries Crushed Second Quarter Estimates by 51.22%
On July 24, TRA reported second quarter earnings that easily beat Wall Street estimates by 63 cents a share. Earnings per share were $1.85 compared to analysts' estimates of $1.23 per share. Net income soared to $202.2 million from $69.4 million in the second quarter of 2007.
Revenues jumped 22% to $843.1 million from $692.5 million in the year ago period mainly due to higher nitrogen product pricing. Ammonia rose 48%, UAN increased 48% and ammonium nitrate gained 25% over a year ago prices.
There was strong nitrogen product demand resulting from low grain inventories and high grain prices.
Outlook
Terra saw record earnings in the second quarter but can it repeat its performance? In July, the company expected strong demand to continue for the remainder of the year as customers would need to fill their storage capacity in anticipation of the spring 2009 planting and application season.
At the end of the second quarter, the company expected tight supplies to continue to support higher prices. However, with the commodities downturn and the credit crisis, the outlook for some of the nitrogen products has changed. Urea prices, for instance, have fallen over the last few weeks.
Consensus Estimates Still Rising
Despite uncertainty in the nitrogen fertilizer market, covering analysts have been raising estimates for the third quarter and the full year. Third-quarter estimates are up 10 cents to $1.52 in the last 30 days.
For the full year, estimates jumped 9% to $5.98 from $5.49 per share in the last month.
Value Fundamentals
Terra Industries is a Zacks #1 Rank (Strong Buy) stock. TRA is dirt cheap. It is trading at only 2.8x forward earnings and has a price-to-book of 1.79.
TRA has an excellent five year average return on equity (ROE) of 16.45%. Additionally, the company pays a dividend with a current yield of 2.00%.
Friday, October 3, 2008
Wilted Ag Sector May Grow Anew
The government's bailout plan, I believe, is too little and too late to make any significant difference in the current credit crisis that continues to worsen.
The meltdown is far beyond Wall Street and the banking industry, because available credit is frozen everywhere, from large corporations to small businesses, and many companies are having a difficult time even meeting payroll because of the inability to borrow short-term money.
We certainly have extreme readings on sentiment indicators in the market, and we are certainly very oversold. Rate cuts, around the world, are a possibility, and that would certainly spark at least a short-term rally. However, I don't know if the rally will have any legs, and we will have to examine the action as indices hit heavy resistance levels.
One area that looks extremely attractive to me and is heavily oversold is the agricultural sector. Many companies in this sector are down between 50% and 70%, all because of forced selling as funds moved to quickly raise cash.
I like the fact that the agricultural sector isn't dependent on worldwide economic growth, but on population growth, which isn't slowing, especially in developing markets.
In addition to this population growth, income growth will also increase the demand for food. Even a modest amount of income growth in developing countries will increase demand for food.
Even though the U.S. is in, I believe, a Wall Street-induced recession, the Chinese economy will continue to expand along with consumer incomes all across Asia. That means the demands for agricultural foods, beef and related products will continue to expand no matter what the U.S. economy does.
Let's take a look at a couple of exchange-traded funds that may give investors an opportunity to take advantage of extremely oversold conditions in this sector.
The first fund is the Market Vectors Agribusiness . This fund's objective is to closely replicate the price and performance of the DAX Global Agribusiness Index. The fund's mandate is to invest at least 80% of its total assets in equity securities in worldwide companies engaged in agriculture.
The top five holdings of this fund are Syngenta , Monsanto , Potash , Deere and Mosaic . The fund holds 7% to 8% of its assets in each one of these companies.
The chart below shows that since the high in June, the price of the ETF has fallen more than 50%. Currently, many of the companies in this fund are trading at extreme discounts to earnings, and that may signal an opportunity to contrarian investors.
If you want to invest directly in the commodities, consider the Powershares DB Agricultural ETF. This fund is set up to track the Deutsche Bank Liquid Commodity Index, which is intended to reflect the agricultural sector. The index currently consists of commodities such as corn, soybeans, wheat and sugar.
Tthis fund has also had its troubles, dropping more than 30% from its July highs. The current price is extremely oversold and due for at least a snapback rally.
Current market conditions can certainly push these funds lower than they are now, but over the longer term I think that the agricultural sector will turn out to be an extremely profitable venture. The key of course is to take small bites and to use protective sell-stops in case the selling accelerates.
The meltdown is far beyond Wall Street and the banking industry, because available credit is frozen everywhere, from large corporations to small businesses, and many companies are having a difficult time even meeting payroll because of the inability to borrow short-term money.
