Is Potash Corp. Overpriced? 27 comments
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Three years ago a single ton of fertilizer used to be worth $340, and in 2008 the price has jumped to $640. Since the summer of 2008 the price of grain commodities has crashed. As the world begins its sowing season, one must wonder,"will people be able to afford to buy fertilizer this year?" If not... then… Is POT over priced?
In this short qualitative piece, we will discuss key demand/market elements that many analysts and speculators are ‘bagging on’, and understand why the current POT price is unsustainable.
Demand: China will buy more!
China has been a driver of the commodity price hikes in the last several years, and fertilizer was no exception. As many readers are aware, China is experiencing major drought right now; this is due to Communist Government’s lack of planning and poor judgment. However, China’s drought will not substantially increase China’s purchase of fertilizers. This may shock some readers, but I beg readers to think one step farther. This is because fertilizers are ‘hygroscopic’, meaning they absorb moistures from the surrounding environment. The application of fertilizer during the drought will result in a disaster, as dusty wind (drought) will simply blow away the fertilizer on top of the dry soil.
What about ‘other’ parts of China? Wouldn't they use fertilizer to increase production? Well, other parts of China (i.e. deeper inland) suffer from lack of proper infrastructure and system that will not efficiently utilize the benefits of fertilizer. Fertilizer should be applied in such a way that it will go into the soil to promote soil rejuvenation for 'many' years, and such application require proper analysis and planning, something China is struggling with. One can always hope that the Chinese government will make ‘another’ foolish blunder in order to increase the crop yield, but China will not make the same mistake twice. Hope is not a strategy.
Demand: Asia’s other developing countries.
Asia’s developing countries (who happen to purchase bulk of fertilizers) are facing severe pressure from the IMF and the World Bank to stabilize their currency by safe-securing sufficient amount of foreign reserves (i.e. the U.S. dollar). The purchases of fertilizers are being delayed, and cancelled. The governments in Asia are promoting home-made fertilizers in order to substitute the import fertilizers.
Demand: North America’s need for more grain!
One might expect other countries will invest in fertilizers to increase their yield, and increase their market share in the industry. However, that is an armchair economic theory. Until very recently, the farming industry has been under severe stress. In many parts of North America, small farming communities disappeared and turned into ghost towns. It is no secret that many farmers have been living off of generous government subsidies. This is why so many corn farmers were excited by ethanol production schemes. For the first time in many decades farmers were able to make serious money from actual farming! Unfortunately, these farmers over-extended themselves with cheap credit, and are now paying the price. The low grain prices are forcing farmers to default on their new ‘tractors’ and ‘planting machines’. This is evident by the fact that growing numbers of farmers are going ‘bankrupt’. At this point in time the worry of fertilizer is at the bottom of many farmers’ check list.
Demand: Grain Rally!
In the past, the prices on fertilizers were ‘justified’ due to high grain prices. However, as grain prices tanked, so did the fertilizer market. Many analysts are still talking about $1000/ton fertilizer and some reporters cite $1500/ton! This means that these analysts are banking on high grain prices. Although we can appreciate their analysis, higher grain price doesn’t necessarily result in higher fertilizer price; and most importantly, we do not expect the rise of grain prices any time soon.
In many countries there is something called ‘wheat board’ and ‘quota’. The ‘wheat board’ guarantees individual farmers that the board will purchase grain from each farmer according to the ‘quota’ that farmers are entitled to. This also means that farmers can’t sell their crops beyond their quota. When times were good, this quota rule was ignored, and farmers used fertilizer to increase their yield. However, with the falling grain prices, there is now no incentive to buy fertilizer to increase the yield, and farmers are playing safe by producing only up to the limit of their quota. This is evident in South America where farmers are seeing their soy bean prices crashing down due to weak demand in Asia. The free-market at work.
Then there are POT-bugs
Since 2008, people have been talking about fertilizer’s value in protecting one’s investment from: ‘THE US DOLLAR CRASH’ and ‘INFLATION.’ Many claimed that fertilizers will hedge against the US dollar and inflation. However, there has been no credible proof that fertilizer stocks have hedged against the foreign exchange risk or the inflation. Such groundless ‘speculation’ is based on ‘hope’ and ‘fear’, the two most dangerous words every investor should stay away from. People must understand that fertilizers are not gold, not even close.
Summary: Yes, $90/share is too much!
The worldwide fertilizer demand is disappearing fast, and although ‘hope’ is keeping this stock up and running, the underlying fundamentals cannot be ignored. So, how will all this play out? The technical shows POT has hit multiple resistances/supports between Dec/Jan (support around $65 and resistance around $80) in the last several weeks. Based on the list of qualitative points, a short is recommended for POT with target price at $65/share.
Here is a link to my portfolio on kaChing.
Disclosure: Short POT.
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jegan
Disclosure. Short POT. Expect it to pull back to $75ish....
On Feb 11 09:29 AM John Polomny wrote:
> Short term your analysis may be correct. However your ignore the
> migration of diets in Asia to a more protein intense food which requires
> greater grain input. In addition even ith these high potash prices
> it is still cost effective and profitable for farmers to apply fertilzers.
