As with gold 6 weeks ago, as with oil 2 days ago, now comes the liquidity chasing one of the few laggard areas... agriculture. Potash (POT) is breaking out in almost identical fashion to the other 2 commodities mentioned.
Last Thursday we saw a story that potash inventories declined for a 3rd consecutive month, although still at 142% above the 5 year average. However, by the time they get closer to average - these stocks most likely will have run a long way.
Potash Corp of Saskatchewan (POT) said on Thursday North American potash inventories declined for a third consecutive month, but inventories at the manufacturer level continue to remain well above average.
Potash inventories had risen steadily through the first-half of 2009, despite major production cuts, as farmers concerned by exorbitant pricing and hurt by the credit crunch had deferred fertilizer application.
In July, India signed contracts to import the bulk of its annual potash requirements at $460 a tonne, well below last year's contract price of more than $600 and the spot market price of $700 at the time.
The new Indian contract has brought some international buyers back into the market, but many buyers and distributors still remain on the sidelines and are waiting for Chinese importers to finalize their annual contract, as they believe that potash prices could fall further.
In a set of graphical data posted to its website, Potash Corp also indicated that potash spot market pricing was almost flat at just under $500 per tonne in September.
With a bevy of bad news in this sector 6+ quarters, sellers may finally be exhausted. Or it simply could be the chase of the underperformers as Ben Bernanke's money looks for the next thing to inflate. Can't tell anymore how much of these moves have to do with actual fundamentals and how much is so much paper currency chasing a fixed amount of stock certificates. Let's keep an eye on what price the Chinese offer for potash; if its favorable, it might set the stage for the next bull run in fertilizer (still among our favorite long term themes). Earnings are Thursday and apparently no one has any fear going into the report since technicals are all that matter in this market.
Tuesday, October 20, 2009
Monday, October 19, 2009
MOO is on sale
Real-time Monetary Inflation (last 12 months): 2.5%*
Too bad the stock market doesn't operate like a grocery store. Grocers regularly run ads touting lower prices to draw customers into their stores. Market makers advertise "specials" too, but unfortunately, a many investors pass up these stocks or funds when they go "on sale."
There's just such a bargain to be had with the Market Vectors Agribusiness Fund (NYSE Arca: MOO) now. Well, to be exact, the bargain's in the options market for the exchange-traded fund. Option premiums are priced now at some of their lowest levels over the past 500 days.
By "priced," I don't mean in terms of dollars but, rather, implied volatility. Implied volatility reflects the option seller's assumption of the underlying stock's price variance over the life of the option.
Right now, with MOO trading just south of the $40 level, market makers are setting call prices with very long odds on upside moves. Just how long are those odds? Look back at the steep plunge MOO shares took in the summer of 2008. After bottoming in fall, the ETFs retraced about a quarter of the decline before leveling out. Market makers figure there's only a 2.2% chance the fund shares can extend that retracement to the $48-$49 level by late November.
Largely, that's due to MOO's dawdling between $36 and $40 since August. Dawdling doesn't go on forever, though.
November $40 calls were offered for only $1.40 per share this morning. These calls break even at expiry on Nov. 20 at only $41.40. Paying 3 1/2 cents a day for a lease on MOO seems like one of the market's current best buys. You don't even need a coupon.
*Note: The monetary inflation rate is calculated daily and represents the change in our proprietary index from this date one year ago. We update long-term inflation in real time as well. Since 1999, the compound annual growth rate in our index is 5.2%.
Too bad the stock market doesn't operate like a grocery store. Grocers regularly run ads touting lower prices to draw customers into their stores. Market makers advertise "specials" too, but unfortunately, a many investors pass up these stocks or funds when they go "on sale."
There's just such a bargain to be had with the Market Vectors Agribusiness Fund (NYSE Arca: MOO) now. Well, to be exact, the bargain's in the options market for the exchange-traded fund. Option premiums are priced now at some of their lowest levels over the past 500 days.
By "priced," I don't mean in terms of dollars but, rather, implied volatility. Implied volatility reflects the option seller's assumption of the underlying stock's price variance over the life of the option.
