Potash Corp. of Saskatchewan Inc., the world’s largest crop-nutrient maker by market value, led fertilizer stocks higher after Credit Suisse Group AG increased its estimates for nutrient prices on “robust” grain demand.
Potash Corp. climbed 6.5 percent to C$49.44 in Toronto, while Plymouth, Minnesota-based Mosaic Co. (MOS), the world’s largest maker of phosphate fertilizer, rose 4.3 percent to $55.77 in New York.
“The outlook for grain prices looks robust,” London-based analyst Lars Kjellberg said today in a note to clients.
Kjellberg expects the price of granular potash, a form of potassium, in the U.S. Midwest to rise to $557 per short ton this year, up from a previous estimate of $546, according to the note. Diammonium phosphate on the U.S. Gulf Coast will rise to $631 a metric ton, more than the previous estimate of $603.
Kjellberg expects higher fertilizer prices to lift industry-wide net profit by 3 percent this year, 17 percent next year and 23 percent in 2013, buoyed by robust grain prices and tight supplies of crop nutrients.
The price of urea, a nitrogen-based fertilizer, in the U.S. cornbelt will rise to $475 a ton this year, up from a previous estimate of $462.
“On the back of the recent market sell off, valuations for the fertilizer sector look highly compelling,” Kjellberg said in the note. “We recommend investors take advantage of the sell off to build a position in the sector.”
Potash Corp. is based in Saskatoon, Saskatchewan.
Tuesday, October 11, 2011
Ag ETFs Jump As Traders Don’t Wait For Data; MOS, DE, POT Rise
Agriculture ETFs are hopping Tuesday on renewed optimism that prices are going higher ahead of a pair of government reports that could pump markets up even more.
The broad PowerShares DB Agriculture Fund (DBA) is up 1.4%. Also, the stock-minded Market Vectors Agribusiness ETF (MOO) has gained 1.8% so far.
Grain futures are rallying ahead of two reports by the USDA expected to be made public on Wednesday morning. Analysts are expecting that the department’s estimates on both U.S. crop production and world agricultural supply as well as demand should show a strongly bullish picture across most major markets.
In particular, demand for corn, soybeans, wheat and even gasoline is expected to tighten, prompting greater buying activities from both investment and commercial traders, according to a report by Dow Jones Newswires. The recent sell-off has made prices more attractive and traders said that many investors weren’t waiting for tomorrow’s numbers to put into black and white what’s widely being assumed.
Shares of fertilizer companies CF Industries Holdings (CF) and Mosaic (MOS) are up more than 4% on the day. Also, ag machinery maker Deere & Co. (DE) is ahead by 3%-plus.
Also prompting a more confident mood is a report by Credit Suisse. The firm’s ag analysts raised their fertilizer price outlook based on expectations of robust grain prices and strong demand from emerging markets.
Shares of Potash (POT), the world’s largest fertilizer producer, are up close to 3%.
The broad PowerShares DB Agriculture Fund (DBA) is up 1.4%. Also, the stock-minded Market Vectors Agribusiness ETF (MOO) has gained 1.8% so far.
Grain futures are rallying ahead of two reports by the USDA expected to be made public on Wednesday morning. Analysts are expecting that the department’s estimates on both U.S. crop production and world agricultural supply as well as demand should show a strongly bullish picture across most major markets.
In particular, demand for corn, soybeans, wheat and even gasoline is expected to tighten, prompting greater buying activities from both investment and commercial traders, according to a report by Dow Jones Newswires. The recent sell-off has made prices more attractive and traders said that many investors weren’t waiting for tomorrow’s numbers to put into black and white what’s widely being assumed.
Shares of fertilizer companies CF Industries Holdings (CF) and Mosaic (MOS) are up more than 4% on the day. Also, ag machinery maker Deere & Co. (DE) is ahead by 3%-plus.
Also prompting a more confident mood is a report by Credit Suisse. The firm’s ag analysts raised their fertilizer price outlook based on expectations of robust grain prices and strong demand from emerging markets.