We certainly have extreme readings on sentiment indicators in the market, and we are certainly very oversold. Rate cuts, around the world, are a possibility, and that would certainly spark at least a short-term rally. However, I don't know if the rally will have any legs, and we will have to examine the action as indices hit heavy resistance levels.
One area that looks extremely attractive to me and is heavily oversold is the agricultural sector. Many companies in this sector are down between 50% and 70%, all because of forced selling as funds moved to quickly raise cash.
I like the fact that the agricultural sector isn't dependent on worldwide economic growth, but on population growth, which isn't slowing, especially in developing markets.
In addition to this population growth, income growth will also increase the demand for food. Even a modest amount of income growth in developing countries will increase demand for food.
Even though the U.S. is in, I believe, a Wall Street-induced recession, the Chinese economy will continue to expand along with consumer incomes all across Asia. That means the demands for agricultural foods, beef and related products will continue to expand no matter what the U.S. economy does.
Let's take a look at a couple of exchange-traded funds that may give investors an opportunity to take advantage of extremely oversold conditions in this sector.
The first fund is the Market Vectors Agribusiness . This fund's objective is to closely replicate the price and performance of the DAX Global Agribusiness Index. The fund's mandate is to invest at least 80% of its total assets in equity securities in worldwide companies engaged in agriculture.
The top five holdings of this fund are Syngenta , Monsanto , Potash , Deere and Mosaic . The fund holds 7% to 8% of its assets in each one of these companies.
The chart below shows that since the high in June, the price of the ETF has fallen more than 50%. Currently, many of the companies in this fund are trading at extreme discounts to earnings, and that may signal an opportunity to contrarian investors.
If you want to invest directly in the commodities, consider the Powershares DB Agricultural ETF. This fund is set up to track the Deutsche Bank Liquid Commodity Index, which is intended to reflect the agricultural sector. The index currently consists of commodities such as corn, soybeans, wheat and sugar.
Tthis fund has also had its troubles, dropping more than 30% from its July highs. The current price is extremely oversold and due for at least a snapback rally.
Current market conditions can certainly push these funds lower than they are now, but over the longer term I think that the agricultural sector will turn out to be an extremely profitable venture. The key of course is to take small bites and to use protective sell-stops in case the selling accelerates.
Guidance Up; Stock Price Down
It's not often that a company raises guidance and its stock drops 16% on the day, but that's exactly what happened to Monsanto (NYSE: MON) yesterday.
The company increased its earnings-per-share guidance to around $3.59 this fiscal year, up from its range of $3.49 to $3.51 from just two weeks ago. Monsanto is scheduled to release official earnings next Wednesday; I wonder if the final earnings number will be even larger.
But investors are rightfully not all that interested in what happened in the most recent quarter. We tend to look forward, and there's a lot to be worried about.
On Wednesday, fertilizer maker Mosaic (NYSE: MOS) released lower-than-expected earnings, and worry that farmers may cut back on their need for high-priced fertilizer pushed down fellow makers Agrium (NYSE: AGU) and PotashCorp (NYSE: POT). Monsanto came along for the ride presumably because investors are worried that lower grain prices are going to put pressure on Monsanto's Roundup or seed prices. But the company increased its expected gross profits from Roundup for next fiscal year by almost 10%. That sounds a tad optimistic, but given the company's knack for beating its own estimates, it's hard to bet against Monsanto.
The bigger problem may be the credit crisis. It doesn't matter what the price of grain is, if farmers can't get loans to buy seeds from Monsanto and Syngenta (NYSE: SYT), or tractors from Deere (NYSE: DE), the entire agriculture sector will suffer.
Given that, I do like the long-term outlook for Monsanto and the rest of the agricultural industry, but the fact that much of the industry is tied to the price of grain scares me a lot. The prices of the stocks and grain have come down considerably, but I'm not ready to call the bottom quite yet. Investors would be wise to wait until fear has been completely priced in before jumping into the sector.
The company increased its earnings-per-share guidance to around $3.59 this fiscal year, up from its range of $3.49 to $3.51 from just two weeks ago. Monsanto is scheduled to release official earnings next Wednesday; I wonder if the final earnings number will be even larger.
But investors are rightfully not all that interested in what happened in the most recent quarter. We tend to look forward, and there's a lot to be worried about.