Right now, with MOO trading just south of the $40 level, market makers are setting call prices with very long odds on upside moves. Just how long are those odds? Look back at the steep plunge MOO shares took in the summer of 2008. After bottoming in fall, the ETFs retraced about a quarter of the decline before leveling out. Market makers figure there's only a 2.2% chance the fund shares can extend that retracement to the $48-$49 level by late November.
Largely, that's due to MOO's dawdling between $36 and $40 since August. Dawdling doesn't go on forever, though.
November $40 calls were offered for only $1.40 per share this morning. These calls break even at expiry on Nov. 20 at only $41.40. Paying 3 1/2 cents a day for a lease on MOO seems like one of the market's current best buys. You don't even need a coupon.
*Note: The monetary inflation rate is calculated daily and represents the change in our proprietary index from this date one year ago. We update long-term inflation in real time as well. Since 1999, the compound annual growth rate in our index is 5.2%.
Agriculture Stocks May Be In for a Fertile Future
Not long ago, before the dark days of the economic fallout, the increasing needs of the growing populations of the developing world were the name of the game. Indeed, for a time, we saw fertilizer and seeds become sexier stories than semiconductors and smart phones. However, as Newton would have it, for every great commodities boom, there must be an equal and opposite bust.
Cautious optimism has firmly taken hold of Wall Street. The US Dollar seems poised for a period of long-term weakness, and those once-sexy agriculture names may be primed for a renewed period of strength.
Last week, The Mosaic Company (MOS) reported their quarterly profits had fallen 92% year-over-year on 66% lower revenue. Still, shares traded up 4% the next day. This may not be unlike much of the financial sector, which rallied sharply off of huge losses last quarter due to a more positive outlook on the future.
Additionally, shares of Potash Corp. of Saskatchewan (POT), another ringleader of the sector, cut earnings estimates back on Sept. 21. However, after a moderate sell-off, shares have begun to rally.
If dollar weakness persists and news from developing nations continues to grow more positive, we may be primed for a nice end of year rally throughout the sector. Moreover, these formerly hot Ag names are not nearly as frothy as their financial and tech sector brethren.
For instance, while POT and MOS are up 36% and 26%, respectively off their March lows, the duo has been left in the dust by companies like Apple (AAPL) (up 129%), Google (GOOG) (up 78%), Goldman Sachs (GS) (up 91%) and Citigroup (C) (up 349%). As a result, money managers who did not participate in the rally in those uber-popular names may turn to MOS and POT because they can more easily justify starting a new position rather than chasing the over-heated runners.
The big day to watch out for is 10/22 when POT will release its numbers before the market opens. Although, as was the case for MOS, the numbers themselves are sure to be lower compared to last year, the importance of the report will come via guidance for 2010 and beyond.
Still, significant interim risks exist. Stocks like POT and MOS are sure to participate in any major sell-off if the vaunted correction ever does in fact come. Also, any short-term dollar strength will act to push the sector down as we saw last Friday following Ben Bernanke’s comments regarding potential for tightening fed policy. Until then, keep your eyes peeled and your noses pinched because these fertilizer names may be about to come back in a big way.
Cautious optimism has firmly taken hold of Wall Street. The US Dollar seems poised for a period of long-term weakness, and those once-sexy agriculture names may be primed for a renewed period of strength.
Last week, The Mosaic Company (MOS) reported their quarterly profits had fallen 92% year-over-year on 66% lower revenue. Still, shares traded up 4% the next day. This may not be unlike much of the financial sector, which rallied sharply off of huge losses last quarter due to a more positive outlook on the future.
Additionally, shares of Potash Corp. of Saskatchewan (POT), another ringleader of the sector, cut earnings estimates back on Sept. 21. However, after a moderate sell-off, shares have begun to rally.
If dollar weakness persists and news from developing nations continues to grow more positive, we may be primed for a nice end of year rally throughout the sector. Moreover, these formerly hot Ag names are not nearly as frothy as their financial and tech sector brethren.