Shares of Potash (POT), the world’s largest fertilizer producer, are up close to 3%.
Thursday, October 6, 2011
Stormy Agricultural Headwinds Give Buying Opportunities
Agriculture companies have been in crashing mode recently. Fertilizers, crop protectors and seeds makers are still an attractive investment for the years to come.
Agri investors with a longer-term view of more than several months know that longer-term trends will dominate (secular trends concerning food scarcity, demographics, climate change, industrialization) and short-term moves provide buying opportunities.
Important issues
Parallel to the situation in 2008, where a sharp sell-off of Agro related stocks and of grain prices was immediately followed by a steady uptrend, you would expect the same to happen in this correction phase.
Low investment in increasing agricultural output has been in place for many years and the catch up trend keeps being interrupted by fears that investments may not pay off. This led to very low inventory levels in 2009 and 2010 and will happen again if current investment in higher yields (by applying fertilizers, crop protectors and especially now new Biotech seeds) is stopped.
The latest USDA report is one reason for the shorter-term oriented farmers to halt investment, with more inventory shortfalls as a consequence in the months ahead.
Why were inventories so much higher all of a sudden in September? No one knows, since no factual explanation was given by the USDA; inventories are counted on estimates for both supply and demand, not on hard facts. Let's face it : who is going to check the contents of grain silos in the Midwest US plains, let alone in the Chinese countryside on a monthly basis? It is possible that October reports will show much lower inventories again, moving in line again with the annual trend.
Pricing for the main crop, corn, is still at almost double the levels seen a year ago, so a slight correction based on fears for demand destruction is not unusual.
Three companies are worthy to buy on dips and provide enough opportunity for the near future.
Company Ticker Price 3M(%) YTD(%) P/ECurrYr P/ENxtYr DivYield
AGRIUM AGU 68.18 -23.6 -25.7 7.3 7.2 0.2
MONSANTO MON 66.25 -10.2 -4.9 20.9 17.7 1.9
MOSAIC MOS 52.18 -24.1 -31.7 8.7 7.8 0.4
Agrium (AGU)
Agrium reported very strong results for Q2 2011 with EPS up by 39% to USD 4.54 and sales up 40% to USD 6.2 bln on higher fertilizer demand and pricing and very good demand for seeds in its retail business.
Mike Wilson, CEO, states: "Crop markets and crop nutrients markets remain tight." (Meaning, that grain inventories are at very low levels and fertilizer demand cannot be met by current supply.)
This was all achieved in a quite difficult quarter for agro chemical makers as plantings had to be delayed due to very bad weather conditions globally (too wet in the West, too dry in the Middle and the East).
Besides being highly profitable with very high free cash flows, Agrium is also an active acquisition seeker, doing deals in Australia and South America lately.
Strong results with more to come in H2 as the South American season starts and China imports even more grains. Agrium is a solid company with less volatile earnings than some of its peers due to the 50% exposure to Retail.
Mosaic (MOS)
Mosaic reported better-than-expected figures for the last quarter of its fiscal year 2010/11, with an EPS of 1.52 per share earned and USD 1.38 anticipated by consensus. Revenue rose by 54% to USD 2.86 bln with USD 2.6 bln expected.
Higher prices and solid demand for fertilizers N (phosphate) and P (potash) were the main reasons here. Prices for phosphate rose by 31% year-over-year (YoY) in this latest quarter; potash prices rose by 20%.
The outlook for the first quarter of the fiscal year 2011/12, remains very upbeat with demand for global fertilizers high, according to CEO James Prokopanko.
The balance sheet is also improving (short term debt - 72%, LT - 39%) rapidly.
Mosaic is in the process of de coupling itself from Cargill, which held a 64% stake in Mosaic.
This gives price pressure to the shares from time to time, but once a stand alone operation, Mosaic can become much more profitable and use its strong balance sheet for more acquisitions.
