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)