The world is not coming to an end! That's a good start, and great news. I'll bet a large sum that many thousands of investors, farmers, and entire C-Level managers were feeling nausea during the last 3-5 hours. The immense volume before the opening bells rang around global stock exchanges tells a "Tale, full of sound and fury…" Sure, many cool-headed pros stepped in and promptly discounted a worst case scenario into all of the direct miners and suppliers of the vital commodity nutrients that keep the populace fed in every nation. Obviously, they were joined by a ton of fearful investors, all rushing to hit the exit ASAP, before everyone else. Equally as deft were the opportunistic traders exploiting this huge sell-off with futures, options, short bids, ETFs, options on futures, every weapon possible that traders can brandish to make a ton on the dropping price per tonne of the chemical stocks in question.
Thank you, and cheers to all of them! I also made some moves, and bought Potash (NYSE:POT) at $29.19. I couldn't help but notice some headline with some ominous sounding threats promising to crash the fertilizer industry by parting ways, effectively busting an oligopolistic cartel that basically controls the large majority of potash supplies. These buccaneer cowboys in the Urals and Belarus not only disrupted the balance of agricultural dynamics, they went "nuclear" and promised a price war. Supposedly, this will drop bid prices and spot prices on global markets, ensuring "mutual destruction." This is directly from SA's Market Currents early this morning:
Tuesday, July 30
3:55 AM Potash producers plunge over Russian spat
Potash producers plunge in overseas trading after Russian potash producer Uralkali (OTC:URALL) says it is leaving its JV with Belaruskali, accusing Belaruskali of violating the terms of their agreement. Uralkali will now export deliveries via its own Swiss-based Uralkali Trading. (statement) On a conference call, CEO Vladislav Baumgertner said the move could trigger a drop in global potash prices to below $300/tonne in H2, from a current $400/tonne. Uralkali and Belaruskali's JV, Belarus Potash Company (BPC), accounts for 43% of the global potash export market. Uralkali -14.2% on the MCX. Israel Chemicals (OTCPK:ISCHY, ISCHF.PK) -10.7% in Tel Aviv. K S AG -16% in Paris. North American fertilizer stocks in play: POT, AGU, MOS
As if no one can fill the void, and the door to the dark and endless abyss is forever off the hinges, hellfire heading our way. Is this the way the future will play out? I don't think so.
I logged on to my account early, hashing out a game plan. It did not include selling! I wanted to find some other positions that I'd be willing to sell from, because the risk-reward scenario, today, is much better in any of the few public companies that supply this lifeblood to the grain crops, the "softs" agri-products.
I sold off some Starwood Hotels (HOT) and some Collectors Universe (NASDAQ:CLCT), both long-term lots, and doubled-down on POT. During the five minutes I took to decide what to buy and sell, I had time to do several things, wrapping my head around the events, checking the futures prices on all the usual suspects. I went with Potash for now, simply because I already own shares. Nitrogen didn't enter the news, just potash. They all were temptingly low-a fire sale if there ever was one.
Thinking about why I own Potash is amazingly simple. Sure, they have market share, but so do Mosaic (NYSE:MOS), Agrium (NYSE:AGU), CF Industries (NYSE:CF). I would have invested in any…I still might. That's why dry powder is important. But I own the stock because people have to eat. All of us eat. We all eat grain crops. All of us do. Corn, wheat, soy, rice, potatoes, all these are always in high demand, and demand keeps growing. They all don't require potash, but enough do. Every culture needs grain stock. I don't think that will change, at least not while we're here.
Crops will continue to yield larger harvests, to feed ever-increasing populations. They take up more land to live on and get buried in, and farmland shrinks in acres, hectares, square miles, and so on.
Potash has a decent dividend. They just increased the quarterly dividend paid. Maybe, in a prolonged drop in what they can charge for potash, dividends could be suspended or discontinued. Not great, but will that diminish the supply-demand balance for hungry crops and hungry people? No. If less potash gets sold, what happens to farmers' crops? They yield less, and get smaller. Demand for potash increases, and so does its costs. What happens if potash is less expensive for farmers? They can plant and harvest more, and profit more…for a time. When critical momentum ensures that enough farmers are planting and selling more, crop prices drop, because of too much supply. Farmers get paid less, can't invest in crops, labor, potash, machinery, etc. The end result is they grow less, and the circle of life continues to keep turning. That's why the stocks are called "cyclical." Yet people will still need to eat, every day, every season, every year. And it's more likely that populations will keep growing, as opposed to a potash catastrophe that triggers and sets in motion global thermonuclear war, and mutually-assured destruction. As least, it probably won't start in Belarus, or the Urals.
By now, you're no doubt thinking "Who's this simple moron, he writes like a child!" That was my intent (and I'm just a bit taller than I was back in the day). My intent is to bring something out in the simplest terms, because after thinking about the repercussions and implications to the stock, sectors, and all the middle and end customers, all the way down to our little tummies, we all need what potash helps to grow. I was a child when I grasped these concepts (including global thermonuclear war and mutually-assured destruction, unfortunately), and sometimes growing up brings with it some sophisticated, complicated thought processes to our complex grey matter. To compound the cerebral aspects are the visceral sensations. Part of those feeling, namely, stress, nausea, fear, and outright panic took hold of more than a few today. Price and volume, and sentiment, all of these resulted in a fast and fierce sell-off. Thanks again!
