Stubborn Ag Bulls Emerge Covered in Fertilizer

The bubble has burst for fertilizer and agricultural chemical stocks, with former stock-market star Mosaic off by a third Thursday and others hard on their heels, like Monsanto and Potash Corp. of Saskatchewan as excess supply and reduced demand slow the pattern of price increases on farm chemicals.

Mosaic, one of the two largest fertilizer makers by sales, recently fell 32% to $45.89 — and has fallen by more than $117, or over two-thirds, since June 18, even after reporting robust fiscal first-quarter earnings growth after the bell Wednesday. Mosaic’s warning that phosphate, a particular grade of fertilizer, was leveling off in price sent hedge funds and Wall Street brokers fleeing from the sector, where consistent price increases had resulted in great expectations.

The action in fertilizer stocks in particular is comparable to the technology bust of 2000 to 2001, when profitable companies like Microsoft and Intel suffered from speculators’ realization that the sky was not the limit. Farmers could not bear the weight of ever-increasing costs forever, especially as grain prices fell by half and credit tightened. And the popularity of the momentum “ag trade” with hedge funds and day traders has led to a decline similar in magnitude and pace to the tech bust.

One long-term skeptic, Citigroup chief U.S. equity strategist Tobias Levkovich, said the bullish argument on agricultural stocks never held much weight. “One of the arguments is that there’s no supply,” Mr. Levkovich said. “When demand falls off, guess what? There’s a little more supply.”


Another giant fertilizer maker, Potash of Saskatchewan, which Goldman Sachs said was one of the top 20 most popular names in hedge-fund portfolios as of the end of June, was down 22% recently at $100.42, less than half its summer peak over $240. Another peer, Bunge is off 62% from its peak, more than such beaten-down financials as Citigroup. Among other stocks exposed to farmers, seed-and-weedkiller processor Monsanto fell 17% to $81.23, off 43% from its peak. Tractor maker Deere & Co. fell 13% to $40.15, and is 58% from its peak.

Mosaic said fiscal first-quarter earnings almost quadrupled, but the immediate issue for the market was the price of phosphate, a grade of fertilizer that contributed more than half its quarterly revenue of $4.32 billion. In response to an “excess” of phosphate on the market, the leading producer of that fertilizer reduced its production, and, as a result, its projection for sales volume of phosphate for the year. Also, it expects the average price of phosphate to be around $1,020 to $1,080 a tonne, more or less level with $1,013 this quarter, after a string

Agriculture stocks were darlings when grain prices doubled and, in some cases, tripled earlier this year. Corn, which was nearly $8 a bushel at the end of June is now at $4.50, and falling again Thursday. Similar drops have occurred in wheat and soybeans. The argument that “everyone needs to eat and they’re not making land any more” has soured on the banks and funds that spread it.

Merrill Lynch cut its rating on the agricultural chemicals sector, including Mosaic and Monsanto, because of signs of weakness in phosphate, and potash, another major grade of fertilizer. Merrill also warned “a global recession, particularly in Asia, represents a risk to corn prices, as it could lead to reduced demand growth.”