Stronger demand and persistent rainfall in Brazil could push sugar prices to new highs.
Sugar prices soared on Tuesday even as a stronger U.S. dollar kept prices muted across soft commodities. Rain in Brazil has heightened concerns that the top sugar grower's yields won't be robust enough to meet strong demand from Mexico and India.
The sweetener has been the year's best-performing soft commodity with prices at levels not seen in more than 28 years. Supply issues have supported stronger prices -- Indian production faltered because a weak monsoon season left plantations dry and now Brazilian output is also threatened by weather. India, which swung from an exporter to an importer of sugar, has had to rely more heavily on Brazil for supplies and traders say Brazil has also seen stronger demand from Mexico and the U.S. Analysts expect sugar prices to hit 26 cents a pound.
Raw sugar for March delivery trading in New York gained 0.84 cent to settle at 24.94 cents a pound on Tuesday while the October contract, which expires on Wednesday, added 0.81 cent to settle at 23.46 cents. In London, white sugar futures touched a record level of $617.70 per metric ton before pulling back slightly to $616.
"Rainfall in Brazil is delaying the crush along with lowered sucrose levels; weak Indian output and still positive demand," said Barclays Capital analyst Sudakshina Unnikrishnan, who holds a near-term price target of 25 cents a pound.
Sugar shortages could mean good things for potash fertilizer producers since potash is essential to increase cane sucrose concentration, or the amount of sweetener than can be produced from cane. Brazil currently imports 90% of its potash needs, which could increase if more land is converted to cane fields.
Shares of potash companies closed Tuesday's trading session broadly lower with Potash Corp of Saskatchewan ( POT - news - people ) down by 39 cents, or 0.4%, at $90.69; Mosaic ( MOS - news - people ) off by 77 cents, or 1.6%, at $48.77 and Intrepid Potash ( IPI - news - people ) lower by 21 cents, or 0.9%, at $23.52.
Tuesday, September 29, 2009
Friday, September 25, 2009
What the Heck Is Wrong With Fertilizer Stocks?
By all accounts, fertilizer stocks should be blazing hot. They sport some of the market's best historical and forward-looking fundamentals. Yet, the S&P 500 Fertilizer and Agricultural Chemical Index is only one of two (of a few dozen) industries with stocks that are - on average - in the red for the last six months.
Oh, don't misunderstand - they look great on paper.
Terra Industries (NYSE:TRA) and CF Industries (NYSE:CF) have trailing P/Es of 8.2 and 8.9 for cryin' out loud, and most of these stocks aren't far behind. So what's wrong with these stocks, and when will they shape up? The secret behind the answer is below, though the timing of the turn-around is still a little elusive.
Back to the Beginning
Just need to make sure we're all on the same page....
Fertilizer stocks basically doubled in price between mid-2006 and mid-2008, but don't assume it was anything the companies did. Fertilizer prices - potash and ammonia based ones in particular - went through the roof. On average, fertilizer costs increased by 83% during those two years. Why? For the same reasons any other commodity rallies - greater demand, limited supply and because manufacturers can charge that price and get it.
Stubborn to the Bone
Other commodity prices, stock prices and even crop prices for that matter don't move in sync. The CRB (commodity) index topped in early 2008. Stocks technically topped in late 2007. Corn, wheat and soybean prices all topped in the first half of 2008.
But fertilizer prices - and potash in particular - barely budged then. As August, 2008 turned into September, 2008, phosphate, potash and nitrogen prices were still on the rise. They didn't start to slide until late in 2008, and even then the price dip wasn't commensurate with the global economic implosion.
Though they'd never say so explicitly, companies like Potash Corp. (NYSE:POT), Syngenta AG (NYSE:SYT), and Mosaic Co. (NYSE:MOS) enjoy the fact that there are few major players in their arena, and as such they can collectively cut production (i.e. hold out) to maintain pricing pressure.
It worked, too. Potash prices only sank from a peak above $900 per ton in late 2008, to only the low $800 level earlier in the year. Only this year, farmers called these companies' bluffs by scaling back on potash and fertilizer usage, by as much as 30%.
That's also the reason Potash once again cut its revenue and earnings forecast (again). It's an epidemic that's not unique to that particular fertilizer company though.
Fast Forward to Today
The farmers are winning the war, and it's likely to come out of the hides of agricultural chemical producers. Translation? It may get worse before it gets better, for these stocks.
As evidence to my thesis, take the recent decision from Canpotex (which represents Potash, Mosaic and Agrium (NYSE:AGU)) to sell potash in India at $460 per ton. That's about half the price from late last year, and doesn't exactly say these companies are sticking to their guns.
Fertilizer companies may argue that the price break was given only because it was a massive 850,000 ton deal, though skeptics aren't hard to find. Those skeptical eyes are now on the lookout for a similar low price to Chinese customers. If China gets a bargain, that will be a sign that the farmers' hold-out has beaten the fertilizer companies'.
Bigger picture, it will also mean lowered margins and a diminished top line for the likes of Monsanto Inc. (NYSE:MON) and Mosaic.
The Outlook
So what may put an end to the fertilizer misery? Two things: the first is higher crop prices, and the second is lower crop yields (which actually go hand in hand). Neither is likely to be a reality in 2009 though, for three reasons.
It's too late to bother with fertilizer this season, which means demand won't likely improve until at least early 2010.
Corn prices - and most crops - are considerably lower than they were at the beginning of the year; many farms simply can't afford to utilize fertilizer.
Despite the lack of fertilizer use this year, crop yields are actually up this season; corn yields are close to hitting peak levels. It hurts corn prices, but forces the question "who needs fertilizer?"
Oh, don't misunderstand - they look great on paper.
Terra Industries (NYSE:TRA) and CF Industries (NYSE:CF) have trailing P/Es of 8.2 and 8.9 for cryin' out loud, and most of these stocks aren't far behind. So what's wrong with these stocks, and when will they shape up? The secret behind the answer is below, though the timing of the turn-around is still a little elusive.
Back to the Beginning
Just need to make sure we're all on the same page....
Fertilizer stocks basically doubled in price between mid-2006 and mid-2008, but don't assume it was anything the companies did. Fertilizer prices - potash and ammonia based ones in particular - went through the roof. On average, fertilizer costs increased by 83% during those two years. Why? For the same reasons any other commodity rallies - greater demand, limited supply and because manufacturers can charge that price and get it.
Stubborn to the Bone
Other commodity prices, stock prices and even crop prices for that matter don't move in sync. The CRB (commodity) index topped in early 2008. Stocks technically topped in late 2007. Corn, wheat and soybean prices all topped in the first half of 2008.
But fertilizer prices - and potash in particular - barely budged then. As August, 2008 turned into September, 2008, phosphate, potash and nitrogen prices were still on the rise. They didn't start to slide until late in 2008, and even then the price dip wasn't commensurate with the global economic implosion.
Though they'd never say so explicitly, companies like Potash Corp. (NYSE:POT), Syngenta AG (NYSE:SYT), and Mosaic Co. (NYSE:MOS) enjoy the fact that there are few major players in their arena, and as such they can collectively cut production (i.e. hold out) to maintain pricing pressure.
It worked, too. Potash prices only sank from a peak above $900 per ton in late 2008, to only the low $800 level earlier in the year. Only this year, farmers called these companies' bluffs by scaling back on potash and fertilizer usage, by as much as 30%.