For instance, while POT and MOS are up 36% and 26%, respectively off their March lows, the duo has been left in the dust by companies like Apple (AAPL) (up 129%), Google (GOOG) (up 78%), Goldman Sachs (GS) (up 91%) and Citigroup (C) (up 349%). As a result, money managers who did not participate in the rally in those uber-popular names may turn to MOS and POT because they can more easily justify starting a new position rather than chasing the over-heated runners.
The big day to watch out for is 10/22 when POT will release its numbers before the market opens. Although, as was the case for MOS, the numbers themselves are sure to be lower compared to last year, the importance of the report will come via guidance for 2010 and beyond.
Still, significant interim risks exist. Stocks like POT and MOS are sure to participate in any major sell-off if the vaunted correction ever does in fact come. Also, any short-term dollar strength will act to push the sector down as we saw last Friday following Ben Bernanke’s comments regarding potential for tightening fed policy. Until then, keep your eyes peeled and your noses pinched because these fertilizer names may be about to come back in a big way.
Thursday, October 1, 2009
Terra Industries Rejects CF Takeover Yet Again
Fertilizer maker Terra Industries ( TRA - news - people ) said Thursday that its board had rejected a takeover offer from rival CF Industries ( CF - news - people ) for a fifth time.
CF has turned up the heat recently in its relentless acquisition pursuit of Terra, saying earlier this week that it had bought about 7% of Terra's shares, valued at around $247 million. Its latest bid for the remaining stake in Terra was $4 billion.
Terra has continually rejected CF's advances, however, and labeled the latest offer as not being in the best interests of the company or its shareholders.
Terra CEO Michael Bennett said that "over the last nine months, our board has reviewed five proposals from CF--and each time the board has unanimously determined that a combination of our companies lacks compelling industrial logic and runs counter to Terra's strategic objectives."
To complicate matters even more, CF Industries itself has been targeted for a takeover, by fellow fertilized maker Agrium ( AGU - news - people ).
Terra shares fell 24 cents, or 0.6%, in morning trading Thursday, while CF shares were mostly flat.
The Bottom Line
We have avoided shares of TRA since our early June coverage began last year, when the stock was trading at $45.44. The stock has technical support in the $30 price area. If the shares can build further momentum, we see overhead resistance around the $37 to $40 price levels. We would remain on the sidelines for now and avoid this fertilizer "love triangle."
Terra Industries is not recommended at this time, holding a Dividend.com rating of 3.2 out of five stars. CF Industries is not currently recommended either, with a Dividend.com rating of 3.4 out of five stars.
CF has turned up the heat recently in its relentless acquisition pursuit of Terra, saying earlier this week that it had bought about 7% of Terra's shares, valued at around $247 million. Its latest bid for the remaining stake in Terra was $4 billion.
Terra has continually rejected CF's advances, however, and labeled the latest offer as not being in the best interests of the company or its shareholders.
Terra CEO Michael Bennett said that "over the last nine months, our board has reviewed five proposals from CF--and each time the board has unanimously determined that a combination of our companies lacks compelling industrial logic and runs counter to Terra's strategic objectives."
To complicate matters even more, CF Industries itself has been targeted for a takeover, by fellow fertilized maker Agrium ( AGU - news - people ).
Terra shares fell 24 cents, or 0.6%, in morning trading Thursday, while CF shares were mostly flat.
The Bottom Line
We have avoided shares of TRA since our early June coverage began last year, when the stock was trading at $45.44. The stock has technical support in the $30 price area. If the shares can build further momentum, we see overhead resistance around the $37 to $40 price levels. We would remain on the sidelines for now and avoid this fertilizer "love triangle."
Terra Industries is not recommended at this time, holding a Dividend.com rating of 3.2 out of five stars. CF Industries is not currently recommended either, with a Dividend.com rating of 3.4 out of five stars.
Zacks Industry Rank Analysis Highlights: Agrium, CF Industries, Intrepid Potash, Mosaic and Potash of Saskatchewan
Chicago, IL – September 30, 2009 – Zacks.com releases the latest Zacks Industry Rank. Stocks featured in this week’s analysis include Agrium (NYSE: AGU - News), CF Industries (NYSE: CF - News), Intrepid Potash (NYSE: IPI - News), Mosaic (NYSE: MOS - News), Potash of Saskatchewan (NYSE: POT - News) and Market Vectors Agribusiness (NYSEArca: MOO - News).