As a rational investor, I've learned basics that are now ingrained in my profiteering, capitalistic, wealth-seeking zeal. We call that "Animal Spirits." Like the "Love of the smell of napalm in the morning," The fertilizer stocks are in a skirmish, and investors smelled blood. Rule #1: Don't Panic! Rule two: think before acting. Rule three; with every problem comes a solution. Rule 4: Make lemonade if life throws you lemons. Again with the kid speak! On the other hand, despite the crushing nature of the ag stocks, the futures for the markets as a whole were up, they opened higher, and there's been no secular spillover effect. That's a positive. Corrections have been happening, but only rotating and cleansing a sector at a time. That's another positive and rational indicator.
Rule five is that in investing and business sudden change brings opportunities. Rule six: Can I think of both how to gain in the situation, and can I solve someone else's problem. And I conceived a few scenarios in a minute or two, certainly before the opening bell rang. No one is irreplaceable. Cartel controlling madmen in Russia are a dime a dozen. Better to lose it over potash than uranium warheads. How much of the world's potash do they own, and control? How can they stop other companies in other nations from selling their product outside of Russia, Belarus, or any of their territory? How?
Do they own an army? No. Do they own the American railroads? No. Do they control all the freight barges and ships on the rivers and seas? No. In Potash's case, can they embargo the Great Lakes, The Mississippi, The Suez or Erie Canals? Obviously not. How are they going to effectively ensure that potash can't be sold unless they control it. THEY CAN'T. If they are effective to a large enough degree, will that raise or lower potash prices. They'll increase. Can they drop enough of their own in volume sufficient enough to supply total demand worldwide? Will they dump it at such a cheap asking price that is tantamount to burning all their money up, and chopping off their Ural noses to spite their faces? Maybe.
Will they come to their senses and sit back down to the negotiation table, once they realize they can't eat potash. Maybe. Can't these other large and equally powerful potash and ag companies come together and reform a cooperative agreement, and get back to business in a reasonable time frame? I'm sure it can be done. Can they form their own cartel, get government aid, and/or other interests to also invest in a set of infrastructure solutions to fill the supply-demand void. Probably. Many other stakeholders have self-interests to protect.
Some of them are already on the phone, working up spreadsheets, trying to create a new line of business as we speak. Would investors like Warren Buffett and Wilber Ross, T. Boone Pickens, and who-know-who seize the opportunity to lease ships, consult with a dozen global ports, railroads, trucking companies, and logistics corporations, as well as warehouses in Turkey, England, China, Panama, etc.
Why don't we reach out to Monsanto (NYSE:MON), Syngenta (NYSE:SYT), Deere (NYSE:DE), DuPont (NYSE:DD), Kroger (NYSE:KR), Kellogg (NYSE:K), General Mills (NYSE:GIS), and the other grocery chains, Wal-Mart (NYSE:WMT), Target (NYSE:TGT), Costco (NASDAQ:COST), Panera (NASDAQ:PNRA), Amazon (NASDAQ:AMZN)… you get the picture.
Let's call the Department of Commerce, Dept. of Agriculture, The FDA, Homeland Security, The IMF, the Eurozone PMs and sovereign leaders, The Israeli govt., The Brazilian, Mexican, Argentinean, Peruvian, and Chilean governments, China and Japan, Ireland, Canadian administration. We can start a grass roots farmers' co-op., spur the Obama Administration restart talks on an infrastructure bank. Would the ethanol producers, refiners, and end customers help us with this project?
Since price imbalance at prolonged low rates could put us out of business, we need to assure any possible partnerships that, if they can help ensure the normalization of supply levels and resume the sales channels, we can shut operations, store lots of gross supply, and regulate the price structure the same way that is has been maintained, and business as usual. Food security is vital to all of us.
Good Lord, I have some basis of a plan of action!?! How in the …? Who would I want to run this by? Who's smarter than me on any one of the issues I can identify, that can do better? Can they help me with their contacts to put together a team of experts to develop new trade routes that can bypass the old supply pipeline, and outflank the dark territories, reaching the end markets, ensuring Farmer Joe can plant his crops.
This initial abstract was what I can come up with, and I'm in none of these businesses, but I am in business. Those men and women are seasoned experts. They have more contacts, resources, knowledge-everything to have already had three meetings and a game plan. They may be delayed by rain, but the game will go on. Hungry people solve potential food and crop threats. Who wants to climb in the Urals anyhow?
This temporary interruption is a choke hold, and risks and uncertainty are real, but the problem is temporary, and the core fundamentals that are basic and inert to the agriculture business remain intact. To those investors that had a chill today, please remember that rational thinking and prudent decision trumps reacting based on fear. If one experiences fear, they can rethink the level of risk they wish to take, become more risk-averse, or learn to react opposite of any understandably human condition we call fear. If indecisive, don't do anything, just stand there, as I read somewhere. That is contrarian investing, and all the greats like Buffett and Templeton have stated repeatedly, "Invest when there's blood in the streets," and "Buy when others are selling, sell when others are buying." Wise advice. Profitable advice. Don't panic is rule #1.
I bought POT at $29.19. I have cash on hand for more, or maybe CF, AGU, MOS. We'll see. I'm going back to watch and maybe trade, or invest, in some agriculture names. They're all on sale.
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Disclosure: I am long CLCT, HOT, PNRA, POT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.