That's also the reason Potash once again cut its revenue and earnings forecast (again). It's an epidemic that's not unique to that particular fertilizer company though.
Fast Forward to Today
The farmers are winning the war, and it's likely to come out of the hides of agricultural chemical producers. Translation? It may get worse before it gets better, for these stocks.
As evidence to my thesis, take the recent decision from Canpotex (which represents Potash, Mosaic and Agrium (NYSE:AGU)) to sell potash in India at $460 per ton. That's about half the price from late last year, and doesn't exactly say these companies are sticking to their guns.
Fertilizer companies may argue that the price break was given only because it was a massive 850,000 ton deal, though skeptics aren't hard to find. Those skeptical eyes are now on the lookout for a similar low price to Chinese customers. If China gets a bargain, that will be a sign that the farmers' hold-out has beaten the fertilizer companies'.
Bigger picture, it will also mean lowered margins and a diminished top line for the likes of Monsanto Inc. (NYSE:MON) and Mosaic.
The Outlook
So what may put an end to the fertilizer misery? Two things: the first is higher crop prices, and the second is lower crop yields (which actually go hand in hand). Neither is likely to be a reality in 2009 though, for three reasons.
It's too late to bother with fertilizer this season, which means demand won't likely improve until at least early 2010.
Corn prices - and most crops - are considerably lower than they were at the beginning of the year; many farms simply can't afford to utilize fertilizer.
Despite the lack of fertilizer use this year, crop yields are actually up this season; corn yields are close to hitting peak levels. It hurts corn prices, but forces the question "who needs fertilizer?"
Today in Commodities: The Almighty Buck
I’m calling an interim bottom, made yesterday on the US dollar index at 76.05 on the December contract. Prices gained 1% today, the first hurdle that must be overcome to confirm my feeling is a close above the 20 day moving average at 77.50. Our first target is 78.50, again on the December contract.
How we are trying to take advantage of this is short cocoa, short Euro-currency and short silver for clients. How did those work out today? Cocoa was lower by just shy of 3%, a move of $890 on a futures contract, the Euro gave up 1%, a move of $1875 on a futures contract, silver was lower by 3.5%, a move of $3000 on a futures contract.
We should have listened to our own advice on oil, as soon as $69 gave way more selling came into the market. We could see a trade down to $62 on this leg. We own December call spreads and will either use a powerful rally to cut losses or look to leg out, stay tuned. Natural gas continues to creep higher on what I believe as more short covering. We would like to see a 40 plus cent pullback to re-establish longs in December or January for clients.
Sugar could follow oil lower so we may suggest lightening up on longs if we get a pop in the next few sessions. Longer term we like being long but as we’ve suggested in past blogs, manage your trades… do not fall asleep at the wheel.
As seen above, the correction in metals we predicted appears to be underway. We’re not suggesting booking profits on shorts or getting long yet!
Treasuries were higher, some clients remain long 30-yr bonds. We expect a trade above 122′00 in coming weeks on the December contract.
Profit taking in live cattle, conservative traders may want to re-establish puts against their long December futures. Corn and wheat traded higher, that makes 3 higher days in a row for corn and 2 on wheat. We suggest long exposure via futures and options for clients. The KCBOT/CBOT wheat spread has yet to develop, keep profit objective at 20 cents premium to KCBOT.
Key reversal in the stock market yesterday as we see the S&P making its way to 990 and the Dow to 9150. Perhaps some speculators bought puts or hedged off their portfolio??
Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.
How we are trying to take advantage of this is short cocoa, short Euro-currency and short silver for clients. How did those work out today? Cocoa was lower by just shy of 3%, a move of $890 on a futures contract, the Euro gave up 1%, a move of $1875 on a futures contract, silver was lower by 3.5%, a move of $3000 on a futures contract.
We should have listened to our own advice on oil, as soon as $69 gave way more selling came into the market. We could see a trade down to $62 on this leg. We own December call spreads and will either use a powerful rally to cut losses or look to leg out, stay tuned. Natural gas continues to creep higher on what I believe as more short covering. We would like to see a 40 plus cent pullback to re-establish longs in December or January for clients.
Sugar could follow oil lower so we may suggest lightening up on longs if we get a pop in the next few sessions. Longer term we like being long but as we’ve suggested in past blogs, manage your trades… do not fall asleep at the wheel.
As seen above, the correction in metals we predicted appears to be underway. We’re not suggesting booking profits on shorts or getting long yet!
Treasuries were higher, some clients remain long 30-yr bonds. We expect a trade above 122′00 in coming weeks on the December contract.
Profit taking in live cattle, conservative traders may want to re-establish puts against their long December futures. Corn and wheat traded higher, that makes 3 higher days in a row for corn and 2 on wheat. We suggest long exposure via futures and options for clients. The KCBOT/CBOT wheat spread has yet to develop, keep profit objective at 20 cents premium to KCBOT.
Key reversal in the stock market yesterday as we see the S&P making its way to 990 and the Dow to 9150. Perhaps some speculators bought puts or hedged off their portfolio??
Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.
Potash: Suffering from an Unrelenting Price Squeeze
We have been watching as Potash (POT) and other fertilizer suppliers are having a hard time negotiating with some of the world’s most influential customers. The problem started earlier this year when India pressed hard and negotiated a deal way below market for the products. Demand was so low that Potash and others had no choice.
In their recent conference call after the abysmal earnings report, management expected prices to come down and predicted a soft market. That was reinforced after the market close last Friday when they again lower estimates. Now it looks like other customers have the idea that bargaining will work as demand is weak. This is not a good sign for companies in this industry.
From the looks of it, prices are falling fast for potash and other fertilizer products through at least the end of 2010. Obviously the sharp decline in prices will erase any hopes for top line earnings growth. We continue to maintain a SELL for the sector and in particular Potash (POT).
From Bloomberg News
Sept. 22 (Bloomberg) — China may skip price negotiations to buy potash supplies this year on weak domestic demand, an analyst at Scotia Capital Inc. said. Buyers may instead start talks for 2010 contracts in the next two months, wrote analyst Na Liu in a report dated yesterday. Liu forecast contract prices for next year at $395 a metric ton, FOB. China is the world’s biggest potash importer.
China has not concluded annual negotiations on prices this year as demand has weakened with farmers replacing potash with other compound or organic fertilizers. Prices of the nutrient tumbled from a record last year as farmers around the world cut purchases because of slumping grain prices.
“Domestic potash sales remain very sluggish and real transaction prices keep slipping,” Liu wrote in the report. The country was a net exporter of potash in July, she said.
China’s consumption of the crop nutrient has declined following a rally in prices and it will take more time for demand to recover, Liu said. “Demand can only revive from the current level into next spring’s planting season,” Liu said. Producers including BPC and Canpotex, a trader representing North American potash suppliers, last year raised the price for Chinese customers to $567 a ton, excluding freight costs.
Potash Corp. of Saskatchewan Inc. and other producers agreed in July to sell to India for $460 a ton, or about 26 percent below last year’s price. Still, contracts to supply potash to China are likely to be signed before the year-end and may spur demand in Europe and other markets, Russian producer OAO Uralkali said Sept 8. It’s “reasonable” to expect a cut compared with last year’s price given market conditions, Acting President Mikhail Antonov said.