On Wednesday, fertilizer maker Mosaic (NYSE: MOS) released lower-than-expected earnings, and worry that farmers may cut back on their need for high-priced fertilizer pushed down fellow makers Agrium (NYSE: AGU) and PotashCorp (NYSE: POT). Monsanto came along for the ride presumably because investors are worried that lower grain prices are going to put pressure on Monsanto's Roundup or seed prices. But the company increased its expected gross profits from Roundup for next fiscal year by almost 10%. That sounds a tad optimistic, but given the company's knack for beating its own estimates, it's hard to bet against Monsanto.
The bigger problem may be the credit crisis. It doesn't matter what the price of grain is, if farmers can't get loans to buy seeds from Monsanto and Syngenta (NYSE: SYT), or tractors from Deere (NYSE: DE), the entire agriculture sector will suffer.
Given that, I do like the long-term outlook for Monsanto and the rest of the agricultural industry, but the fact that much of the industry is tied to the price of grain scares me a lot. The prices of the stocks and grain have come down considerably, but I'm not ready to call the bottom quite yet. Investors would be wise to wait until fear has been completely priced in before jumping into the sector.
Mosiac Earnings Disappoint - Only Up 384% (MOS, POT, AGU)
Agricultural nutrients and fertilizer producer The Mosaic Company (NYSE:MOS) reported net earnings of $2.65 per share October 1, and if the market’s reaction is any indication of the tenor for the upcoming earnings season, it’s time to strap ourselves in for a shaky ride for the rest of 2008. (Speaking of earnings season, another good read is: Five Tricks Companies Use During Earnings Season.)
Mosaic’s net earnings of $1.18 billion improved 384% from the $305 million posted a year ago. And that’s not one of those facade-laden growth rates, where one of the comparison quarters is thrown off by a huge one-time expense or gain. Mosaic’s performance was about as organic as nearly 400% can be - revenue growth was more than a double with $4.3 billion in sales as opposed to just over $2 billion last year.
Average prices for the company’s two largest revenue sources - potash and phosphates for crop fertilizers - are up well over 200% in less than a year, or as the company stated in its news release, "substantially" higher. The average rate for potash (most of which are set in medium-term contracts) was $488 per tonne, while phosphate sold for an average of $1,013 per tonne during the quarter. The rapid price increases have allowed gross margins to expand by 12 percentage points, from 26% to more than 38% in the quarter ending August 31.
When Did We Get So Optimistic?
Alas to any readers new to this slice of the ag sector, these blowout figures were not unexpected by analysts. Mosaic actually missed earnings estimates of $2.94, although it beat revenue-side estimates by about $200 million. The "miss" on earnings, combined with a planned slowdown in the production of its number-one product (phosphates), helped to send the stock into the slammer. On October 2, Mosaic was down as much as 30%.
The losses carried over into leading potash producer Potash Corp. of Saskatchewan (NYSE:POT) and Agrium (NYSE:AGU), both of which were down more than 20% in mid-day trading.
If the reaction to Mosaic’s earnings are any indication of the tone for Q4 earnings, I suggest we all pick up an extra bottle of Maalox (sold by Novartis NYSE:NVS) before next week. Mosaic was generally upbeat in its conference call, noting that fundamentals in the ag sector remain healthy. Strong underlying demand versus limited supplies of most agricultural nutrients should keep prices either stable or moving upward in the near future.
Analysts Making Me Cynical
The planned slowdown of phosphates - which makes up over half of Mosaic’s sales - is for between 500,000 and 1 million tonnes over the next few months, or between 6% and 12% of a full year’s production level. This is certainly noteworthy and will affect sales, but prices are expected to remain in the $1,020 to $1,080 range. Analysts have unfortunately missed the baton again; as soon as their precious estimates had to be notched down, they downgraded the stock, adjusting price targets down by as much as $40 per share! The typical sell-side analysts’ behavior is increasingly becoming a contrarian indicator for me. If they say "sell", I want to buy, and if they say "buy", chances are the stock is already up 50% in the past month and about to crest.
Potash Corp’s 20% stock drubbing October 2 is even more puzzling. Phosphates are much less important to Potash Corp, where the nutrient makes up less than one-third of sales. As the company’s descriptive name suggests, potash is the main driver of earnings, and Mosaic noted in its earnings call that pricing trends are still going upward for potash, and that global supplies are much tighter than for phosphates.
If These Guys Are Wrong, I Don’t Wanna’ Be Right
Potash Corp, Agrium and Mosaic all trade for P/E ratios (current year) well under 10. Forward multiples based on 2009 earnings estimates are all the way down to the four- to five-times level. If we are indeed already in a recession (or standing right at the precipice), then earnings estimates will be coming down across every sector.
