Time for Fertilizer Stocks?

Is it time to Load Up on Fertilizer Stocks?

Springtime is usually the season when the farming community begins to spread fertilizer on their fields. Organic farmers typically use manure from farm animals, or some other form of organic compost. Large, commercial operations typically use ground potash, a rock mined in Canada and elsewhere.

I’m not going to debate organic versus conventional farming here, but suffice it to say that all plants – regardless of how they are grown – need a good source of nitrogen and potassium.

Potash – otherwise known as potassium carbonate – is essential to commercial agriculture. It improves crop yield, taste, water retention, color, disease resistance and texture of food crops. Fruits, vegetables, rice, corn, wheat, soybeans and cotton all benefit from being grown in soil enriched with potash.

In the past few years, shareholders of the largest, profitable potash producers like Potash Corporation of Saskatchewan (POT), The Mosaic Company (MOS), and Agrium, Inc. (AGU) were very happy campers. The stocks traded at PE multiples pushing 30 during the commodity boom of last year.

Not anymore: they’re all off more than 70% from 2008 highs. The financial distress that hit the rest of the economy in the fourth quarter of 2008 hit farmers too. When times are tough, farmers hunker down and cut costs. And one of their biggest expenses is fertilizer.

Most farmers typically have a large stockpile of potash on hand, and not buying on a regular basis causes them to use up what they have. You see, they can’t just stop fertilizing: many soils are overworked, or are marginal to begin with. If they scrimp or otherwise cut back on their applications of nutrients, yields suffer, and crop prices rise.

Once their penny-pinching became obvious to Wall Street, the already jittery markets didn’t need any prompting to hammer shares down to today’s low single digit PE’s, where they’ve remained since last October.

The problem facing the three companies mentioned above is that several big financially strapped potash producers in Russia have dropped prices 25%, putting pressure on others to do the same. This would have the effect of continuing to hold prices low.

It’s all being watched closely by China – one of the world’s biggest potash customers – who’s set to begin negotiations with the industry for its 2009 purchases. In response to the Russian action, Potash has cut production in order to keep prices from dropping through the floor.

The key here is to keep a watchful eye on crop prices. As they start to rise, farmers will jump on the bandwagon and fertilize more to increase their yields and make more money. And given that most are depleting current potash inventories, buying could soon resume in a big way, driving prices up once again.

Growing economies like the BRIC’s: Brazil, Russia, India and China are big potash users, and let’s face it: the world’s growing population will always need to eat.

Original article

Comments

[urbanhiker:]

Ho hum, nothing new here.

Mar 11 07:05 PM

[Steak:]

I was hoping to see something about fertilizer prices and expectations...alas

Mar 11 07:14 PM

[naidle:]

I'm big on the Ag stocks over the next 10 years but we really need to come up with more compelling arguments than "people gotta eat" in articles such as this.

Mar 11 11:25 PM

[Dan Heil:]

I am bullish on ag stocks as well but as naidle says above, it would be great to hear more about the value of these companies as a whole as compared to one another. I also think that recent bids on Terra Ind. by CF Ind. as well as Agrium's bid on CF last month would be important to mention since you are speaking of the industry as a whole.

Mar 12 03:16 AM

[ArtfulDodger:]

Mr. David Fessler:

Not sure at all what your conclusion is in this article. It looks like get ready to buy, but watch for a while first?

Mar 12 08:54 AM

[Cem Unal:]

I bought AGU, MOS, POT in december and have currently bought more of POT during the pull-back on the Uralkali News. Indeed nothing new in this article but I recommand reading the Market Analysis report of POT for 1Q09 that can be found on their website.

Mar 12 09:19 AM

[BiomassBlog:]

As a farmer there were a few things in this piece that surprised me.

One was the statement that “most farmers typically have a large stockpile of potash on hand”. It’s my perception that farmers storing fertilizer, let alone unblended individual nutrients like K, is not quite so common. Rather it’s my understanding that there may still be quite a bit of stock held at local/regional suppliers who purchased or committed at higher prices last year.

The second statement was that “many soils are overworked, or are marginal to begin with”. Again this may be true in some instances, but more often it’s now the case that farmers utilize soil testing or estimated crop removal rates to determine exactly what that year’s planting will require. Coupled with more precision delivery methods and no till techniques, such processes keep the soil’s base nutrients at a proper level year after to year.

Mar 12 10:06 AM

[Jake2:]

Reader, pass by.

Mar 12 02:22 PM

[anopenmind:]

Jim Cramer started bashing Ags almost a year ago. Since then, other "experts" are up, down, up, down on Ags. Never seen another segment where "experts" are so erratic with their "expert" advise.

I figure Russia can not contiually supply enough potash to drive the world's price low and keep it there, as "experts" have always reminded us the tight supply controlled by few + growing demand, perhaps not so much this planting season, but early spring 2010? At some point in time, Potash price may be headed toward $400, once predicted by Morningstar. What other stocks to better hold?

Mar 12 03:18 PM