In their recent conference call after the abysmal earnings report, management expected prices to come down and predicted a soft market. That was reinforced after the market close last Friday when they again lower estimates. Now it looks like other customers have the idea that bargaining will work as demand is weak. This is not a good sign for companies in this industry.
From the looks of it, prices are falling fast for potash and other fertilizer products through at least the end of 2010. Obviously the sharp decline in prices will erase any hopes for top line earnings growth. We continue to maintain a SELL for the sector and in particular Potash (POT).
From Bloomberg News
Sept. 22 (Bloomberg) — China may skip price negotiations to buy potash supplies this year on weak domestic demand, an analyst at Scotia Capital Inc. said. Buyers may instead start talks for 2010 contracts in the next two months, wrote analyst Na Liu in a report dated yesterday. Liu forecast contract prices for next year at $395 a metric ton, FOB. China is the world’s biggest potash importer.
China has not concluded annual negotiations on prices this year as demand has weakened with farmers replacing potash with other compound or organic fertilizers. Prices of the nutrient tumbled from a record last year as farmers around the world cut purchases because of slumping grain prices.
“Domestic potash sales remain very sluggish and real transaction prices keep slipping,” Liu wrote in the report. The country was a net exporter of potash in July, she said.
China’s consumption of the crop nutrient has declined following a rally in prices and it will take more time for demand to recover, Liu said. “Demand can only revive from the current level into next spring’s planting season,” Liu said. Producers including BPC and Canpotex, a trader representing North American potash suppliers, last year raised the price for Chinese customers to $567 a ton, excluding freight costs.
Potash Corp. of Saskatchewan Inc. and other producers agreed in July to sell to India for $460 a ton, or about 26 percent below last year’s price. Still, contracts to supply potash to China are likely to be signed before the year-end and may spur demand in Europe and other markets, Russian producer OAO Uralkali said Sept 8. It’s “reasonable” to expect a cut compared with last year’s price given market conditions, Acting President Mikhail Antonov said.
Saturday, September 19, 2009
PotashCorp Reduces 2009 Earnings Guidance
Listed: TSX, NYSE Symbol: POT
SASKATOON, Sept. 18 /CNW/ - Potash Corporation of Saskatchewan Inc. (PotashCorp) today announced revised earnings guidance of $3.25-$3.75 per share for full-year 2009, shifting from a range of $4.00-$5.00 per share(1) provided in July 2009. The change primarily reflects lower than forecasted potash sales volumes due to continued slow demand and limited restocking by fertilizer distributors around the world. Over the past 12 months, nearly 20 million tonnes of potash production has been curtailed by global producers. PotashCorp will continue to keep a tight rein on our production until demand returns in the new year. Our 2009 earnings are still expected to be among the best in company history, despite an anticipated decrease of 60 percent in year-over-year potash volumes and an 85 percent decline in our combined phosphate and nitrogen gross margin. Earnings for third-quarter 2009 are expected to be at the low-end of the $0.80-$1.20 per share guidance range previously provided.
Potash inventories that can be measured in the retail chain - this excludes less easily identified inventories in China - have been largely eliminated and potash levels in soils around the world have been significantly reduced. This creates a progressively higher risk to crop yields as soil fertility is continually diminished. While the immediate impact has been masked by good weather and residual soil nutrient levels in markets with healthy long-term fertilization and agronomic practices, such as the US and Australia, yields for key crops in several other major growing regions are expected to be substantially below 2008 levels. A significant rebound is required to address this situation and we expect 2010 global potash demand to be in the range of 50-55 million tonnes.
"Food production is an unending and long-term business," said PotashCorp President and Chief Executive Officer Bill Doyle. "Decisions related to fertilizer use today inevitably impact crop yields - and soil needs - for years to come. Although there are fluctuations in fertilizer demand, there is an essential need for our products that is based on science. The potash, phosphate and nitrogen being mined from the soil by current crops must be replaced to protect the world's future food production. As farmers around the world begin the lengthy process of replenishing nutrients in the soil, we anticipate a new wave of demand growth that will allow us to once again demonstrate the full potential of our company."
Potash Corporation of Saskatchewan Inc. is the world's largest fertilizer enterprise by capacity producing the three primary plant nutrients and a leading supplier to three distinct market categories: agriculture, with the largest capacity in the world in potash and third largest in phosphate and nitrogen; animal nutrition, with the world's largest capacity in phosphate feed ingredients; and industrial chemicals, as the largest global producer of industrial nitrogen products and the world's largest capacity for production of purified industrial phosphoric acid.
SASKATOON, Sept. 18 /CNW/ - Potash Corporation of Saskatchewan Inc. (PotashCorp) today announced revised earnings guidance of $3.25-$3.75 per share for full-year 2009, shifting from a range of $4.00-$5.00 per share(1) provided in July 2009. The change primarily reflects lower than forecasted potash sales volumes due to continued slow demand and limited restocking by fertilizer distributors around the world. Over the past 12 months, nearly 20 million tonnes of potash production has been curtailed by global producers. PotashCorp will continue to keep a tight rein on our production until demand returns in the new year. Our 2009 earnings are still expected to be among the best in company history, despite an anticipated decrease of 60 percent in year-over-year potash volumes and an 85 percent decline in our combined phosphate and nitrogen gross margin. Earnings for third-quarter 2009 are expected to be at the low-end of the $0.80-$1.20 per share guidance range previously provided.
Potash inventories that can be measured in the retail chain - this excludes less easily identified inventories in China - have been largely eliminated and potash levels in soils around the world have been significantly reduced. This creates a progressively higher risk to crop yields as soil fertility is continually diminished. While the immediate impact has been masked by good weather and residual soil nutrient levels in markets with healthy long-term fertilization and agronomic practices, such as the US and Australia, yields for key crops in several other major growing regions are expected to be substantially below 2008 levels. A significant rebound is required to address this situation and we expect 2010 global potash demand to be in the range of 50-55 million tonnes.
"Food production is an unending and long-term business," said PotashCorp President and Chief Executive Officer Bill Doyle. "Decisions related to fertilizer use today inevitably impact crop yields - and soil needs - for years to come. Although there are fluctuations in fertilizer demand, there is an essential need for our products that is based on science. The potash, phosphate and nitrogen being mined from the soil by current crops must be replaced to protect the world's future food production. As farmers around the world begin the lengthy process of replenishing nutrients in the soil, we anticipate a new wave of demand growth that will allow us to once again demonstrate the full potential of our company."
Potash Corporation of Saskatchewan Inc. is the world's largest fertilizer enterprise by capacity producing the three primary plant nutrients and a leading supplier to three distinct market categories: agriculture, with the largest capacity in the world in potash and third largest in phosphate and nitrogen; animal nutrition, with the world's largest capacity in phosphate feed ingredients; and industrial chemicals, as the largest global producer of industrial nitrogen products and the world's largest capacity for production of purified industrial phosphoric acid.
Citigroup Analyst Pessimistic on Fertilizer Industry
After holding off from buying fertilizers last year, industry analysts have expected farmers to return to their potash-buying ways this fall, but a recent survey among growers and distributors has Citigroup Global Markets less than confident this will happen any time soon.
P.J. Juvekar, analyst with Citigroup, recently conducted a survey, talked to fertilizer distributors, and even went to a farming convention in Illinois.