Zacks Industry Rank Analysis is written by Charles Rotblut, CFA, Senior Market Analyst for Zacks.com.
This week: Fertilizer's Farming Problem
Hostile takeover attempts have kept fertilizer companies in the news. The acquisition talk has helped to overshadow a negative trend that should have investors concerned - ongoing cuts to full-year profit forecasts.
During the past 90 days, the Zacks Consensus Estimates have been revised downwards on several fertilizer companies, including Agrium (NYSE: AGU - News), Intrepid Potash (NYSE: IPI - News), Mosaic (NYSE: MOS - News) and Potash of Saskatchewan (NYSE: POT - News).
The most recent cuts were related to a warning from POT. The company predicted that its full-year profits would be in the range of $3.25 to $3.75 per share, instead of the prior guidance of $4 to $5 per share. The company blamed 'continued slow demand and limited restocking by fertilizer distributors' as the reasons for the revised forecast.
All Is Not Well on the Farm
The big reason why profit projections for fertilizer companies have been falling is not weaker demand for fertilizer, but rather why demand is down. After enjoying very strong profits in 2007 and 2008, many farmers are now seeing their incomes drop. Even after adjusting for a recent rebound, corn futures are down substantially from the start of the year. Wheat prices are also down. Soy prices have plunged over the past few months.
Supply is a big reason why. Though the spring planting season was delayed, favorable weather patterns resulted in bumper crops throughout the summer. At the same time, a decline in oil prices hurt demand for ethanol, which, in turn, impacted farmers.
Compounding matters is the economy. The worldwide contraction likely reduced food consumption. (Did you notice how there were not any headlines about food shortages this year?) Plus, consumers have looked for cheaper ways to feed their families. These factors have kept cattle prices weak, which contributed to weaker demand for grains.
Then there is the banking crisis. Bank closures affect rural areas worse than urban areas because of a lack of competition. In some rural communities, the only nearby bank was seized by the FDIC. Not to mention the increased difficulty of securing loans.
The net result is lower farm profitability. In late August, the Department of Agriculture forecast that farm profits would fall 38% this year. There has been relatively little since then that would cause a big, positive revision to that forecast.
Mergers Are the One Positive
The one positive for the group are the proposed deals.
CF Industries (NYSE: CF - News) announced on Monday that it bought 7% of Terra Industries' outstanding stock over the past 2 weeks. CF wants TRA shareholders to accept a merger agreement that would represent an approximate 15% premium over TRA's current share price.
However, Agrium wants to purchase CF. AGU recently extended the deadline for its acquisition offer of CF to Oct 22. (The offer represents approximately a 4% premium over CF's current price.) It is probable that if AGU were to buy CF, CF's acquisition of TRA would be called off.
Compounding matters is the fact that TRA recently announced a special $7.50 per share dividend, payable in the fourth quarter. CF's offer for TRA would be adjusted to reflect this dividend.
The merger activity makes shorting these stocks risky over the very near-term, even with the falling estimates. On the other hand, much of the upside from the proposed deals appears to be priced in. Overall, the downside risks outweigh probable short-term upside, particularly if neither acquisition offer is accepted.
Zacks Rank
IPI, MOS and POT are Zacks #5 Rank ('strong sell') stocks. AGU and CF are Zacks #3 Rank ('hold') stocks. They are all classified in Fertilizers, which has a Zacks Industry Rank of 206, placing the group near the bottom of the Industry Rank List.
Fertilizers stock also account for a significant portion of Market Vectors Agribusiness (NYSEArca: MOO - News), something to consider when evaluating this ETF.
Zacks "Profit from the Pros " e-mail newsletter offers continuous coverage of the industries and the stocks poised to outperform the market. Subscribe to this free newsletter today by visiting http://at.zacks.com/?id=5611.
About Zacks
Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3:1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit From the Pros by going to http://at.zacks.com/?id=5610.
