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.
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