However, if pricing for the ag nutrients has indeed stabilized at these higher levels based on fundamental supply/demand forces, maybe there isn’t the inevitable next shoe to drop. I for one do not want to bet against the secular trends here. World grain inventories are at 35-year lows, and many emerging markets crave more protein in their diet, which means more grain for feedstocks.
Parting Thoughts
The cash flow being thrown off by these companies is amazing. Mosaic is on pace to deliver more than $3.5 billion in operating cash flow over the next 12 months, or nearly 25% of the company’s total market cap. If they wanted to, Mosaic and Potash Corp. could start buying back 10-15% of their shares every year and take over the entire companies' private stock in less than a decade. If analysts keep their heads stuck in the dirt, it just may be the best allocation of capital from management’s perspective. (For more information regarding cash flow, see: How Some Companies Abuse Cash Flow.)
Mosaic’s net earnings of $1.18 billion improved 384% from the $305 million posted a year ago. And that’s not one of those facade-laden growth rates, where one of the comparison quarters is thrown off by a huge one-time expense or gain. Mosaic’s performance was about as organic as nearly 400% can be - revenue growth was more than a double with $4.3 billion in sales as opposed to just over $2 billion last year.
Average prices for the company’s two largest revenue sources - potash and phosphates for crop fertilizers - are up well over 200% in less than a year, or as the company stated in its news release, "substantially" higher. The average rate for potash (most of which are set in medium-term contracts) was $488 per tonne, while phosphate sold for an average of $1,013 per tonne during the quarter. The rapid price increases have allowed gross margins to expand by 12 percentage points, from 26% to more than 38% in the quarter ending August 31.
When Did We Get So Optimistic?
Alas to any readers new to this slice of the ag sector, these blowout figures were not unexpected by analysts. Mosaic actually missed earnings estimates of $2.94, although it beat revenue-side estimates by about $200 million. The "miss" on earnings, combined with a planned slowdown in the production of its number-one product (phosphates), helped to send the stock into the slammer. On October 2, Mosaic was down as much as 30%.
The losses carried over into leading potash producer Potash Corp. of Saskatchewan (NYSE:POT) and Agrium (NYSE:AGU), both of which were down more than 20% in mid-day trading.
If the reaction to Mosaic’s earnings are any indication of the tone for Q4 earnings, I suggest we all pick up an extra bottle of Maalox (sold by Novartis NYSE:NVS) before next week. Mosaic was generally upbeat in its conference call, noting that fundamentals in the ag sector remain healthy. Strong underlying demand versus limited supplies of most agricultural nutrients should keep prices either stable or moving upward in the near future.
Analysts Making Me Cynical
The planned slowdown of phosphates - which makes up over half of Mosaic’s sales - is for between 500,000 and 1 million tonnes over the next few months, or between 6% and 12% of a full year’s production level. This is certainly noteworthy and will affect sales, but prices are expected to remain in the $1,020 to $1,080 range. Analysts have unfortunately missed the baton again; as soon as their precious estimates had to be notched down, they downgraded the stock, adjusting price targets down by as much as $40 per share! The typical sell-side analysts’ behavior is increasingly becoming a contrarian indicator for me. If they say "sell", I want to buy, and if they say "buy", chances are the stock is already up 50% in the past month and about to crest.
Potash Corp’s 20% stock drubbing October 2 is even more puzzling. Phosphates are much less important to Potash Corp, where the nutrient makes up less than one-third of sales. As the company’s descriptive name suggests, potash is the main driver of earnings, and Mosaic noted in its earnings call that pricing trends are still going upward for potash, and that global supplies are much tighter than for phosphates.
If These Guys Are Wrong, I Don’t Wanna’ Be Right
Potash Corp, Agrium and Mosaic all trade for P/E ratios (current year) well under 10. Forward multiples based on 2009 earnings estimates are all the way down to the four- to five-times level. If we are indeed already in a recession (or standing right at the precipice), then earnings estimates will be coming down across every sector.
However, if pricing for the ag nutrients has indeed stabilized at these higher levels based on fundamental supply/demand forces, maybe there isn’t the inevitable next shoe to drop. I for one do not want to bet against the secular trends here. World grain inventories are at 35-year lows, and many emerging markets crave more protein in their diet, which means more grain for feedstocks.
Parting Thoughts
The cash flow being thrown off by these companies is amazing. Mosaic is on pace to deliver more than $3.5 billion in operating cash flow over the next 12 months, or nearly 25% of the company’s total market cap. If they wanted to, Mosaic and Potash Corp. could start buying back 10-15% of their shares every year and take over the entire companies' private stock in less than a decade. If analysts keep their heads stuck in the dirt, it just may be the best allocation of capital from management’s perspective. (For more information regarding cash flow, see: How Some Companies Abuse Cash Flow.)