"Based on our discussions it seems that the fall fertilizer application season is likely to be weaker than expected," he said in a note to clients. "Our earlier thesis that farmers could not skip application indefinitely ... still stands, but application may be delayed past fall."
Several factors concern Mr. Juvekar, including the fact that farmers may be harvesting their crops two to four weeks later than usual, delaying and limiting the fall fertilizer application window.
"Every month that passes without normal volumes increases the risk a producer will break in price, which is what happened in July when Silvinit lowered price sto US$460 a tonne," he said. Silvinit agreed to a contract with India earlier this summer.
As well, while most expected China to agree to terms with producers shortly after India did, so far that has not happened. There is definite risk that China will also use volume as an incentive for lower prices.
At the same time, while producers have historically been able to hold rank on pricing, the recent Silvinit deal shows there are cracks in the facade.
"In the recent weak demand environment, some producers have shown a willingness to place volume over price to generate cash. Potash is a global commodity and pricing resolve is only as strong as the weakest link in the chain," he said.
Yet another problem is shrinking income for many farmers as corn prices have plummeted 25% year-to-date, with the U.S. Deparment of Agriculture forecasting farmer net income to fall 38% to US$54-billion. The current price of US$3.15 a bushel is also not enough, as one Illinoisian farmer claimed to need prices at US$4 a bushel to break even.
All of this has left Mr. Juvekar with a rather pessimistic view of the industry in the short term. He has cut the forecasted potash export price in for 2010-2011 to US$400 a tonne from US$450.
He is also dropping ratings on both Potash Corp. of Saskatchewan Inc. (POT) and Mosaic Co. (MOS) to Hold from Buy while slashing target prices to US$98 and US$54 from US$115 and US$62 respectively.
P.J. Juvekar, analyst with Citigroup, recently conducted a survey, talked to fertilizer distributors, and even went to a farming convention in Illinois.
"Based on our discussions it seems that the fall fertilizer application season is likely to be weaker than expected," he said in a note to clients. "Our earlier thesis that farmers could not skip application indefinitely ... still stands, but application may be delayed past fall."
Several factors concern Mr. Juvekar, including the fact that farmers may be harvesting their crops two to four weeks later than usual, delaying and limiting the fall fertilizer application window.
"Every month that passes without normal volumes increases the risk a producer will break in price, which is what happened in July when Silvinit lowered price sto US$460 a tonne," he said. Silvinit agreed to a contract with India earlier this summer.
As well, while most expected China to agree to terms with producers shortly after India did, so far that has not happened. There is definite risk that China will also use volume as an incentive for lower prices.
At the same time, while producers have historically been able to hold rank on pricing, the recent Silvinit deal shows there are cracks in the facade.
"In the recent weak demand environment, some producers have shown a willingness to place volume over price to generate cash. Potash is a global commodity and pricing resolve is only as strong as the weakest link in the chain," he said.
Yet another problem is shrinking income for many farmers as corn prices have plummeted 25% year-to-date, with the U.S. Deparment of Agriculture forecasting farmer net income to fall 38% to US$54-billion. The current price of US$3.15 a bushel is also not enough, as one Illinoisian farmer claimed to need prices at US$4 a bushel to break even.
All of this has left Mr. Juvekar with a rather pessimistic view of the industry in the short term. He has cut the forecasted potash export price in for 2010-2011 to US$400 a tonne from US$450.
He is also dropping ratings on both Potash Corp. of Saskatchewan Inc. (POT) and Mosaic Co. (MOS) to Hold from Buy while slashing target prices to US$98 and US$54 from US$115 and US$62 respectively.
Dow Keep Agri Business
EI DuPont De Nemours Co. (NYSE: DD - News) recently said it expects the performance of its seed business, Pioneer Hi-Bred, to grow more than 15% year over year in 2009. The company’s seed business has gained more than 2% of share in the North American seed corn market, which is the largest industry gain in the current year. It gained 3% in the North American soybean market and 5% in the Canadian canola seed market.
Considering a 15% growth, the seed division should generate revenue of $4.6 billion, compared with $4 billion in 2008. The business had accounted for roughly 13% of Du Pont’s total sales of $30.5 billion last year.
DuPont is the world’s second-largest chemical company. While its Agricultural and Nutrition segment is expected to be the key performance driver, continued weakness in demand across most of US markets offsets overall growth for the company. DuPont’s second-quarter profit of $417 million, or 46 cents per share, missed the Zacks Consensus Estimate of 53 cents, due to lower sales volumes and adverse currency impact.
Meanwhile, rival Dow Chemical Co. (NYSE: DOW - News) also said it does not plan to divest Dow AgroSciences in the near term. Rumors were rife earlier this year that Dow might spin off this fast-growing agricultural unit or team it up with another agricultural company in order to reduce its over $16 billion debt from the Rohm & Haas acquisition.
Dow AgroSciences, which makes genetically modified seeds, herbicides and pesticides, has seen robust growth in recent years and added to the parent company’s first-quarter profit. Currently, the unit is facing tough competition from the industry leader Monsanto Co. (NYSE: MON - News). Dow is also planning to pay off the loan from the sale of its Morton Salt and Optimal businesses. The deal is expected to close by the end of the year.
We maintain our Neutral recommendation on Du Pont and Dow Chemical.
zacks.com
Considering a 15% growth, the seed division should generate revenue of $4.6 billion, compared with $4 billion in 2008. The business had accounted for roughly 13% of Du Pont’s total sales of $30.5 billion last year.
DuPont is the world’s second-largest chemical company. While its Agricultural and Nutrition segment is expected to be the key performance driver, continued weakness in demand across most of US markets offsets overall growth for the company. DuPont’s second-quarter profit of $417 million, or 46 cents per share, missed the Zacks Consensus Estimate of 53 cents, due to lower sales volumes and adverse currency impact.
Meanwhile, rival Dow Chemical Co. (NYSE: DOW - News) also said it does not plan to divest Dow AgroSciences in the near term. Rumors were rife earlier this year that Dow might spin off this fast-growing agricultural unit or team it up with another agricultural company in order to reduce its over $16 billion debt from the Rohm & Haas acquisition.
Dow AgroSciences, which makes genetically modified seeds, herbicides and pesticides, has seen robust growth in recent years and added to the parent company’s first-quarter profit. Currently, the unit is facing tough competition from the industry leader Monsanto Co. (NYSE: MON - News). Dow is also planning to pay off the loan from the sale of its Morton Salt and Optimal businesses. The deal is expected to close by the end of the year.
We maintain our Neutral recommendation on Du Pont and Dow Chemical.
zacks.com
Monday, September 7, 2009
Thumbs Up for Agrium - Desjardins
Agrium Inc. (AGU) got the thumbs up this week from Desjardins Securities analyst John Redstone, who initiated coverage on the fertilizer company, with a BUY rating and C$75.80 price target.
"Agrium is well positioned to benefit from improving fertilizer markets through its current operations and from its acquisition of CF Industries," said Mr. Redstone in a note to clients.
On the macro front, he said fertilizer markets should recover in the short term because of curtailed production, low soil nutrient levels and rising foodstuff prices. Longer term, they will benefit from rising demand from developing countries, low inventories and a limited supply-side response.
