Potash: Thesis versus Reality Yet Again

We are back to the world of thesis versus reality. It's a world we've been living in since I started this blog - people front running a recovery that constantly is out of reach; it's been Groundhog Day (the movie) repeatedly.

In the thesis world, speculators drive stocks up on the basis of what they believe will happen in the future, while ignoring the facts on the ground - even things the CEOs themselves say. Because they know better as forecasters of the future. In the reality world, companies report... well, reality. I won't bother you with the FedEx (FDX) report Wednesday morning which is a lot better proxy on the economy than 99.9% of government reports, because it's an actual company that has to deal with the real world, unlike the fantasy of government numbers. For about the 4th? time in the past 18 months, they are pushing guidance down...

As you know, the commodity trade has been the big winner... very crowded; it's 2007 all over again. If only these companies would not open their mouths and report on reality, we could keep bidding up stocks in this group for no reason other than "everyone else is buying so I must too". Mosiac (MOS) and Potash (POT) have been reporting poor numbers for about 3 quarters now, while constantly saying the turn is "just around the bend". Then in the next quarter, the turn has not come. I have now come the point at which I doubt their words, because they keep saying one thing, and another happens.

Wednesday, the fertilizer names were taking a hit because Potash (POT) says they are cutting back production yet again.... but not to worry, this will just lead to even larger demand "soon". (Groundhog Day)

• PotashCorp today indicated a further reduction in 2009 potash production of 0.8 million tonnes, bringing curtailments this calendar year to 4.7 million tonnes and total curtailments to 5.5 million tonnes since August 2008.
• Lagging demand due to an extremely slow US spring season and extended negotiations with offshore buyers are the reasons behind the shutdowns. However, with the world's soils and supply chain nearing depletion after almost a year of deferral, we expect demand to return in second-half 2009 as Brazil approaches its major application season and India and China inevitably return to the market.
• This unprecedented period of draw-down throughout the supply chain, coupled with the expectation of lower global crop production and higher crop prices, is expected to lead to an even stronger rebound in 2010.

It's a darn shame these companies have to report actual business metrics, because if they did not, speculators could run these stocks up another 50-100% based on thesis. Because when you create reasons for stocks to go up based on opinion, rather than fact... no price is too high.

I say all this with the background of potash as my favorite long-term commodity - and I own these names...

Disclosure: Long Potash, Mosaic in fund; no personal position

Comments

[Puerto:]

After several quarters of optimistic forecasts (and reasonable results), the Germany-based group K+S issued a statement yesterday headlined "Extraordinary weak demand for potash fertilizers continues / Clear reduction in expectations for 2009 sales volumes / Additional production curtailment in H2 / European prices reduced in line with the situation on overseas markets / Further significant reduction in revenues and earnings expected in 2009".
The stock price fell 14% and the slide continues today. The stock price correlates very well with POT.

Jun 18 05:37 AM

[Pax Americana:]

Useful advice thier Mark , concerning [FDX] being a "Proxy for the Amercan Economy"...Good Article..

Jun 18 06:33 AM

[Edit or perish:]

Because people have been wrongly anticipating and predicting an upturn over the past three or four quarters doesn't logically imply that this will continue indefinitely as in some silly movie. Some things happen over and over again until they stop.

If anything, the longer the delay in purchasing of fertilizer at expected levels, the greater the need for them will be. Crop yields will still be important and only become more. Some agricultural inputs can be postponed until economic conditions improve, but fertilizer has a direct bearing on yields, efficiency and profits.

The optimists aren't wrong, they're just early.