Monsanto Co
Monsanto Co (MON) has topped consensus estimates consistently for the last 4 quarters. On Thursday, the company boosted its 2008 earnings outlook for the second time in as many months to dispel fears of high phosphorous prices upsetting its business. The analyst community accordingly narrowed its quarterly loss view for Monsanto to 12 cents per share. The most accurate estimate, however, is pegged at a loss of 10 cents for the fourth quarter. Monsanto is scheduled to report on Wednesday, Oct 10, before the start of trading.
Is Agriculture Dead?
Ag is dead - or so says the MarketBeat blog.
The post lists all sorts of related companies, noting how much they are down, and throws in a comparison to Microsoft (MSFT) and the tech bubble.
The ag companies have earnings, and there is clear and obvious demand for their product as part of the resource theme and the global ascendancy theme, as opposed to internet stocks which were valued based on eyeballs.
So clearly ag is different!
Hang with me here, I'm not going where you think I am.
I do think ag is different, but that may not be right. The fundamental case for ag in terms of the world needing their stuff seems different - but that may not be right. The ag companies make a lot of money and trade at valuations that can be measured - but that may not matter.
Ag is either different or it isn't. If you have a 2-3% weighting you don't have to be right about it being different. It would be better if you could be right but you don't have to be. If you have 10-15% or more in ag, well, it does matter whether you are right or not.
I have had Monsanto (MON) for a long time, bought on the way up in the high $80s, sold some in the $120s and still have the stock down here, a few points under water. The way things have worked out, it is maybe 1% of the portfolio.
There is no convincing me that the name will not be a moon shot. I like the name so much I would have it over to Thanksgiving dinner (trying to inject some humor). If I am wrong and the name goes to zero, that will be bad but not ruinous. I preach on and on about moderation in themes like these for this very reason.
If you follow the logic of the MarketBeat post, then we can conclude that there are people who made the same mistakes with ag as with tech from way back when.
All ag stocks are down a lot. All mining stocks are down a lot. All emerging market stocks are down a lot. All oil stocks are down a lot. All industrial stocks are down a lot. All financials stocks are down a lot. Owning some of these is not a problem. Owning too many could be. This might sound subtle, but in terms of portfolio impact it could be quite meaningful.
(By the way, I am not suggesting anyone buy Monsanto. It is just an example; I assume you have stocks that you would like to have over for Thanksgiving dinner too.)
The post lists all sorts of related companies, noting how much they are down, and throws in a comparison to Microsoft (MSFT) and the tech bubble.
The ag companies have earnings, and there is clear and obvious demand for their product as part of the resource theme and the global ascendancy theme, as opposed to internet stocks which were valued based on eyeballs.
So clearly ag is different!
Hang with me here, I'm not going where you think I am.
I do think ag is different, but that may not be right. The fundamental case for ag in terms of the world needing their stuff seems different - but that may not be right. The ag companies make a lot of money and trade at valuations that can be measured - but that may not matter.
Ag is either different or it isn't. If you have a 2-3% weighting you don't have to be right about it being different. It would be better if you could be right but you don't have to be. If you have 10-15% or more in ag, well, it does matter whether you are right or not.
I have had Monsanto (MON) for a long time, bought on the way up in the high $80s, sold some in the $120s and still have the stock down here, a few points under water. The way things have worked out, it is maybe 1% of the portfolio.
There is no convincing me that the name will not be a moon shot. I like the name so much I would have it over to Thanksgiving dinner (trying to inject some humor). If I am wrong and the name goes to zero, that will be bad but not ruinous. I preach on and on about moderation in themes like these for this very reason.
If you follow the logic of the MarketBeat post, then we can conclude that there are people who made the same mistakes with ag as with tech from way back when.
All ag stocks are down a lot. All mining stocks are down a lot. All emerging market stocks are down a lot. All oil stocks are down a lot. All industrial stocks are down a lot. All financials stocks are down a lot. Owning some of these is not a problem. Owning too many could be. This might sound subtle, but in terms of portfolio impact it could be quite meaningful.
(By the way, I am not suggesting anyone buy Monsanto. It is just an example; I assume you have stocks that you would like to have over for Thanksgiving dinner too.)
The Real Reasons Fertilizer Stocks Are In the Dirt
Wednesday afternoon the sell-off in fertilizer stocks was reignited. Mosaic (MOS) released its latest earnings report and the results were good, but not good enough.