Mr. Redstone said Agrium has several key advantages to help it benefit from improving fertilizer markets, including a long potash reserve life, in-house production of ammonia, and low sulphur and natural gas costs.
"Furthermore, Agrium continues to demonstrate its determination and ability to grow by acquisition," he wrote.
As part of his bullish valuation, the analyst has included Agrium's hostile and yet unresolved bid for CF Industries (CF).
Our valuation of AGU assumes this transaction is successful, and that AGU acquires all the outstanding shares of CF for US$40.00/share (US$2.008b total through debt financing) and issues an additional 49.2m shares (on top of its existing 158.1m fully diluted shares outstanding).
We have also assumed that AGU’s estimate of US$150m/year in operational synergies is realized.
As of late June, roughly 62% of the outstanding shares of CF had been tendered to the AGU offer, but CF remains unwilling to engage in dialogue with Agrium.
"Agrium is well positioned to benefit from improving fertilizer markets through its current operations and from its acquisition of CF Industries," said Mr. Redstone in a note to clients.
On the macro front, he said fertilizer markets should recover in the short term because of curtailed production, low soil nutrient levels and rising foodstuff prices. Longer term, they will benefit from rising demand from developing countries, low inventories and a limited supply-side response.
Mr. Redstone said Agrium has several key advantages to help it benefit from improving fertilizer markets, including a long potash reserve life, in-house production of ammonia, and low sulphur and natural gas costs.
"Furthermore, Agrium continues to demonstrate its determination and ability to grow by acquisition," he wrote.
As part of his bullish valuation, the analyst has included Agrium's hostile and yet unresolved bid for CF Industries (CF).
Our valuation of AGU assumes this transaction is successful, and that AGU acquires all the outstanding shares of CF for US$40.00/share (US$2.008b total through debt financing) and issues an additional 49.2m shares (on top of its existing 158.1m fully diluted shares outstanding).
We have also assumed that AGU’s estimate of US$150m/year in operational synergies is realized.
As of late June, roughly 62% of the outstanding shares of CF had been tendered to the AGU offer, but CF remains unwilling to engage in dialogue with Agrium.
Ways to Trade the Ag Space
A reader asked in an email, "if one wanted to invest in Grains, what symbols [do] you recommend?"
I don't know if I would necessarily recommend any symbol. The two stocks that I am most familiar with in this arena are the Rogers Agricultural Index (RJA) and the PowerShares DB Agriculture Fund (DBA). I once owned RJA so let's start with that one first.
RJA is an ETN designed to track the (Jim) Rogers Agricultural Index, which itself is a blend of a whole slew of soft commodities in various weights. You can get more information from its prospectus. The important item to note on RJA is that it is basically a promissory note, not an ETF, and does not hold any actual commodities or contracts. It is a liability of the bank or organization that sponsors it. In light of the financial crisis, this is an important consideration. Also, while RJA promises exposure to a wide range of commodities, the weighting may dampen any price run-up. For instance, when rice made its huge run, RJA barely moved as rice was less than 5% of the index at the time.
DBA is an actual ETF that is basically equal-weighted in four commodities: wheat, corn, soybeans and sugar. Obviously, this leaves investors out in the cold if rice or orange juice makes a big run but conversely, sugar is on a tear and the 25% (actually 31% according to ETFConnect) weighting gives investors better exposure to price moves. I would advise interested readers to read the prospectus to find out more about how the fund buys its contracts and how that might affect investor returns.
My inclination at this point would be to play the ag space via companies in the supply chain which can range from equipment suppliers like Caterpillar (CAT) to fertilizer producers like Mosaic (MOS) to seed companies like Monsanto. I feel more comfortable making buy/sell decisions on companies, where I can estimate intrinsic values, than with commodities where I have less of a base to judge fundamental value.
Keep in mind that each investor should determine the appropriate strategy for his own portfolio. What works for me may not be right for you and vice versa..seeking alpha
I don't know if I would necessarily recommend any symbol. The two stocks that I am most familiar with in this arena are the Rogers Agricultural Index (RJA) and the PowerShares DB Agriculture Fund (DBA). I once owned RJA so let's start with that one first.
RJA is an ETN designed to track the (Jim) Rogers Agricultural Index, which itself is a blend of a whole slew of soft commodities in various weights. You can get more information from its prospectus. The important item to note on RJA is that it is basically a promissory note, not an ETF, and does not hold any actual commodities or contracts. It is a liability of the bank or organization that sponsors it. In light of the financial crisis, this is an important consideration. Also, while RJA promises exposure to a wide range of commodities, the weighting may dampen any price run-up. For instance, when rice made its huge run, RJA barely moved as rice was less than 5% of the index at the time.
DBA is an actual ETF that is basically equal-weighted in four commodities: wheat, corn, soybeans and sugar. Obviously, this leaves investors out in the cold if rice or orange juice makes a big run but conversely, sugar is on a tear and the 25% (actually 31% according to ETFConnect) weighting gives investors better exposure to price moves. I would advise interested readers to read the prospectus to find out more about how the fund buys its contracts and how that might affect investor returns.
My inclination at this point would be to play the ag space via companies in the supply chain which can range from equipment suppliers like Caterpillar (CAT) to fertilizer producers like Mosaic (MOS) to seed companies like Monsanto. I feel more comfortable making buy/sell decisions on companies, where I can estimate intrinsic values, than with commodities where I have less of a base to judge fundamental value.
Keep in mind that each investor should determine the appropriate strategy for his own portfolio. What works for me may not be right for you and vice versa..seeking alpha
Market Vectors Agribusiness ETF Takes a Hit on UBS Downgrades
UBS Investment Research (UBS) downgraded two top agriculture companies Mosaic Co (MOS) and Potash Corp (POT) to Neutral from Buy on Friday. This comes after the Department of Agriculture says profits for U.S. farmers will plunge more than expected this year, dropping 38 percent from 2008 as the recession erodes demand for crops, livestock and dairy products.
These downgrades put pressure on the Market Vectors Agribusiness ETF (MOO) which holds top stakes in the two companies. The ETF (MOO) primarily invests in equity securities of U.S. and foreign companies primarily engaged in the business of agriculture. The ETF has enjoyed nice gains since its November 08 low.
We have included a list of the top holdings within the ETF:
TOP 10 HOLDINGS (MOO) ( 60.41% OF TOTAL ASSETS)
Company Symbol % Assets
ARCHER DANIELS MDLND (ADM) 5.78
DEERE CO (DE) 4.85
Komatsu Ltd. N/A 4.55
Kubota Corporation N/A 4.54
MONSANTO COMPANY (MON) 6.08
POTASH CP SASKATCHEW (POT) 8.82
SYNGENTA AG ADS (SYT) 7.8
MOSAIC COMPANY (THE) (MOS) 7.6
Wilmar (F34.SI) 5.67
Yara International (YAR) 4.72
These downgrades put pressure on the Market Vectors Agribusiness ETF (MOO) which holds top stakes in the two companies. The ETF (MOO) primarily invests in equity securities of U.S. and foreign companies primarily engaged in the business of agriculture. The ETF has enjoyed nice gains since its November 08 low.
