The Real Reasons Fertilizer Stocks Are In the Dirt

Tag : Fertilizer


Nevertheless, they have done nothing but fall over the past twomonths and many investors are left scratching their heads. But thisone isn’t too tough to figure out.
As the world is finally starting to realize, many of the forwardestimates were a bit too high. After all, high commodity pricesusually have some impact on demand. And in this case, althoughtotal revenues have increased steadily for the Big Three andmargins have increased, no one is expecting the great times tolast.
These are mining stocks and are highly cycle. You have to pricethose discounts into the market.
Granted, it’s going to take some time to bring new supply online (it takes 5-7 years to bring a new potash mine on line), butit will come. Rest assured there will be more fertilizer supplycoming, which will help bring fertilizer prices back down andsignificantly reduce the long-term profitability of many of thesefertilizer companies.
3. Long-term Value
The long-term is probably one of the biggest issues holding backfertilizer stocks. We cannot forget the importance of fertilizer,after all, in the last 50 years the amount of arable farmland has dropped 37%on a per capita basis . So fertilizer consumption will not disappear.
High fertilizer prices have done one thing though; they’vebrought a lot of competition into the market. Potash is the perfectexample. The following companies are expanding big into potash.Here are a few examples, though by no means all of them:
Mosaic – is still on schedule to ramp up its potashproduction by 50% over the next 12 years. In a plan laid out inApril, Mosaic stated it will invest $3.15 billion in expanding itspotash mines to increase production from 10.4 million tonnes to15.5 million tonnes by 2020.
Uralkali ( URALY.PK ) – Despite some setbacks, Uralkali is on pace to increase itspotash production by 35% by the end of 2010.
Rio Tinto ( RTP ) – Rio Tinto has been one of the top mining companies thathas declared its intentions to move into potash mining. A littleover a month ago the mining giant stated it will spend $3.5 billionto open a potash mine in Argentina.
At last report, Rio Tinto stated it expects this mine to produceabout 2.3 million tonnes of potash in early 2012 and then ramp upto full capacity of 4.3 million tonnes by 2020.
BHP Billiton ( BHP ) – has been one of the most aggressive mining majors to jumpinto the potash race. BHP shelled out $284 million to buy out AngloPotash last spring. Anglo held a 25% stake in BHP’sSaskatchewan potash project.
BHP expects this mine to start producing potash as early as 2012and has not confirmed a timeline since the takeover. But it shouldbe on line between 2012 and 2015.
Potash One ( KCLOF ) – is one of the leading potash “junior”companies. Potash One and a handful of others are still chasingafter the big potash prize. Many are well funded and are activelylaying the groundwork for a big joint-venture (i.e. with a foreigncountry that would put up a big loan in exchange for a supplyagreement) or takeover.
These companies would need massive amounts of capital to go intoproduction. If you look at some of their management teams, it wouldnot be overly surprising to see one of them become a producing minein the next few years.
4. Agriculture Commodity Prices have Plummeted
Finally, the price of agriculture commodities has quite a bit to dowith how much fertilizer farmers are willing to use. Ifthey’re getting record high prices for crops, there’snot much worry over some extra fertilizer costs. But when theirprofit per acre have dropped by 40% (which has happened recently)they’re going to tighten up the purse strings a bit.
Fertilizer demand does have some elasticity and it will be impactedby crop prices.Which are all interrelated. Corn prices might behigh while soybean prices may be down, but they will reachequilibrium as farmers chase after the bigger cash crop.
So when you see Powershares DB Agriculture Fund ( DBA ) drop 35% from its highs earlier this year when the “foodcrisis” story really hit the mainstream, you know fertilizerdemand (and profit levels of fertilizer producers) will surelyfollow.
As you can see, there is a lot more supply coming. We looked at apartial view of potash (Intrepid ( IPI ) has some plans, Russia’s Silvinet recovers from sinkholeproblems, etc.), but as you can see, the same is true for most ofthe other forms of fertilizer as well. As long as we valuefertilizer companies for their long-term profitability, it’seasy to understand how they all came crashing down to reality overthe past couple of months.
There is a lot of supply coming and potash prices will likely stayaround $500 to $1,000 a ton over the long term. They won’t betoo high to attract aggressive amounts of new supply and theywon’t be too low so that mines are going to have to be shutdown. Potash prices will probably remain in a nice range whereevery company makes enough money (that’s even more likelysince 2 cartels control more than 70% of world potash exports.)
Yesterday, Merrill Lynch ( MER ) analysts offered a pretty much bearish report on potash (allcommodities in general for that matter) and I’m sure someothers will follow. All of the downgrades will surely add to theselling pressure and will finally push these stocks to a bottom.
Of course, all this is pretty good news. There have been a lot ofinvestors plowing money into the fertilizer sector over the pastyear (on the way up and the way back down) and it looks like mostinvestors weren’t prepared. Fertilizer companies are stillmining companies and there will be plenty of volatility.
Blame the hedge funds for pounding down the share prices or justlook at it as a bubble that burst with the regular accompanyingconsequences, but I’m now starting to turn cautiously bullishon agriculture again.
This time around it won’t be a huge speculation fueled risingtide that lifts all boats. The long-term opportunity in agricultureis still there, but the biggest wins probably won’t be infertilizer stocks, they’ll be in other agriculture subsectors .
Fertilizer stocks are in for a long period of ups and downs. Iexpect them then to have a few more months of rough going withplenty of false starts too. After all, there are still a fewanalysts with $300 and $400 price targets on Potash Corp that stillhave to turn negative before we can confirm a hard bottom.
Despite it all, anyone buying now should reasonably expect a 30% to50% on Mosaic, Potash Corp, and Agrium despite any more ups anddowns to come. Even with a lot of road blocks down the road, there is somesignificant value in the fertilizer producers.
Disclosure: No position in any companies mentioned