We were prepared for some rough times, but I don’t think any of us thought it was going to get this bad:
Mosaic (MOS) down $104.
Potash Corp (POT) down $139.
Agrium (AGU) down $70.
Sure, Mosaic is growing profits, margins, cash flows, and sales, but they missed expectations. In a market like this, missing by just a penny could easily result in a disastrous sell-off.
Mosaic missed, and paid the price. Shares plummeted 40% on Thursday.
For anyone looking to “buy on bad news,” there’s a lot more to consider. This sell-off in once-darling fertilizer stocks has happened for a lot of reasons. And those same reasons are what will limit fertilizer stocks' upside from here.
1. Great Expectations, Big Disappointments
As I stated back in early August in reference to fertilizer companies,
Expectations were just too high. Nobody could live up to them…
From here it could be a long way to go before the uptrend resumes in these stocks.
It has been a long way down since then. The fundamentals haven’t been able to stop the downward momentum.
Big expectations usually lead to big disappointments.
2. Basic Current Valuation
I know the basic arguments: Mosaic has a forward P/E ratio of 4, its margins have been regularly expanding, it sold off Saskferco, and the agriculture story (emerging markets, biofuels, no new farmland, etc.), but it hasn’t played out too well over the past couple of months for fertilizer companies
Nevertheless, they have done nothing but fall over the past two months and many investors are left scratching their heads. But this one isn’t too tough to figure out.
As the world is finally starting to realize, many of the forward estimates were a bit too high. After all, high commodity prices usually have some impact on demand. And in this case, although total revenues have increased steadily for the Big Three and margins have increased, no one is expecting the great times to last.
These are mining stocks and are highly cycle. You have to price those discounts into the market.
Granted, it’s going to take some time to bring new supply on line (it takes 5-7 years to bring a new potash mine on line), but it will come. Rest assured there will be more fertilizer supply coming, which will help bring fertilizer prices back down and significantly reduce the long-term profitability of many of these fertilizer companies.
3. Long-term Value
The long-term is probably one of the biggest issues holding back fertilizer stocks. We cannot forget the importance of fertilizer, after all, in the last 50 years the amount of arable farmland has dropped 37% on a per capita basis. So fertilizer consumption will not disappear.
High fertilizer prices have done one thing though; they’ve brought a lot of competition into the market. Potash is the perfect example. The following companies are expanding big into potash. Here are a few examples, though by no means all of them:
Mosaic – is still on schedule to ramp up its potash production by 50% over the next 12 years. In a plan laid out in April, Mosaic stated it will invest $3.15 billion in expanding its potash mines to increase production from 10.4 million tonnes to 15.5 million tonnes by 2020.
Uralkali (URALY.PK) – Despite some setbacks, Uralkali is on pace to increase its potash production by 35% by the end of 2010.
Rio Tinto (RTP) – Rio Tinto has been one of the top mining companies that has declared its intentions to move into potash mining. A little over a month ago the mining giant stated it will spend $3.5 billion to open a potash mine in Argentina.
At last report, Rio Tinto stated it expects this mine to produce about 2.3 million tonnes of potash in early 2012 and then ramp up to full capacity of 4.3 million tonnes by 2020.
BHP Billiton (BHP) – has been one of the most aggressive mining majors to jump into the potash race. BHP shelled out $284 million to buy out Anglo Potash last spring. Anglo held a 25% stake in BHP’s Saskatchewan potash project.
BHP expects this mine to start producing potash as early as 2012 and has not confirmed a timeline since the takeover. But it should be on line between 2012 and 2015.
Potash One (KCLOF) – is one of the leading potash “junior” companies. Potash One and a handful of others are still chasing after the big potash prize. Many are well funded and are actively laying the groundwork for a big joint-venture (i.e. with a foreign country that would put up a big loan in exchange for a supply agreement) or takeover.
These companies would need massive amounts of capital to go into production. If you look at some of their management teams, it would not be overly surprising to see one of them become a producing mine in the next few years.
4. Agriculture Commodity Prices have Plummeted
Finally, the price of agriculture commodities has quite a bit to do with how much fertilizer farmers are willing to use. If they’re getting record high prices for crops, there’s not much worry over some extra fertilizer costs. But when their profit per acre have dropped by 40% (which has happened recently) they’re going to tighten up the purse strings a bit.
Fertilizer demand does have some elasticity and it will be impacted by crop prices.Which are all interrelated. Corn prices might be high while soybean prices may be down, but they will reach equilibrium as farmers chase after the bigger cash crop.