> The situations you describe with drought will lead to lower yields
> and higher prices so making subsequent planting seasons more fertilizer
> intensive.
jegan
That is foolish. Then you can get sawed on the way down and the way up. If your crystal ball is unblemished then by all means by and sell to maximize your gains. Hopefully you won't miss the rise past where you sold.
Otherwise you may want to take a longer view and ride out the short term.
I currently own POT. But I'm going to give it a hard look because of your points. Thank you for your view.
If China and India want to develop as nations they need Potash. There is no way around it. They can cut back on a lot of output but internal growth alone demands it.
So until more potash mines come on stream (now pushed back at least 2-3 years due to this crash) POT runs the show.
You can do worse than investing in the worlds leader in potash with great books and management.
On Feb 11 02:27 PM jegan ;-) wrote:
> Short term or not, if he is correct, why would anyone stay in a stock
> that should drop from $95 to $65? If you really **love** the stock,
> then sell and buy it back later. A 30% loss, even if temporary is
> not reasonable.
>
> jegan
>
> Disclosure. Short POT. Expect it to pull back to $75ish....
Did I read someone say it is NOT a day trader stock? Just check the price charts on the daily basis on google. Heck last week went from 80 to 95 and down again this week to 85 and the way down to 80 by weekend. I bet half the trading is by quick flippers. And the beauty is that the options move just as fast and furiously.
Here is a suggestion. Buy your 100 shares (or whatever) for next 5 years and with remaining play money, buy whenever it is down by 5-10% on the day. It always comes up within few days. Remember to sell half the position and put stop loss on remaining half.
It has worked as a charm for the last month. I know - it works as long as it works! However, I am always net long with tight stops. I would not wait for it to come down to $65 again.
That said, don't know where you heard that the IMF was "putting severe pressure" on Asian countries "to stabilize their currency". If anything, the IMF has been busy encouraging Asian countries to float, either upward (until the crisis hit) or downward (since then).
Looks to me you're hastily cobbling together half baked arguments to back your short position.
It's a case of "are you short because you're bearish or are you bearish because you're short?"
But yes, it looks overbought and might healthily retrace.
“Although 940 Potash Corporation of Saskatchewan employees received temporary lay-off notices, about two thirds remained working for part of the inventory adjustment period doing maintenance and capital project work.
Spokesperson Rhonda Speiss says customers are sitting on the sidelines right now waiting to place orders so the temporary lay-off prevents their warehouses from over-filling. The end date to PCS's temporary lay-offs remains March 15th. “
www.saskatoonhomepage....
The price of potash is not down? Well, because there is no buyer. As indicated, customers are NOT BUYING. Even POT’s spokesperson admits to the fact. Laying-off to avoid warehouse over-filling is not exactly a ‘good supply control’. Potash has to be processed in order to be used as a fertilizer, and that takes time; you can’t just spray raw salty-potash on the field, you can only spray fertilizer that has been treated and processed. This all means that there isn’t sufficient demand in the market that will allow a sustainable production of fertilizer. Maybe customers think fertilizer prices are too high and feel there is no need to place an order? I have discussed such possibilities in the article.
I hope this answered your question. =)
On Feb 12 09:26 AM Kurtwalter wrote:
> The few potash producers in the world, who basically run a monopoly,
> have shown great supply control in the face of declining demand.
> In this kind of market the usual demand-supply-price mechanisms do
> no work. Article is wrong. Price of potash has not gone down.
Asian currency is beyond the scope of this article.
However, I will answer your 'concerns'.
The IMF and the World bank has 'toured' the East Asian countries last year, and told them to borrow money in order to secure their currency. As a result, countries such as South Korea have entered a currency swap agreement with the United States and other countries. As of November 08, 10.4 billion U.S. dollars (loaned by the Federal Reserve) are now in the S. Korean banking system (out of 12.5 billion dollars total).
Asian countries are 'stressed' to be 'prudent' with their 'limited' foreign currency reserve, and this trend will continue well into 2009. There are other juicy subjects such as IMF's secret tour of major Asian cities in January 2009, but I will stop it here.
I hope this answered your question. Cheers.
Some interesting IMF related stories:
www.iht.com/articles/2...
www.chinadaily.com.cn/...
www.koreatimes.co.kr/w...
www.sundaytimes.lk/090...
On Feb 12 07:50 AM taojaxx wrote:
> Agree on the short position, short term. Was long up until a week
> ago or so.
> That said, don't know where you heard that the IMF was "putting
> severe pressure" on Asian countries "to stabilize their currency".
> If anything, the IMF has been busy encouraging Asian countries to
> float, either upward (until the crisis hit) or downward (since then).
>
> Looks to me you're hastily cobbling together half baked arguments
> to back your short position.
> It's a case of "are you short because you're bearish or are you bearish
> because you're short?"
> But yes, it looks overbought and might healthily retrace.
Fertilizer Pricing in Canada
By Agriculture and Agri-food Canada (Government Agency)
www4.agr.gc.ca/AAFC-AA...
