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What's in Store for the Fertilizer Industry?

by: Early Bird September 03, 2008 | about stocks: AGU / DBC / GSG / MOS / POT / RJA

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After being an active trader in stocks related to the fertilizer industry for the past three years, I have recognized some interesting factors that have had a huge impact on the price movements of these companies' stock prices.

Since the stock price of listed companies in the fertilizer industry peaked in June, it has slumped by approximately 30%. In the same period, the fertilizer industry has experienced 15% higher prices for the fertilizer UREA (same for CAN, Amonia etc). With the fertilizer price booms, we also are watching the prices of oil and natural gas falling sharply, which means higher margins for the fertilizer producing companies. They are reaching all time high profits for their products. Why is this so? Why does the stock price of fertilizer companies fall when they experience higher prices for their products and better margins?

I believe one answer is the food prices ("of course", you might think, but few people care about it on a daily basis). You'll find a high correlation between the corn price (same for wheat, soybeans) and the stock price of i.e Agrium (AGU), Mosaic (MOS) and Potash (POT). It is important to watch the food prices closely. That is why the global sell-off in commodities has also hit fertilizer stocks hard.

In the long term, I believe that fundamentals will win, and last week's news about China hiking and expanding their export taxes on fertilizer will yet again boost international fertilizer prices and hence give better profit. It's a proof that the demand is still strong and supply is still insufficient

And, while the oil price keeps falling, I will keep on buying. Remember, lower oil and natural gas prices gives lower costs.

The global bull run is not over yet!

Disclosure: none

Mosaic: Feeding on Higher Prices, But Outlook Is Scrawny Jan 09, 2009
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The Great Year-End U.S. Jobs Blowout Jan 09, 2009
A Real Commodity Moneymaker Jan 09, 2009

Related Stocks:

AGU, DBC, GSG, MOS, POT, RJA

This article has 27 comments:

Sep 03 10:11 AM
excellent article!!!
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Sep 03 10:12 AM
Excellent analysis!
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Sep 03 10:18 AM
The other reason might be that the stock price is already accounting for net profits that are impossible to generate even at higher margin for the fertilizer companies. As an investor, the question in my mind would be at what multiple should the fertilizer stocks trade?

Their P/E (as on bberg) is about 49 and 44 respectively while the Est 1Year P/E is 13 and 10. If that is any indication the street is expecting a 4x increase in EPS number from these companies.

There is no major volume expansion coming on-line in 2008 or 2009 so that means that 4x EPS increase should come from margin expansions. Seems too aggressive.

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Sep 03 10:20 AM
Interesting article concluding that global bull run is not over. Many people who follow technical charts think its over because most world markets are trading below a downward sloping 200day moving average. Author has put up good fundamental arguments but behaviour of stock prices may diverge from fundamentals at certain times.
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Sep 03 10:26 AM
Can someone please comment on the relationship between US dollar and fertilizer stock prices? Charts seem to show an inverse relationship.
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Sep 03 10:32 AM
New information,very interesting.
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Sep 03 10:32 AM
I own a small amount of POT, so I'm rooting for this, too, but honestly - you call this Excellent Analysis? Lol, it's mostly cheerleading at best.
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Sep 03 10:46 AM
I agree. It does seem the long term prospects for POT are excellent. Don't know what's in store for the short term though. September is a bad month. It's negative historically. POT is down again today. However, that may just make it a bargain in the short term. I think the petroleum stats get reported tomorrow since this is a holiday week. Since most things were shut down (including shipping intakes), it seems likely that the petroleum draw downs will buoy the commodities, especially oil. This may help POT et al in the short term. Does anyone have any idea when these stocks are likely to turn around? The fundamentals are really good, and everyone wants lots of food to eat.
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Sep 03 11:05 AM
It has occurred to me that this stock amy wait until it gets near its next earnings release. Then it may start going up on what will undoubtedly be really fantastic earnings for Q3. At the current price, $155, the PE after Q3 will be 16.7, and after Q4 results it will be 12.3. This is for a company that is supposed to grow 70% next year.
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Sep 03 11:05 AM
There are a lot of great companies on sale right now, POT being one of them. At 150-155, I'm a buyer. I don't think that anyone can call a bottom to the commodity sell off --- but you do need a tolerance for pain to buy these stocks right now.
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Sep 03 11:11 AM
The fact that KDB seems to be seriously interested in buying a big part of Lehman is likely good news for the market. It may effectively make Lehman easily able to weather the bad loan problems yet to come. If this deal happens, the entire market may run up. It is an election year after all.
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Sep 03 11:55 AM
Baker Hughes just put out a report that the refinery damage from Gustav may be as bad as that for Katrina. This should buoy oil and gas. Also Zaks this morning put out a target estimate for POT of $250 based on 2008 earnings (estimated PE at that time would be 18.9). This would be for late Jan. or early Feb. in 2009, when Q4 results are announced. One of the most respected analyst groups is saying the stock will almost double in 6 months. That is encouraging.
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Sep 03 11:56 AM
David, I'm with you. Does anyone know what the support/resistance numbers are for POT? I had to sell my shares today because I've just lost too much money and I have a feeling that we're no where near the bottom yet. Thanks for a great article.
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Sep 03 02:40 PM
Emerson: It looks to me like there is support at about $145. There was also support at about $163-4. It seemingly went through that today. The semi-major overhead resistance is at $175, $183, and $190. The options are really bunching up tightly now. It makes one think that a turn around is likely soon. I think the petroleum stocks news comes out tomorrow, since this is a holiday week. One would think that news would tend to make oil go up. That would likely have the same effect on other commodities and on POT. Of course, I thought Gustav would tend to make oil go up. Apparently the relief that it wasn't a category 4 to 5 hurricane was enough to put the lie to that scenario. A lot of people thought that oil would bottom in the $90 - $100 range (i.e. retrace to a point constituting about half its recent upward movement). We are getting very close to that now. If we get a sudden spate of very bad economic news, oil may go below even that. Without such an impetus, it seems likely to me that the soothsayers will be approximately correct.
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Sep 03 03:02 PM
Pot is only about 10% higher than when their earnings were 4.25 w/ an expectation of 12-13 bucks in the current year- ie: about 12 PE as mentioned for a co growing 200% this year and estimated 75% next.