Follow us on Twitter: http://twitter.com/zacksresearch
Zacks Industry Rank Analysis is written by Charles Rotblut, CFA, Senior Market Analyst for Zacks.com.
This week: Fertilizer's Farming Problem
Hostile takeover attempts have kept fertilizer companies in the news. The acquisition talk has helped to overshadow a negative trend that should have investors concerned - ongoing cuts to full-year profit forecasts.
During the past 90 days, the Zacks Consensus Estimates have been revised downwards on several fertilizer companies, including Agrium (NYSE: AGU - News), Intrepid Potash (NYSE: IPI - News), Mosaic (NYSE: MOS - News) and Potash of Saskatchewan (NYSE: POT - News).
The most recent cuts were related to a warning from POT. The company predicted that its full-year profits would be in the range of $3.25 to $3.75 per share, instead of the prior guidance of $4 to $5 per share. The company blamed 'continued slow demand and limited restocking by fertilizer distributors' as the reasons for the revised forecast.
All Is Not Well on the Farm
The big reason why profit projections for fertilizer companies have been falling is not weaker demand for fertilizer, but rather why demand is down. After enjoying very strong profits in 2007 and 2008, many farmers are now seeing their incomes drop. Even after adjusting for a recent rebound, corn futures are down substantially from the start of the year. Wheat prices are also down. Soy prices have plunged over the past few months.
Supply is a big reason why. Though the spring planting season was delayed, favorable weather patterns resulted in bumper crops throughout the summer. At the same time, a decline in oil prices hurt demand for ethanol, which, in turn, impacted farmers.
Compounding matters is the economy. The worldwide contraction likely reduced food consumption. (Did you notice how there were not any headlines about food shortages this year?) Plus, consumers have looked for cheaper ways to feed their families. These factors have kept cattle prices weak, which contributed to weaker demand for grains.
Then there is the banking crisis. Bank closures affect rural areas worse than urban areas because of a lack of competition. In some rural communities, the only nearby bank was seized by the FDIC. Not to mention the increased difficulty of securing loans.
The net result is lower farm profitability. In late August, the Department of Agriculture forecast that farm profits would fall 38% this year. There has been relatively little since then that would cause a big, positive revision to that forecast.
Mergers Are the One Positive
The one positive for the group are the proposed deals.
CF Industries (NYSE: CF - News) announced on Monday that it bought 7% of Terra Industries' outstanding stock over the past 2 weeks. CF wants TRA shareholders to accept a merger agreement that would represent an approximate 15% premium over TRA's current share price.
However, Agrium wants to purchase CF. AGU recently extended the deadline for its acquisition offer of CF to Oct 22. (The offer represents approximately a 4% premium over CF's current price.) It is probable that if AGU were to buy CF, CF's acquisition of TRA would be called off.
Compounding matters is the fact that TRA recently announced a special $7.50 per share dividend, payable in the fourth quarter. CF's offer for TRA would be adjusted to reflect this dividend.
The merger activity makes shorting these stocks risky over the very near-term, even with the falling estimates. On the other hand, much of the upside from the proposed deals appears to be priced in. Overall, the downside risks outweigh probable short-term upside, particularly if neither acquisition offer is accepted.
Zacks Rank
IPI, MOS and POT are Zacks #5 Rank ('strong sell') stocks. AGU and CF are Zacks #3 Rank ('hold') stocks. They are all classified in Fertilizers, which has a Zacks Industry Rank of 206, placing the group near the bottom of the Industry Rank List.
Fertilizers stock also account for a significant portion of Market Vectors Agribusiness (NYSEArca: MOO - News), something to consider when evaluating this ETF.
Zacks "Profit from the Pros " e-mail newsletter offers continuous coverage of the industries and the stocks poised to outperform the market. Subscribe to this free newsletter today by visiting http://at.zacks.com/?id=5611.
About Zacks
Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3:1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit From the Pros by going to http://at.zacks.com/?id=5610.
Follow us on Twitter: http://twitter.com/zacksresearch
Tuesday, September 29, 2009
Sugar Fundamentals Sweeten Up
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.
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.
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?"
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