We have included a list of the top holdings within the ETF:
TOP 10 HOLDINGS (MOO) ( 60.41% OF TOTAL ASSETS)
Company Symbol % Assets
ARCHER DANIELS MDLND (ADM) 5.78
DEERE CO (DE) 4.85
Komatsu Ltd. N/A 4.55
Kubota Corporation N/A 4.54
MONSANTO COMPANY (MON) 6.08
POTASH CP SASKATCHEW (POT) 8.82
SYNGENTA AG ADS (SYT) 7.8
MOSAIC COMPANY (THE) (MOS) 7.6
Wilmar (F34.SI) 5.67
Yara International (YAR) 4.72
Sunday, September 6, 2009
The tale of two grains
The price of corn is down, and it is all on supply news.
This spring, farmers put 87 million acres of corn in the ground, and even though planting was late (and, therefore, so was crop development), the current buzz is that it's going to be a bumper year.
As of the August 12 World Supply and Demand Estimates, the USDA is expecting 12.76 billion bushels of corn to be harvested this year, up from last year's 12.1 billion bushels. The jump comes both from the number of acres harvested (80 million this year, versus last year's 78.6 million) and projected yield increases (159.5 bushels/acre, compared with last year's 153.9). Of course, a successful harvest will depend on the weather staying warm and dry, but if it does, corn supplies are projected to hit a record 14.5 billion bushels.
All this means that there's plenty of corn to go around - probably more than needed, especially since the demand picture looks so dismal right now. Demand in the feed sector remains weak, and ethanol demand is questionable at best. Between tight credit and sub-$70 oil, the push for more ethanol is more of a nudge than a shove, unlike the days when oil was over $100 and credit was easy.
However, there is one question mark in the demand picture: high-fructose corn syrup. That compound, much maligned in "The Omnivore's Dilemma" and currently starring in a feel-good PR campaign by the Corn Refiners Association, is a cheap substitute for sugar. With sugar now over 23 cents a pound and possibly on its way higher, we could see new demand, as some food producers increasingly switch over to the lower-cost corn-based sweetener.
Soybeans have a different story, and it's as simple as ABC: Argentina, Brazil and China. But first, we need to start at home.
The U.S. soybean supply is at its lowest in five years, with beginning stocks sitting at 110 million bushels in July. Compare that with last year's 205 million bushels, or 2007/08's 574 million bushels, and you can understand why analysts call the market tight.
Adding to last year's supply problems, Argentina suffered a drought and had a dismal harvest for the 2008/09 crop year (ending in June). Only 32 million tons of soybeans were harvested - a 33% drop from the 2006/07 crop of 47.5 million tons. (Brazil also suffered lower soybean production due to drought, although it wasn't hit nearly as bad as Argentina.)
But planting season is coming - and Argentinian and Brazilian farmers have a couple of things going for them as they plant. First of all, soy is the cheapest crop to plant, as opposed to corn or wheat, and the credit crunch is still alive and well in the agricultural sector. Second, the rains are back. Weather forecasters expect El Nino to drop much-needed rain all over Argentina's growing regions by November, right in time for planting. Third, farmers in South America know that the less-than-exceptional U.S. harvest means that all eyes will turn to Argentina and Brazil for their soybean supply.
One country sure to be watching the U.S. harvest is China. Last May, China's demand for old crop soybeans made headlines, and there have been reports of sales for delivery in the 2009/10 marketing year that began on Tuesday. It won't stop here; analysts expect China will continue its usual pattern of stocking up on soybeans during price decreases.
This year, acres devoted to soybeans increased to 77.7 million. Even though crop development is a little slow compared with the five-year average - due to the late planting and unusual summer weather - production should be good. If the weather remains warm and dry while the beans finish developing and are harvested, yields are estimated to be 41.7 bushels/acre or 3.2 billion bushels - roughly 240 million bushels more than last year.
Betting On The Weather
These last few weeks of crop development and harvesting are heavily reliant on the weather. Good weather means high corn and soybean yields - but low prices. Bad weather means lower yields and difficulty drying out a wet harvest, but also the possibility of higher prices. No wonder all eyes are on The Weather Channel.
We've got farmers hoping for dry weather and no frost, so they can get their crops in - and at this point, the bigger, the better for them. Traders, on the other hand, are watching the weather reports as well - but for bad news. If you look at the charts, you can almost tell if traders are betting on frost or not, because at this point in the season, that's what moves the curve. As Chad Henderson from Prime Ag Consultants said about corn's performance last week:
"Everyone who bought last week was betting on a frost. We didn't get it."
As of Wednesday, the weather picture for the next few weeks seems in favor of a good harvest, which corn and soy prices reflected. As of 2:16 p.m. on Wednesday, December corn had dropped 2.25 cents to $3.17 a bushel on the day, and November soybeans dropped 3.2 cents to $9.522 a bushel.
Already Looking Ahead
This year's corn and soybean harvest isn't even complete yet, but that hasn't stopped farmers from planning what to plant next year. A recent survey by Farm Futures indicates that next year, farmers may move away from planting soybeans and plant more corn - even though the corn/soybean price ratio favors soybeans.
Of course, since much of this year's crop is still in the field, plans may change, especially as the market prices factor in the harvest. More than any other time of the year, this critical pre-harvest period is really just a bet on the weather.
This spring, farmers put 87 million acres of corn in the ground, and even though planting was late (and, therefore, so was crop development), the current buzz is that it's going to be a bumper year.
As of the August 12 World Supply and Demand Estimates, the USDA is expecting 12.76 billion bushels of corn to be harvested this year, up from last year's 12.1 billion bushels. The jump comes both from the number of acres harvested (80 million this year, versus last year's 78.6 million) and projected yield increases (159.5 bushels/acre, compared with last year's 153.9). Of course, a successful harvest will depend on the weather staying warm and dry, but if it does, corn supplies are projected to hit a record 14.5 billion bushels.
All this means that there's plenty of corn to go around - probably more than needed, especially since the demand picture looks so dismal right now. Demand in the feed sector remains weak, and ethanol demand is questionable at best. Between tight credit and sub-$70 oil, the push for more ethanol is more of a nudge than a shove, unlike the days when oil was over $100 and credit was easy.
However, there is one question mark in the demand picture: high-fructose corn syrup. That compound, much maligned in "The Omnivore's Dilemma" and currently starring in a feel-good PR campaign by the Corn Refiners Association, is a cheap substitute for sugar. With sugar now over 23 cents a pound and possibly on its way higher, we could see new demand, as some food producers increasingly switch over to the lower-cost corn-based sweetener.
Soybeans have a different story, and it's as simple as ABC: Argentina, Brazil and China. But first, we need to start at home.
The U.S. soybean supply is at its lowest in five years, with beginning stocks sitting at 110 million bushels in July. Compare that with last year's 205 million bushels, or 2007/08's 574 million bushels, and you can understand why analysts call the market tight.
Adding to last year's supply problems, Argentina suffered a drought and had a dismal harvest for the 2008/09 crop year (ending in June). Only 32 million tons of soybeans were harvested - a 33% drop from the 2006/07 crop of 47.5 million tons. (Brazil also suffered lower soybean production due to drought, although it wasn't hit nearly as bad as Argentina.)
But planting season is coming - and Argentinian and Brazilian farmers have a couple of things going for them as they plant. First of all, soy is the cheapest crop to plant, as opposed to corn or wheat, and the credit crunch is still alive and well in the agricultural sector. Second, the rains are back. Weather forecasters expect El Nino to drop much-needed rain all over Argentina's growing regions by November, right in time for planting. Third, farmers in South America know that the less-than-exceptional U.S. harvest means that all eyes will turn to Argentina and Brazil for their soybean supply.