--------
To understand pricing in the potash industry, it is useful to re-state the facts:
1) PCS has most of the industry excess capacity,
2) the potash industry has a tendency to ruinous price cutting when supply exceeds demand,
3) the suspension agreement with the U.S. government dictates a minimum price at which Saskatchewan potash producers can sell into the U.S. market, and
4) PCS has taken on the task of the residual supplier to potash markets. If PCS were to produce at full capacity and offer all of its production capability to the market, then prices would be much lower. By not doing so, PCS recognises its market power as the dominant producer able to directly influence or set the market price of potash by varying production. However, in exchange for the higher price, PCS must sacrifice sales or market share while other potash producers enjoy the higher price do not need to reduce their sales or market share. PCS realises that market demand is inelastic and that the industry has a tendency to ruinous price competition. Given these parameters, it has no choice but to choose the combination of sales and price that it requires to meet its corporate financial goals. IF PCS were to aggressively pursue market share by increasing production to the limit of its production capability, and assuming no change in demand, potash prices would fall quickly. However, PCS may then be accused of predatory pricing with the objective of driving out its higher-cost rivals.
------------------
Now that POT is experiencing excess warehouse capacity, I'm on the short side. I hope this answered your concerns.
On Feb 11 07:39 PM naidle wrote:
> I hope people listen to you so I can double up on my current position
> at $86 :)
>
> If China and India want to develop as nations they need Potash.
> There is no way around it. They can cut back on a lot of output
> but internal growth alone demands it.
>
> So until more potash mines come on stream (now pushed back at least
> 2-3 years due to this crash) POT runs the show.
I'm not necessarily a big fan of POT. I did make money on MOS and AGU, but presently, I'm short POT. Up (or down depending on how you look at it) 12% the this week. I most probably will close at about $75 to $79. If it then moves up again, I might buy it for the move up. Its just how the market is working right now.
jegan
On Feb 11 05:46 PM J Galt wrote:
> Short term or not, if he is correct, why would anyone stay in a stock
> that should drop from $95 to $65? If you really **love** the stock,
> then sell and buy it back later. A 30% loss, even if temporary is
> not reasonable.
>
> jegan
>
> That is foolish. Then you can get sawed on the way down and the way
> up. If your crystal ball is unblemished then by all means by and
> sell to maximize your gains. Hopefully you won't miss the rise past
> where you sold.
> Otherwise you may want to take a longer view and ride out the short
> term.
I think you need to study up a bit though (Don't mean that as an offense). I'm not big on ag products, but I do read a lot. If you think that China is the driver for POT, you should read Interfax China (www.interfax.cn/news/8.../) and China Financial Markets (mpettis.com/) to get a feel for what's going on there. I'd also watch not only the Ag companies directly, but keep an eye on the Baltic Dry Index.
Some concerns I have right now with POT (shipping, iron producers, copper, and just about everything else that expects China to drive their recovery...) is that (1) China is experiencing a drought. One Chinese article I read expressed that the unaffected areas cannot replace those drought affected areas of China. (2) China presently is **very actively** re-negotiating their material costs. This is reported more with iron pricing, but also has been noted with copper and other products as well. (3) China has and probably will continue to reduce their imported materials.
Just did a quick Google....Read this (seekingalpha.com/artic...)
jegan ;-)
On Feb 11 07:39 PM naidle wrote:
> I hope people listen to you so I can double up on my current position
> at $86 :)
>
> If China and India want to develop as nations they need Potash.
> There is no way around it. They can cut back on a lot of output
> but internal growth alone demands it.
>
> So until more potash mines come on stream (now pushed back at least
> 2-3 years due to this crash) POT runs the show.
AM taojaxx wrote:
> Agree on the short position, short term. Was long up until a week
> ago or so.
> That said, don't know where you heard that the IMF was "putting severe
> pressure" on Asian countries "to stabilize their currency". If anything,
> the IMF has been busy encouraging Asian countries to float, either
> upward (until the crisis hit) or downward (since then).
> Looks to me you're hastily cobbling together half baked arguments
> to back your short position.
> It's a case of "are you short because you're bearish or are you bearish
> because you're short?"
> But yes, it looks overbought and might healthily retrace.
" At some point if American farmers do not grow enough to support Americas needs then Obama will nationalize the farms"
If US government nationalize the farms, it will lead to starvation and a revolution in the USA. Russia is a good example.
- Lowered current demand due to Global Recession
Reasons why you should buy:
- China's commitment to urbanization -- less farmers, more manufacturing/service based (Pressure on farmers that remain to be more efficient)
- The requirement of subsidies around the world to provide farmers an incentive to produce (Current food prices are too low)
- Fertilizer prices are holding their own versus many other cyclical commodities like oil, metal prices, gas, etc.
Conclusion:
If you are shorting a fertilizer company now, you are shorting all of these expectations that are already built into the share price. If the world tips over from here, stock piling food will be next. If it moves up from here, you eliminate the most important reason to short while all of the long reasons remain.
Disclosure: I am long AGU at $29 on TSX.