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.