One country sure to be watching the U.S. harvest is China. Last May, China's demand for old crop soybeans made headlines, and there have been reports of sales for delivery in the 2009/10 marketing year that began on Tuesday. It won't stop here; analysts expect China will continue its usual pattern of stocking up on soybeans during price decreases.
This year, acres devoted to soybeans increased to 77.7 million. Even though crop development is a little slow compared with the five-year average - due to the late planting and unusual summer weather - production should be good. If the weather remains warm and dry while the beans finish developing and are harvested, yields are estimated to be 41.7 bushels/acre or 3.2 billion bushels - roughly 240 million bushels more than last year.
Betting On The Weather
These last few weeks of crop development and harvesting are heavily reliant on the weather. Good weather means high corn and soybean yields - but low prices. Bad weather means lower yields and difficulty drying out a wet harvest, but also the possibility of higher prices. No wonder all eyes are on The Weather Channel.
We've got farmers hoping for dry weather and no frost, so they can get their crops in - and at this point, the bigger, the better for them. Traders, on the other hand, are watching the weather reports as well - but for bad news. If you look at the charts, you can almost tell if traders are betting on frost or not, because at this point in the season, that's what moves the curve. As Chad Henderson from Prime Ag Consultants said about corn's performance last week:
"Everyone who bought last week was betting on a frost. We didn't get it."
As of Wednesday, the weather picture for the next few weeks seems in favor of a good harvest, which corn and soy prices reflected. As of 2:16 p.m. on Wednesday, December corn had dropped 2.25 cents to $3.17 a bushel on the day, and November soybeans dropped 3.2 cents to $9.522 a bushel.
Already Looking Ahead
This year's corn and soybean harvest isn't even complete yet, but that hasn't stopped farmers from planning what to plant next year. A recent survey by Farm Futures indicates that next year, farmers may move away from planting soybeans and plant more corn - even though the corn/soybean price ratio favors soybeans.
Of course, since much of this year's crop is still in the field, plans may change, especially as the market prices factor in the harvest. More than any other time of the year, this critical pre-harvest period is really just a bet on the weather.
Friday, September 4, 2009
Burned By Morgan Stanley, Potash & More
They looked like hot stocks. So how are the traders playing Morgan Stanley, Potash and more now that they’ve been burned?
Steve Grasso
On July 20th the Governor thought a move higher in the casino space was nothing but a losing bet. At the time he said, “Hold back on MGM , LVS and other casino stocks purely on technical basis. I think you've got to hold back on the casino names."
As it turns out Lady Luck was not smiling on this trade. Over the last month shares of MGM are about 7% higher while Las Vegas Sands soared nearly 40%. What does Grasso have to say for himself?
We've seen a nice rally in almost every stock since that time, he says. I'd still stay away from casinos.
Joe Terranova
On August 6th The Liquidator turned bullish on a bank. “If you look at Morgan Stanley , the trade has been to buy every dip this year. Why? Because the stock moves higher on every dip subsequent to when the bad news comes out,” he said.
Unfortunately this trade left Terranova weeping all the way to the bank. Since his call shares of Morgan have plunged 10%. So what does he have to say for himself?
Morgan is having trouble at $30, but I still like it, says Terranova.
Tim Seymour
On August 19th The Ambassador thought a fertilizer company was well positioned for growth “A company like Potash ,” he said. “They've got this new paradigm where the price of their underlying commodity triples or quadruples.”
As it turns out this fertilizer trade was anything but fertile. Since he said to get long shares of Potash are down about 7%. So what does he have to say for himself?
I'm sticking with this trade, says Seymour. I still believe in it.
In case you're wondering, Guy Adami gets a pass this week.
______________________________________________________
Steve Grasso
On July 20th the Governor thought a move higher in the casino space was nothing but a losing bet. At the time he said, “Hold back on MGM , LVS and other casino stocks purely on technical basis. I think you've got to hold back on the casino names."
As it turns out Lady Luck was not smiling on this trade. Over the last month shares of MGM are about 7% higher while Las Vegas Sands soared nearly 40%. What does Grasso have to say for himself?
We've seen a nice rally in almost every stock since that time, he says. I'd still stay away from casinos.
Joe Terranova
On August 6th The Liquidator turned bullish on a bank. “If you look at Morgan Stanley , the trade has been to buy every dip this year. Why? Because the stock moves higher on every dip subsequent to when the bad news comes out,” he said.
Unfortunately this trade left Terranova weeping all the way to the bank. Since his call shares of Morgan have plunged 10%. So what does he have to say for himself?
Morgan is having trouble at $30, but I still like it, says Terranova.
Tim Seymour
On August 19th The Ambassador thought a fertilizer company was well positioned for growth “A company like Potash ,” he said. “They've got this new paradigm where the price of their underlying commodity triples or quadruples.”
As it turns out this fertilizer trade was anything but fertile. Since he said to get long shares of Potash are down about 7%. So what does he have to say for himself?
I'm sticking with this trade, says Seymour. I still believe in it.
In case you're wondering, Guy Adami gets a pass this week.
______________________________________________________
Thursday, September 3, 2009
Mosaic Takeover Speculation Heating Up Again
The rumor mill is centered on Mosaic (MOS) again, as there is renewed interest in a possible takeover bid. In mid-July when we first wrote about this topic (Mosaic’s Potash Attracts Vale’s Eye), the rumors originated in a Brazilian newspaper that mining giant Vale SA (VALE) was looking to diversify into potash mines. There was also a side note, that BHP Billiton could potentially have an interest as well. After that double-digit rally in July, a spokesperson from Vale dismissed the possibility of a deal because of concerns it might strain relationships with the government, also saying that they would prefer to grow organically for the time being.
Wednesday, Mosaic is up about 2% even as the rest of the market is selling off. Options trading on Mosaic has been exceedingly bullish today as well with the September $60 calls accounting for about a third of contracts sold.
“Trading in Mosaic Co. options jumped to a six-week high on renewed speculation that North America’s second-largest potash producer will be acquired. The shares climbed as much as 4.8 percent, halting a seven-day retreat.
Volume in bullish call options rose to 92,419, more than quadruple the four-week average and six times the number of puts. Calls give the right to buy a security for a certain amount, the strike price, by a given date. Puts convey the right to sell. The stock gained 1.7 percent to $49.29 at 1 p.m. New York time, after losing 11 percent since Aug. 20.
The most-active contracts were September $60 calls, which more than doubled to $1.25 and accounted for more than a third of today’s trading. A buyer at that price is betting that the stock rises to at least $61.25 before the options expire Sept. 18. The stock hasn’t closed above $60 in 11 months.”– from Bloomberg.com
The Bloomberg article makes the case that the options activity and strength of the stock today is based solely on renewed takeover speculation. If that is the case, with Vale on the sidelines, the likely suitor would by BHP Billiton. At this point neither BHP nor Cargill (majority owner of Mosaic) have confirmed that talks have taken place. However, there is one other possible explanation, Potash’s (POT) CEO Norbert Steiner told Reuters that prices for potash fertilizer are likely “bottoming out”. This would likely give a boost to all potash firms, but Mosaic seems to be getting a particular bounce above the rest.