On the basis of consensus 2011/12 estimates the shares now trade at a PE of 8.7x, falling to 7.8x for the following fiscal year. Cash flow is very high at an estimated USD 6.50 per share for 2011/12 (EPS at USD 5.77 est.) This will allow for more acquisitions (hard to find though, mainly to be found among competitors) or for share buy backs.
In the end, the attractiveness of the underlying assets is what drives the share prices of specialized fertilizer makers like Mosaic, Potash Corp. (POT) and Agrium.
Monsanto (MON)
Monsanto published Q4 numbers for its broken book year 2010/11. These were better than expected at an EPS loss (seeds companies make money in the spring and summer).of 22 cents with minus 27 cents estimated.
Guidance for the next quarter (also typically a weak one) is now raised to an EPS of 10 to 15 cents with 8 cents anticipated. For the fiscal year 2011/12, an EPS of USD 3.34 to 3.44 is now guided for with consensus at USD 3.42. The main reason here is the good demand situation in Latin America. This implies an annual growth rate for EPS of some 16%.
Sales in Q4 reached USD 2.25 bln.
Biotech Seeds prices are set to rise by 10% in 2011/12.
Comments by Hugh Grant, CEO of Monsanto: "It is clear that we have turned a corner and returned to growth mode."
Good numbers with a very confident outlook by management for the year ahead. Valuation is in line with growth at 17x 2012/13 but margin expansion is set to accelerate as new biotech seeds come to market.
Balance sheet strength is assured with high free cash flows generated.
It's a stock for future increased demand trends for agricultural products, food, feed and for bio-based materials and bio fuels.
Agri investors with a longer-term view of more than several months know that longer-term trends will dominate (secular trends concerning food scarcity, demographics, climate change, industrialization) and short-term moves provide buying opportunities.
Important issues
Parallel to the situation in 2008, where a sharp sell-off of Agro related stocks and of grain prices was immediately followed by a steady uptrend, you would expect the same to happen in this correction phase.
Low investment in increasing agricultural output has been in place for many years and the catch up trend keeps being interrupted by fears that investments may not pay off. This led to very low inventory levels in 2009 and 2010 and will happen again if current investment in higher yields (by applying fertilizers, crop protectors and especially now new Biotech seeds) is stopped.
The latest USDA report is one reason for the shorter-term oriented farmers to halt investment, with more inventory shortfalls as a consequence in the months ahead.
Why were inventories so much higher all of a sudden in September? No one knows, since no factual explanation was given by the USDA; inventories are counted on estimates for both supply and demand, not on hard facts. Let's face it : who is going to check the contents of grain silos in the Midwest US plains, let alone in the Chinese countryside on a monthly basis? It is possible that October reports will show much lower inventories again, moving in line again with the annual trend.
Pricing for the main crop, corn, is still at almost double the levels seen a year ago, so a slight correction based on fears for demand destruction is not unusual.
Three companies are worthy to buy on dips and provide enough opportunity for the near future.
Company Ticker Price 3M(%) YTD(%) P/ECurrYr P/ENxtYr DivYield
AGRIUM AGU 68.18 -23.6 -25.7 7.3 7.2 0.2
MONSANTO MON 66.25 -10.2 -4.9 20.9 17.7 1.9
MOSAIC MOS 52.18 -24.1 -31.7 8.7 7.8 0.4
Agrium (AGU)
Agrium reported very strong results for Q2 2011 with EPS up by 39% to USD 4.54 and sales up 40% to USD 6.2 bln on higher fertilizer demand and pricing and very good demand for seeds in its retail business.
Mike Wilson, CEO, states: "Crop markets and crop nutrients markets remain tight." (Meaning, that grain inventories are at very low levels and fertilizer demand cannot be met by current supply.)
This was all achieved in a quite difficult quarter for agro chemical makers as plantings had to be delayed due to very bad weather conditions globally (too wet in the West, too dry in the Middle and the East).
Besides being highly profitable with very high free cash flows, Agrium is also an active acquisition seeker, doing deals in Australia and South America lately.
