FERTILIZER PRICES SPARK WORRIES ABOUT AG BUSINESS

Consider the agricultural products sector as one of the choice morality tales on Wall Street, circa 2008. On one hand, profits continue to expand at prodigious rates, as feverish demand for products like fertilizer drive sales by triple-digit levels. However, prices flattened out earlier this year, as customers - that is, farmers - balked at spiraling costs. The twisted hand of the credit market also played a role, as farmers found access to capital increasingly difficult to come by as the growing season matured. Meanwhile, hedge funds and momentum players continued to bet aggressively on the sector, even amidst signs that fundamentals might have peaked just after mid-year - in large measure because few other sectors worked, or worked as spectacularly, as the ag business had in the first half of the year. As company profits continued to swell, those investors refused to disabuse themselves of the idea that trees grow to the sky. But as the poet wrote, ”Turn, turn, turn.” Most of the names in the group have fallen in a fashion as spectacular as the rallies that made them such darlings earlier this year. The performance of Mosiac (MOS) garnered special notice, plunging 73% from the June highs, including Thursday’s ripe 35% scrum. The decline came after it recorded quarterly results that showed profits tripled while sales in the period doubled. But after five quarters of recording profits that beat estimates by 10% or more, Mosiac actually fell short of the lofty forecasts. Worse, it said that inventories have built for products like phosphate, which represented more than half its sales. That’s led to pressure on pricing, and prompted the company to announce plans to cut back on production. In short, fundamentals have peaked. Even though almost all the names in the sector have suffered egregious haircuts - Monsanto (MON) has lost some $35 billion of market capitalization since June - it’s difficult for analysts to project the recovery in production and pricing. Ergo, shares of Potash (POT) followed Mosiac lower, down 20% on the session. Terra Industries (TRA) - hit just a week ago by worries about its exposure to urea, a prime chemical component in some fertilizer products - fell another 25% Thursday, sinking to a low for the year. The fallout has spread to other areas of the agribusiness empire, such as soybean producer Bunge (BG), which lost 20%, and equipment maker Deere (DE). Both have traded at new lows for the year.