The dynamic of higher protein diets for a billion+ folks is powerful, amplified by non-sensical mandates for the conversion of corn to dirty fuel.

S & P - btw reiterated target of 280 after last earnings call.

The elephant in the ointment is the impact from the union strike.

Looks like a pretty good entry...

Good Huntin'
fc
fancam.com

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Sep 03 04:09 PM
Great article, u got it right!
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Sep 03 06:51 PM
David, Thanks so much for your reply and all the effort (and wisdom) that you put into it! I see that POT went up a bit from its lows today, what are your thoughts on that--buy now or wait?
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Sep 04 02:44 AM
I think food prices will inevitably rise, because there are more people in the world, now, who have money to chase nice things to eat. Think China/India/Vietnam/Th... the middle eastern countries, etc. They all like to eat, want to eat, and now have the money to pay for what they want. So, all of us will be paying more for our food. Get used to it! Unfortunately, there is nothing to be done about high food prices, because of this dynamic. There are just too many people on the earth now.
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Sep 04 12:44 PM
Jim Rogers is still very bullish on agriculture. Everything related to agriculture will do well in the next few years.

jimrogers-investments....
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Sep 04 01:08 PM
David White and Emerson -

POT is at the 38.2 retracement

the 50% is at $136 and

the61.8% is at $111

Other levels suggest $111 is the greater possibility
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Sep 04 04:17 PM
POT has so much potential to pop thatI am nibbling my way in in the 150-160 range. Next buy is at 120 if it goes there. I think the cost of missing is greater than the risk of this company dropping another 20-40%. But what really confuses me is that sine 8/11, TNH is up 30% while POT is down 6%. I don't have any interpretation of this as yet. MON also down. Is this a strike issue, or did I miss something important?
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Sep 04 04:21 PM
Author claims he's buying yet has no disclosure? Sketchy at best. I love it when all that can be pointed to is the alleged global commodity bull run. Facts is facts right? LOL
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Sep 04 05:17 PM
The only relevant question is, are food prices falling faster than the price of the petroleum required to produce it. If not, then farmers' ability to pay for fertilizer will stay the same or increase. Do we have any numbers on this? e.g. fuel required to produce x amount of corn, increase in fuel vs. increase in corn, etc. It should be simple math.

I'm skeptical of any claim that total human food demand has fallen. Consumers might be moving to cheaper alternative foods though - more or less processed, whichever's cheaper.
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Sep 05 06:18 PM
Philman: "There are just too many people on the earth now. " What? Are you one of those radical (and very wrong, morally) people who actually believes that? If so...do us a favor....I mean, who gets to decide who are the "excess people"? That's just wrong. Getting back to the facts: our food production continues to outstrip population growth...by *far*. The issue is not our ability to produce for 8 billion...or even 18 billion people. We *waste* enough food each year in the U.S. to feed India. Not even including the ethanol mandate in that.
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Sep 05 09:54 PM
Disclosure: I hold POT.

I think the price of POT has just gone in lockstep with the general trend of commodities (gold, oil, etc) and that is primarily a function of hedge funds dumping commodities and commodity-related stocks in a very big way recently, primarily on dollar strengthening. Many people can't imagine how much money these funds control and how much they influence market prices.

It's pretty simple. When the dollar weakens the hedgies pile into commodity-related investments to (duh) hedge inflation, driving prices into euphoria-inducing regions and when the dollar strengthens they pile out, causing much fear and uncertainty to us regular Joe investors who hold commodity-related investments and think about things like company performance or commodity fundamentals (which do remain positive, I believe).

So what we are seeing now with corrected POT and commodity prices should turn around when the dollar resumes it's decline and the hedge funds pile back in again. However, that may take some time. The better part of a year, I believe. Plus or minus. The dollar (and commodities) will trade in a sideways range during this period.

Patience and faith is required of us long-termers who do not have the inside dope on what the hedge funds or the centrals banks are going to do before they do it.

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Sep 05 10:28 PM
I've been wondering too. When I'm not researching equities I might be buying and applying organic fertilizers. Prices have stabilized but stabilized high. Same with chicken feed.

And the difference between the 70's and now amount to 3 billion extra mouths to feed. And from what I'm being told nitrogen in particular from China was slowing considerably before summer (based on what I saw from the pre-Olympic sailing invasive species hyper-population no wonder if they are consuming nitrogen domestically). Employing nitrogen-fixing species in farming is a useful but slower process and not practical for corn.

And if prices fall won't that drive supply out of the market too? As long as we are stuck with ethanol as a "solution" fundamentals IMHO will prevail. The buy signal? Mirror mirror on the wall.
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Sep 09 12:07 AM
Around the globe the demand and political ramifications of continuing to feed a hungry world population will impact all economies in a volitile manner........long term outlook appears solid for POT ....weather, oil, and laughable strethening of US currency in short term have been painful to this stock...........You may not need a new car/truck but you do want to eat.
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