Strong results with more to come in H2 as the South American season starts and China imports even more grains. Agrium is a solid company with less volatile earnings than some of its peers due to the 50% exposure to Retail.
Mosaic (MOS)
Mosaic reported better-than-expected figures for the last quarter of its fiscal year 2010/11, with an EPS of 1.52 per share earned and USD 1.38 anticipated by consensus. Revenue rose by 54% to USD 2.86 bln with USD 2.6 bln expected.
Higher prices and solid demand for fertilizers N (phosphate) and P (potash) were the main reasons here. Prices for phosphate rose by 31% year-over-year (YoY) in this latest quarter; potash prices rose by 20%.
The outlook for the first quarter of the fiscal year 2011/12, remains very upbeat with demand for global fertilizers high, according to CEO James Prokopanko.
The balance sheet is also improving (short term debt - 72%, LT - 39%) rapidly.
Mosaic is in the process of de coupling itself from Cargill, which held a 64% stake in Mosaic.
This gives price pressure to the shares from time to time, but once a stand alone operation, Mosaic can become much more profitable and use its strong balance sheet for more acquisitions.
On the basis of consensus 2011/12 estimates the shares now trade at a PE of 8.7x, falling to 7.8x for the following fiscal year. Cash flow is very high at an estimated USD 6.50 per share for 2011/12 (EPS at USD 5.77 est.) This will allow for more acquisitions (hard to find though, mainly to be found among competitors) or for share buy backs.
In the end, the attractiveness of the underlying assets is what drives the share prices of specialized fertilizer makers like Mosaic, Potash Corp. (POT) and Agrium.
Monsanto (MON)
Monsanto published Q4 numbers for its broken book year 2010/11. These were better than expected at an EPS loss (seeds companies make money in the spring and summer).of 22 cents with minus 27 cents estimated.
Guidance for the next quarter (also typically a weak one) is now raised to an EPS of 10 to 15 cents with 8 cents anticipated. For the fiscal year 2011/12, an EPS of USD 3.34 to 3.44 is now guided for with consensus at USD 3.42. The main reason here is the good demand situation in Latin America. This implies an annual growth rate for EPS of some 16%.
Sales in Q4 reached USD 2.25 bln.
Biotech Seeds prices are set to rise by 10% in 2011/12.
Comments by Hugh Grant, CEO of Monsanto: "It is clear that we have turned a corner and returned to growth mode."
Good numbers with a very confident outlook by management for the year ahead. Valuation is in line with growth at 17x 2012/13 but margin expansion is set to accelerate as new biotech seeds come to market.
Balance sheet strength is assured with high free cash flows generated.
It's a stock for future increased demand trends for agricultural products, food, feed and for bio-based materials and bio fuels.
Fertilizer Stocks a Growth & Value Harvest
Companies that provide vital soil nutrients will be key investments in the global agricultural megatrend now underway. And now is an especially good time to look at some of the top names as their share prices have come down so hard recently and created some real values.
Doing some stock screening this morning, I found two fertilizers companies that kept popping up. Agrium (NYSE: AGU - News) made it through the Zacks #1 Rank Growth Stocks Screen, which requires more than the top earnings momentum rating reserved for only 220 stocks in a universe of 4,400.
This screen also demands the following growth metrics: a minimum 20% historical growth rate and a minimum 20% projected growth rate.
And AGU joined CF Industries (NYSE: CF - News), also a #1 Rank stock, on the Zacks Growth & Value Screen because both names have very compelling valuations of around 7 times forward earnings.
It should not surprise you that AGU also shows up on the Undervalued Zacks #1 Ranks Stocks Screen.
Won't Recession Plow Ag Stock Estimates?
This is an important question to address before buying any cyclical stock as the valuations on industrial, materials, and energy companies can look really attractive as their prices drop.
But when a recession, or even just a slowdown, is getting priced-in, stock prices get hit bad long before the estimates come down. And so what looks 'cheap' today may be about to get more expensive as the earnings estimate revisions roll in.