So when you see Powershares DB Agriculture Fund (DBA) drop 35% from its highs earlier this year when the “food crisis” story really hit the mainstream, you know fertilizer demand (and profit levels of fertilizer producers) will surely follow.
As you can see, there is a lot more supply coming. We looked at a partial view of potash (Intrepid (IPI) has some plans, Russia’s Silvinet recovers from sinkhole problems, etc.), but as you can see, the same is true for most of the other forms of fertilizer as well. As long as we value fertilizer companies for their long-term profitability, it’s easy to understand how they all came crashing down to reality over the past couple of months.
There is a lot of supply coming and potash prices will likely stay around $500 to $1,000 a ton over the long term. They won’t be too high to attract aggressive amounts of new supply and they won’t be too low so that mines are going to have to be shut down. Potash prices will probably remain in a nice range where every company makes enough money (that’s even more likely since 2 cartels control more than 70% of world potash exports.)
Yesterday, Merrill Lynch (MER) analysts offered a pretty much bearish report on potash (all commodities in general for that matter) and I’m sure some others will follow. All of the downgrades will surely add to the selling pressure and will finally push these stocks to a bottom.
Of course, all this is pretty good news. There have been a lot of investors plowing money into the fertilizer sector over the past year (on the way up and the way back down) and it looks like most investors weren’t prepared. Fertilizer companies are still mining companies and there will be plenty of volatility.
Blame the hedge funds for pounding down the share prices or just look at it as a bubble that burst with the regular accompanying consequences, but I’m now starting to turn cautiously bullish on agriculture again.
This time around it won’t be a huge speculation fueled rising tide that lifts all boats. The long-term opportunity in agriculture is still there, but the biggest wins probably won’t be in fertilizer stocks, they’ll be in other agriculture subsectors.
Fertilizer stocks are in for a long period of ups and downs. I expect them then to have a few more months of rough going with plenty of false starts too. After all, there are still a few analysts with $300 and $400 price targets on Potash Corp that still have to turn negative before we can confirm a hard bottom.
Despite it all, anyone buying now should reasonably expect a 30% to 50% on Mosaic, Potash Corp, and Agrium despite any more ups and downs to come. Even with a lot of road blocks down the road, there is some significant value in the fertilizer producers.
We were prepared for some rough times, but I don’t think any of us thought it was going to get this bad:
Mosaic (MOS) down $104.
Potash Corp (POT) down $139.
Agrium (AGU) down $70.
Sure, Mosaic is growing profits, margins, cash flows, and sales, but they missed expectations. In a market like this, missing by just a penny could easily result in a disastrous sell-off.
Mosaic missed, and paid the price. Shares plummeted 40% on Thursday.
For anyone looking to “buy on bad news,” there’s a lot more to consider. This sell-off in once-darling fertilizer stocks has happened for a lot of reasons. And those same reasons are what will limit fertilizer stocks' upside from here.
1. Great Expectations, Big Disappointments
As I stated back in early August in reference to fertilizer companies,
Expectations were just too high. Nobody could live up to them…
From here it could be a long way to go before the uptrend resumes in these stocks.
It has been a long way down since then. The fundamentals haven’t been able to stop the downward momentum.
Big expectations usually lead to big disappointments.
2. Basic Current Valuation
I know the basic arguments: Mosaic has a forward P/E ratio of 4, its margins have been regularly expanding, it sold off Saskferco, and the agriculture story (emerging markets, biofuels, no new farmland, etc.), but it hasn’t played out too well over the past couple of months for fertilizer companies
Nevertheless, they have done nothing but fall over the past two months and many investors are left scratching their heads. But this one isn’t too tough to figure out.
As the world is finally starting to realize, many of the forward estimates were a bit too high. After all, high commodity prices usually have some impact on demand. And in this case, although total revenues have increased steadily for the Big Three and margins have increased, no one is expecting the great times to last.
These are mining stocks and are highly cycle. You have to price those discounts into the market.
Granted, it’s going to take some time to bring new supply on line (it takes 5-7 years to bring a new potash mine on line), but it will come. Rest assured there will be more fertilizer supply coming, which will help bring fertilizer prices back down and significantly reduce the long-term profitability of many of these fertilizer companies.
3. Long-term Value
The long-term is probably one of the biggest issues holding back fertilizer stocks. We cannot forget the importance of fertilizer, after all, in the last 50 years the amount of arable farmland has dropped 37% on a per capita basis. So fertilizer consumption will not disappear.