At this time we are reaffirming our Undervalued rating for Mosaic, and even though lower potash prices have eroded profitability the company still has a bright future. We reject the idea of investing on the basis of rumors, but we believe it is priced attractively so as to attract interest from bidders.
Wednesday, Mosaic is up about 2% even as the rest of the market is selling off. Options trading on Mosaic has been exceedingly bullish today as well with the September $60 calls accounting for about a third of contracts sold.
“Trading in Mosaic Co. options jumped to a six-week high on renewed speculation that North America’s second-largest potash producer will be acquired. The shares climbed as much as 4.8 percent, halting a seven-day retreat.
Volume in bullish call options rose to 92,419, more than quadruple the four-week average and six times the number of puts. Calls give the right to buy a security for a certain amount, the strike price, by a given date. Puts convey the right to sell. The stock gained 1.7 percent to $49.29 at 1 p.m. New York time, after losing 11 percent since Aug. 20.
The most-active contracts were September $60 calls, which more than doubled to $1.25 and accounted for more than a third of today’s trading. A buyer at that price is betting that the stock rises to at least $61.25 before the options expire Sept. 18. The stock hasn’t closed above $60 in 11 months.”– from Bloomberg.com
The Bloomberg article makes the case that the options activity and strength of the stock today is based solely on renewed takeover speculation. If that is the case, with Vale on the sidelines, the likely suitor would by BHP Billiton. At this point neither BHP nor Cargill (majority owner of Mosaic) have confirmed that talks have taken place. However, there is one other possible explanation, Potash’s (POT) CEO Norbert Steiner told Reuters that prices for potash fertilizer are likely “bottoming out”. This would likely give a boost to all potash firms, but Mosaic seems to be getting a particular bounce above the rest.
At this time we are reaffirming our Undervalued rating for Mosaic, and even though lower potash prices have eroded profitability the company still has a bright future. We reject the idea of investing on the basis of rumors, but we believe it is priced attractively so as to attract interest from bidders.
Wednesday, September 2, 2009
Tuesday, September 1, 2009
Today in Commodities: The End Is Beginning
Really it is just the beginning of September, but historically the next two months are not kind to equity markets. Will this year be different? VIX spike and talk of bank failures… I think I would rather be on the sidelines than in a market that has bounced 50% while the circumstances have not justified that type of move, but maybe that is just me. Equities hit today; on this leg we target 975 in the S&P and 9075 in the Dow.
US dollar up 60 ticks now above the 20 day moving average and the Aussie down 160 ticks now below the 20 day moving average. RBA holds at 3.0%. See previous posts.
Oil broke the short term trendline, a trade below $68 should mean a trade lower. This bodes well for the Crude : natural gas ratio but not so good for the recent December $75/80 call spreads purchased for clients. Stay tuned. In natural gas we advised clients to buy back their November $6.50 call spreads today for $300 and to hold the $5.50 calls. Clients are down on the trade, expiration 44 days from today.
Silver and gold traded remarkably well considering all outside markets. We suggest long exposure in silver.
Sugar pared its losses closing down only 15-23 ticks. We still like being long March 10′ contracts. Agriculture puked today with a lot of red on the screen. We had already cut losses on the soybean spread from last week but today was a nail biter for those who stayed with it, as new crop gained 58′4 cents or $2920 on old crop (zsx9-zsu9). We feel a early frost scare is worth having light long exposure in grains, to date we’ve been wrong. Take profit on your October lean hogs but stay with the December for more upside. We advised clients to roll their long December live cattle/ short October live cattle into a long in February and to stay short October. With October being the front month we feel this spread will work better.
US dollar up 60 ticks now above the 20 day moving average and the Aussie down 160 ticks now below the 20 day moving average. RBA holds at 3.0%. See previous posts.
Oil broke the short term trendline, a trade below $68 should mean a trade lower. This bodes well for the Crude : natural gas ratio but not so good for the recent December $75/80 call spreads purchased for clients. Stay tuned. In natural gas we advised clients to buy back their November $6.50 call spreads today for $300 and to hold the $5.50 calls. Clients are down on the trade, expiration 44 days from today.
Silver and gold traded remarkably well considering all outside markets. We suggest long exposure in silver.
Sugar pared its losses closing down only 15-23 ticks. We still like being long March 10′ contracts. Agriculture puked today with a lot of red on the screen. We had already cut losses on the soybean spread from last week but today was a nail biter for those who stayed with it, as new crop gained 58′4 cents or $2920 on old crop (zsx9-zsu9). We feel a early frost scare is worth having light long exposure in grains, to date we’ve been wrong. Take profit on your October lean hogs but stay with the December for more upside. We advised clients to roll their long December live cattle/ short October live cattle into a long in February and to stay short October. With October being the front month we feel this spread will work better.
CF Industries Files Lawsuit
Deerfield-based CF Industries Holdings Inc. (NYSE: CF - News) filed a lawsuit against Terra Industries Inc. (NYSE: TRA - News) to force the company to convene a shareholder meeting for a business combination being pushed by CF.
Fertilizer maker Terra responded that its board has decided to hold an annual meeting on Nov. 19. The company had postponed the meeting when larger rival CF Industries launched an unsolicited bid in April this year. In its statement, CF noted that Terra's last annual general meeting (AGM) was held nearly 16 months ago and according to law, AGMs must be held on an annual basis.
Terra repeatedly rebuffed CF’s takeover bid stating that the offer substantially undervalues the company. CF’s all-stock offer for Terra Industries has expired and the company does not plan to extend the offer because of opposition from Terra's board. However, CF stated that it continues to pursue Terra.
CF is offering a 35% premium in an all-stock takeover bid. The company raised its offer this month to 0.465 shares of CF for each share of Terra, which makes and sells nitrogen products. In January, CF had made an offer valued at around $2.1 billion, raising it in March to about $2.2 billion.
CF is a holding company for CF Industries, which sells nitrogen and phosphate fertilizers. CF is itself fending off a hostile bid from larger Canadian rival Agrium Inc. (NYSE: AGU - News). CF maintains that Agrium's offer undervalues the company. CF also believes that Agrium intends to distract its hostile takeover bid for Terra.
Fertilizer maker Terra responded that its board has decided to hold an annual meeting on Nov. 19. The company had postponed the meeting when larger rival CF Industries launched an unsolicited bid in April this year. In its statement, CF noted that Terra's last annual general meeting (AGM) was held nearly 16 months ago and according to law, AGMs must be held on an annual basis.
Terra repeatedly rebuffed CF’s takeover bid stating that the offer substantially undervalues the company. CF’s all-stock offer for Terra Industries has expired and the company does not plan to extend the offer because of opposition from Terra's board. However, CF stated that it continues to pursue Terra.
CF is offering a 35% premium in an all-stock takeover bid. The company raised its offer this month to 0.465 shares of CF for each share of Terra, which makes and sells nitrogen products. In January, CF had made an offer valued at around $2.1 billion, raising it in March to about $2.2 billion.
CF is a holding company for CF Industries, which sells nitrogen and phosphate fertilizers. CF is itself fending off a hostile bid from larger Canadian rival Agrium Inc. (NYSE: AGU - News). CF maintains that Agrium's offer undervalues the company. CF also believes that Agrium intends to distract its hostile takeover bid for Terra.
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