This is a theme I have been writing about since the first week of August. I said the downward earnings revisions would come in September and October. So far, they haven't been that bad.
Before I address the global-macro perspective that might help you decide if estimates could hold, or still come down further, let me show you the current consensus estimates that make these two stocks so attractive, along with their price history and recent moves...
AGU: 52wk Low - High 60.15 - 99.14 The stock has been in a slow sideways channel downtrend since the high, but traded back up to $90 in early September and then hit $60 on Tuesday's market sell-off. Now trading above $71 on this recovery rally. The company is scheduled to report earnings on November 2.
The bottom table is a rough sketch of recent analyst action. With about 16 analysts covering AGU, 2 have raised their estimates for the current quarter and for next year within the past 30 days, and 1 analyst upped their targets in the past week. This is one part of the 'intel' that goes into the Zacks Rank along with the magnitude of the revision and accuracy of the analyst.
CF: 52wk Low - High 97.79 - 192.68 Made its surge from $150 to $190 in August when the rest of the market was melting down. Dropped below $120 this week and now trading $140. Earnings are expected Nov 1.
CF also has a couple of recent upward revisions. But you may also notice that next year's consensus reflects a drop in EPS. If the high estimates near $24 are correct, this stock could indeed be an extreme value here. Time and further revisions will tell.
Where's the Big Guy?
You didn't think I was going to write about fertilizer stocks and leave out Potash of Saskatchewan (NYSE: POT - News)? The behemoth of the essential soil nutrient it is named for has also had some recent earnings estimate revisions which basically balance out as the current quarter was taken down and next quarter raised.
Based on consensus estimates, POT looks poised to grow EPS at 16% next year after hitting 85% growth this year. 2011 and 2012 projected earnings of $3.79 and $4.42, respectively, combine to create a forward P/E multiple of 12 times for this Zacks #2 Rank (buy) stock. POT is due to report on October 27.
Finally we should mention Mosaic (NYSE: MOS - News) as their outlook has softened. Since they missed their EPS number for the most recent quarter when they reported last week, most analysts (12 of 14) have lowered estimates for the current year while 4 vs. 7 have raised vs. lowered their outlook for next year. This mixed bag knocked the stock down to a Zacks #3 Rank (hold) on September 27.
The Global Ag Megatrend
I have written often about the global megatrend of food demand, even calling this the 'decade of food' as the world population tops 7 billion on its way to a projected 9 billion by 2050.
It's not just population growth driving agricultural trends. Emerging economies have billions of people who also aspire to raise their food choices along with their living standards. More meat-based diets mean more grain than ever will be demanded.
Okay, so that's the big secular trend driving things for the next several years. But what about the next six months, especially if recession becomes reality? According analysts at Macquarie Equities Research, generally 'the demand for agriculture commodities has been immune to economic downturns with lower income elasticities of demand compared to either industrial metals or energy.'
My outlook is that there will be no recession and that with these important stocks so cheap, one or two should be considered for the commodity portion of one's portfolio. And this isn't about 'buy and hold' for years either.
With the excellent trading swings the fertilizer stocks tend to make, their resurgent bull markets should offer some good opportunities over the next several years to capture 10-30% gains every few months.
Doing some stock screening this morning, I found two fertilizers companies that kept popping up. Agrium (NYSE: AGU - News) made it through the Zacks #1 Rank Growth Stocks Screen, which requires more than the top earnings momentum rating reserved for only 220 stocks in a universe of 4,400.
This screen also demands the following growth metrics: a minimum 20% historical growth rate and a minimum 20% projected growth rate.
And AGU joined CF Industries (NYSE: CF - News), also a #1 Rank stock, on the Zacks Growth & Value Screen because both names have very compelling valuations of around 7 times forward earnings.
It should not surprise you that AGU also shows up on the Undervalued Zacks #1 Ranks Stocks Screen.
Won't Recession Plow Ag Stock Estimates?
This is an important question to address before buying any cyclical stock as the valuations on industrial, materials, and energy companies can look really attractive as their prices drop.