High fertilizer prices have done one thing though; they’ve brought a lot of competition into the market. Potash is the perfect example. The following companies are expanding big into potash. Here are a few examples, though by no means all of them:
Mosaic – is still on schedule to ramp up its potash production by 50% over the next 12 years. In a plan laid out in April, Mosaic stated it will invest $3.15 billion in expanding its potash mines to increase production from 10.4 million tonnes to 15.5 million tonnes by 2020.
Uralkali (URALY.PK) – Despite some setbacks, Uralkali is on pace to increase its potash production by 35% by the end of 2010.
Rio Tinto (RTP) – Rio Tinto has been one of the top mining companies that has declared its intentions to move into potash mining. A little over a month ago the mining giant stated it will spend $3.5 billion to open a potash mine in Argentina.
At last report, Rio Tinto stated it expects this mine to produce about 2.3 million tonnes of potash in early 2012 and then ramp up to full capacity of 4.3 million tonnes by 2020.
BHP Billiton (BHP) – has been one of the most aggressive mining majors to jump into the potash race. BHP shelled out $284 million to buy out Anglo Potash last spring. Anglo held a 25% stake in BHP’s Saskatchewan potash project.
BHP expects this mine to start producing potash as early as 2012 and has not confirmed a timeline since the takeover. But it should be on line between 2012 and 2015.
Potash One (KCLOF) – is one of the leading potash “junior” companies. Potash One and a handful of others are still chasing after the big potash prize. Many are well funded and are actively laying the groundwork for a big joint-venture (i.e. with a foreign country that would put up a big loan in exchange for a supply agreement) or takeover.
These companies would need massive amounts of capital to go into production. If you look at some of their management teams, it would not be overly surprising to see one of them become a producing mine in the next few years.
4. Agriculture Commodity Prices have Plummeted
Finally, the price of agriculture commodities has quite a bit to do with how much fertilizer farmers are willing to use. If they’re getting record high prices for crops, there’s not much worry over some extra fertilizer costs. But when their profit per acre have dropped by 40% (which has happened recently) they’re going to tighten up the purse strings a bit.
Fertilizer demand does have some elasticity and it will be impacted by crop prices.Which are all interrelated. Corn prices might be high while soybean prices may be down, but they will reach equilibrium as farmers chase after the bigger cash crop.
So when you see Powershares DB Agriculture Fund (DBA) drop 35% from its highs earlier this year when the “food crisis” story really hit the mainstream, you know fertilizer demand (and profit levels of fertilizer producers) will surely follow.
As you can see, there is a lot more supply coming. We looked at a partial view of potash (Intrepid (IPI) has some plans, Russia’s Silvinet recovers from sinkhole problems, etc.), but as you can see, the same is true for most of the other forms of fertilizer as well. As long as we value fertilizer companies for their long-term profitability, it’s easy to understand how they all came crashing down to reality over the past couple of months.
There is a lot of supply coming and potash prices will likely stay around $500 to $1,000 a ton over the long term. They won’t be too high to attract aggressive amounts of new supply and they won’t be too low so that mines are going to have to be shut down. Potash prices will probably remain in a nice range where every company makes enough money (that’s even more likely since 2 cartels control more than 70% of world potash exports.)
Yesterday, Merrill Lynch (MER) analysts offered a pretty much bearish report on potash (all commodities in general for that matter) and I’m sure some others will follow. All of the downgrades will surely add to the selling pressure and will finally push these stocks to a bottom.
Of course, all this is pretty good news. There have been a lot of investors plowing money into the fertilizer sector over the past year (on the way up and the way back down) and it looks like most investors weren’t prepared. Fertilizer companies are still mining companies and there will be plenty of volatility.
Blame the hedge funds for pounding down the share prices or just look at it as a bubble that burst with the regular accompanying consequences, but I’m now starting to turn cautiously bullish on agriculture again.
This time around it won’t be a huge speculation fueled rising tide that lifts all boats. The long-term opportunity in agriculture is still there, but the biggest wins probably won’t be in fertilizer stocks, they’ll be in other agriculture subsectors.
Fertilizer stocks are in for a long period of ups and downs. I expect them then to have a few more months of rough going with plenty of false starts too. After all, there are still a few analysts with $300 and $400 price targets on Potash Corp that still have to turn negative before we can confirm a hard bottom.
Despite it all, anyone buying now should reasonably expect a 30% to 50% on Mosaic, Potash Corp, and Agrium despite any more ups and downs to come. Even with a lot of road blocks down the road, there is some significant value in the fertilizer producers.
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