Jun 18 07:47 AM

[long_on_oil:]

Good article and I hope I am the optimist that edit has eluded to. I have recently gotten into AG stocks because I like many others, see good times ahead. The exploding population coupled with the soils of the world becoming worn out has to eventually bode well for the ferterlizer companies, it is just a matter of time.
My problem is that I have never been good at market timing so I try to buy during the worst of times and then wait for the best; so that is what I am doing now when I buy AGU and MON. Ferterlizer and seed; just add DEere and you got AG covered.
If you are like me you will start watching these companies and then you will wake up one day to discover you have sat back and watched them double...lol

Jun 18 09:06 AM

[Mentor:]

Despite what Bill Doyle declared in latest coferences, that he is sure that potash demand will soon come back, and keeping a price position of $750/mt.
If we come back to last year when prices commodities increased and potash reached the current $750, who took the initiative to rise price to $1000 ?, it was not POT or MOS or other norther amarican player, it was BPC. That's why I am watching BPC, and may be the surprise will come from the outsider, by reducing potash price for Q3 and/or Q4, specially right these days there is much talks with both new indian fertilizers minister and chineese. So I agree with the article that the thesis could be different from reality at least for 2nd half 2009.

Jun 18 09:20 AM

[naidle:]

It reminds me of the saying I hear a lot as a theory for buying ag stocks - "people have to eat"

That's like investing in Freddie Mac because "everyone needs insurance".

I'm long ag stocks too but that type of oversimplification wreaks of speculation. It's not just Governments who mislead, it's the majority of investment professionals who are bias.

Good article, thanks.

Jun 18 10:22 AM

[groty:]

To me, I interpret the pricing news from K&S as very bearish because it virtually guarantees the China and India contracts will be negotiated at less than the $750/ton price the producers have desperately tried to defend since last year by repeatedly cutting production. If true, then 2009 and 2010 earnings estimates are probably still too higher.

And yet the momentum guys come out gunning the stocks higher at the open again today. I don't think there's anything that can shake their desire to own these names for the nex 3-4 years......until new mines come online and create excess capacity.

Jun 18 10:32 AM

[Joe Bruin:]

In defense of the fertilizer companies, the farmers will have to use it in the future if they skipped an application this past season. Otherwise, their yields will be down. Plants love potassium, nitrogen, and minerals. You can't cheat mother nature. Mother nature doesn't care if there is an economic slow down. Mother nature doesn't care that farmers where not able to get financing to purchase fertilizers.

It's supply and demand. The commodities (corn, soybean,...) are at historically low levels. It doesn't look good for consumers especially with China increasing it's soybean purchases. It's the commodity prices that will eventually entice farmers to increase their yields and that means using fertilizers.

The bottom line : watch commodity levels. They are the key to the whole agriculture complex.

www.reuters.com/articl...

Jun 18 11:06 AM

[bluetick:]

Potash might get in short supply at $250/ton, but at $750/ton there will be plenty to go around. Doyle should know by now that farmers won't pay the price for a shortage somebody tried to create by cutting production in half. Who really lost out? The mining employees who were sent home and the stockholders who thought POT knew what they were doing regarding running the company's business.

Jun 18 11:48 AM

[cstauffer:]

I would hardly say the POT has been reporting "poor" numbers for three quarters in a world where just producing a profit is reason for a sigh of relief. That being said, valuing POT or any other owner of a scarce but necessary commodity based upon quarterly profits is foolish. That being said, I am glad that this is ther way traders think because it gives those of us who focus on a longer time horizon than just next quarter opportunties to purchase shares of these companies at prices well below replacement value, intrinsic value or take out value. It has recently been stated that if BHP wanted to buy POT they would have to pay upwards of $150 per share. I was recently at an investor conference put on by AGU where it was illustrated very convincingly that AGU was trading at just 43% of replacement value.

Jun 18 02:15 PM

[long_on_oil:]

Now lets apply a little common sense. Demand for AG is down because of the acres that can't be planted due to the wet weather across the nation. That tells me the demand for commodities is going to skyrocket this fall and some area of the world will have to make up the loss by planting and growing more.
In order to produce higher yields you have to have great seed and fertilizer so why isn't the demand for these items constant. If world demand for corn, wheat, soybeans etc is constant then the need for the seed and fertilizer should be too. Am I missing something?

Jun 18 03:01 PM