But when a recession, or even just a slowdown, is getting priced-in, stock prices get hit bad long before the estimates come down. And so what looks 'cheap' today may be about to get more expensive as the earnings estimate revisions roll in.
This is a theme I have been writing about since the first week of August. I said the downward earnings revisions would come in September and October. So far, they haven't been that bad.
Before I address the global-macro perspective that might help you decide if estimates could hold, or still come down further, let me show you the current consensus estimates that make these two stocks so attractive, along with their price history and recent moves...
AGU: 52wk Low - High 60.15 - 99.14 The stock has been in a slow sideways channel downtrend since the high, but traded back up to $90 in early September and then hit $60 on Tuesday's market sell-off. Now trading above $71 on this recovery rally. The company is scheduled to report earnings on November 2.
The bottom table is a rough sketch of recent analyst action. With about 16 analysts covering AGU, 2 have raised their estimates for the current quarter and for next year within the past 30 days, and 1 analyst upped their targets in the past week. This is one part of the 'intel' that goes into the Zacks Rank along with the magnitude of the revision and accuracy of the analyst.
CF: 52wk Low - High 97.79 - 192.68 Made its surge from $150 to $190 in August when the rest of the market was melting down. Dropped below $120 this week and now trading $140. Earnings are expected Nov 1.
CF also has a couple of recent upward revisions. But you may also notice that next year's consensus reflects a drop in EPS. If the high estimates near $24 are correct, this stock could indeed be an extreme value here. Time and further revisions will tell.
Where's the Big Guy?
You didn't think I was going to write about fertilizer stocks and leave out Potash of Saskatchewan (NYSE: POT - News)? The behemoth of the essential soil nutrient it is named for has also had some recent earnings estimate revisions which basically balance out as the current quarter was taken down and next quarter raised.
Based on consensus estimates, POT looks poised to grow EPS at 16% next year after hitting 85% growth this year. 2011 and 2012 projected earnings of $3.79 and $4.42, respectively, combine to create a forward P/E multiple of 12 times for this Zacks #2 Rank (buy) stock. POT is due to report on October 27.
Finally we should mention Mosaic (NYSE: MOS - News) as their outlook has softened. Since they missed their EPS number for the most recent quarter when they reported last week, most analysts (12 of 14) have lowered estimates for the current year while 4 vs. 7 have raised vs. lowered their outlook for next year. This mixed bag knocked the stock down to a Zacks #3 Rank (hold) on September 27.
The Global Ag Megatrend
I have written often about the global megatrend of food demand, even calling this the 'decade of food' as the world population tops 7 billion on its way to a projected 9 billion by 2050.
It's not just population growth driving agricultural trends. Emerging economies have billions of people who also aspire to raise their food choices along with their living standards. More meat-based diets mean more grain than ever will be demanded.
Okay, so that's the big secular trend driving things for the next several years. But what about the next six months, especially if recession becomes reality? According analysts at Macquarie Equities Research, generally 'the demand for agriculture commodities has been immune to economic downturns with lower income elasticities of demand compared to either industrial metals or energy.'
My outlook is that there will be no recession and that with these important stocks so cheap, one or two should be considered for the commodity portion of one's portfolio. And this isn't about 'buy and hold' for years either.
With the excellent trading swings the fertilizer stocks tend to make, their resurgent bull markets should offer some good opportunities over the next several years to capture 10-30% gains every few months.
Don't Dismiss Fertilizer
With the economy pulling back, commodities are usually first on the chopping block. As the basic elements of society, any concerns that economic growth is contracting leads the market to believe that demand for commodities - copper, iron ore and oil - will decline. As a result, commodity prices retreat quickly, which in turn causes the market to sell shares in the companies that make or sell the underlying commodities.
Fundamentally StrongNo commodities have been spared; not even fertilizer. Ironically, fertilizers prices continue to remain strong and have not pulled back as much as other commodities. However, prices of agricultural commodities, like corn and wheat, have slipped a little, and investors use those commodity prices to extrapolate future fertilizer demand. Lower grain prices suggests that farmer profits will decline; lower farming profits suggests that farmers will buy less fertilizer in order to reduce expenses. That's the scenario that occurred in 2008, and indeed sent fertilizer prices spiraling downward, and taking the valuations of the company's that make fertilizer along for the ride.
There's no question that another recession will depress shares further. But fertilizer helps increase food production, the most essential need for society. The long-term demand for food continues to remain robust, thus the long-term outlook for fertilizer remains strong.
Price Vs. ValueFertilizer shares have been getting hammered in the past month, and valuations are beginning to look interesting again. Prices are still off from 2008 and 2009 lows, but investors should keep a close watch on this industry, as it offers the greatest potential going forward. Nitrogen producer CF Industries (NYSE:CF) was trading for as high as $192 a few months ago, and shares have since pulled back to $120 trading at 8.5 times current earnings. Phosphate and potash giant Mosaic (NYSE:MOS) has pulled back from nearly $90 to $46 today. Shares fell over 3% after the company announced earnings as high sulfur costs hurt margins. Mosaic has a pristine balance sheet with over $3 billion in net cash against a market cap of $21 billion.
For those investors who want a basket bet, Market Vectors Agribusiness ETF (NYSE:MOO) has holdings in all of the major fertilizer stocks; along with interests in other high quality names like farm equipment giant Deere (NYSE:DE) and seed company Monsanto (NYSE:MON). MOO offers greater diversity which helps on the downside, but that also means if a name like CF or Mosaic begin to climb higher again, MOO will likely under perform.
In any regard, the long-term outlook for agriculture and fertilizer remains as strong as ever. There are always going to be pullbacks when the economy stutters, or investors get nervous. However, as long as investors buy in at the right price, the upside value will take care of itself. (For additional reading, also see Water: The Ultimate Commodity.)
Fundamentally StrongNo commodities have been spared; not even fertilizer. Ironically, fertilizers prices continue to remain strong and have not pulled back as much as other commodities. However, prices of agricultural commodities, like corn and wheat, have slipped a little, and investors use those commodity prices to extrapolate future fertilizer demand. Lower grain prices suggests that farmer profits will decline; lower farming profits suggests that farmers will buy less fertilizer in order to reduce expenses. That's the scenario that occurred in 2008, and indeed sent fertilizer prices spiraling downward, and taking the valuations of the company's that make fertilizer along for the ride.
There's no question that another recession will depress shares further. But fertilizer helps increase food production, the most essential need for society. The long-term demand for food continues to remain robust, thus the long-term outlook for fertilizer remains strong.
Price Vs. ValueFertilizer shares have been getting hammered in the past month, and valuations are beginning to look interesting again. Prices are still off from 2008 and 2009 lows, but investors should keep a close watch on this industry, as it offers the greatest potential going forward. Nitrogen producer CF Industries (NYSE:CF) was trading for as high as $192 a few months ago, and shares have since pulled back to $120 trading at 8.5 times current earnings. Phosphate and potash giant Mosaic (NYSE:MOS) has pulled back from nearly $90 to $46 today. Shares fell over 3% after the company announced earnings as high sulfur costs hurt margins. Mosaic has a pristine balance sheet with over $3 billion in net cash against a market cap of $21 billion.
For those investors who want a basket bet, Market Vectors Agribusiness ETF (NYSE:MOO) has holdings in all of the major fertilizer stocks; along with interests in other high quality names like farm equipment giant Deere (NYSE:DE) and seed company Monsanto (NYSE:MON). MOO offers greater diversity which helps on the downside, but that also means if a name like CF or Mosaic begin to climb higher again, MOO will likely under perform.
In any regard, the long-term outlook for agriculture and fertilizer remains as strong as ever. There are always going to be pullbacks when the economy stutters, or investors get nervous. However, as long as investors buy in at the right price, the upside value will take care of itself. (For additional reading, also see Water: The Ultimate Commodity.)
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