Agriculture Stocks May Be In for a Fertile Future

by David Gibbs

Not long ago, before the dark days of the economic fallout, the increasing needs of the growing populations of the developing world were the name of the game. Indeed, for a time, we saw fertilizer and seeds become sexier stories than semiconductors and smart phones. However, as Newton would have it, for every great commodities boom, there must be an equal and opposite bust.

Cautious optimism has firmly taken hold of Wall Street. The US Dollar seems poised for a period of long-term weakness, and those once-sexy agriculture names may be primed for a renewed period of strength.

Last week, The Mosaic Company (MOS) reported their quarterly profits had fallen 92% year-over-year on 66% lower revenue. Still, shares traded up 4% the next day. This may not be unlike much of the financial sector, which rallied sharply off of huge losses last quarter due to a more positive outlook on the future.

Additionally, shares of Potash Corp. of Saskatchewan (POT), another ringleader of the sector, cut earnings estimates back on Sept. 21. However, after a moderate sell-off, shares have begun to rally.

If dollar weakness persists and news from developing nations continues to grow more positive, we may be primed for a nice end of year rally throughout the sector. Moreover, these formerly hot Ag names are not nearly as frothy as their financial and tech sector brethren.

For instance, while POT and MOS are up 36% and 26%, respectively off their March lows, the duo has been left in the dust by companies like Apple (AAPL) (up 129%), Google (GOOG) (up 78%), Goldman Sachs (GS) (up 91%) and Citigroup (C) (up 349%). As a result, money managers who did not participate in the rally in those uber-popular names may turn to MOS and POT because they can more easily justify starting a new position rather than chasing the over-heated runners.

The big day to watch out for is 10/22 when POT will release its numbers before the market opens. Although, as was the case for MOS, the numbers themselves are sure to be lower compared to last year, the importance of the report will come via guidance for 2010 and beyond.

Still, significant interim risks exist. Stocks like POT and MOS are sure to participate in any major sell-off if the vaunted correction ever does in fact come. Also, any short-term dollar strength will act to push the sector down as we saw last Friday following Ben Bernanke’s comments regarding potential for tightening fed policy. Until then, keep your eyes peeled and your noses pinched because these fertilizer names may be about to come back in a big way.

Disclosure: none.

Comments

[anopenmind:]

Weak product demand for full Y2009 planting seasons, following by another year of such? Do farmers really go for two, perhaps more years of less fertilizers? If so, why have they used so much in years past? While I sold my Mosaic stake to buy into China Green Ag and Yongye International early August (and happy with such), am keeping my POT (the kind for the soil), trusting early demand for early spring 2010 will come; and come, why not?

Oct 16 08:20 AM

[CGP:]

Looks like POT trading in $85-96 range since mid-July.

I believe part of the reason for big usage was to grow corn during the push for ethanol as an alt fuel (which seems to have melted away)

Oct 16 11:40 AM

[enviro111:]

corn is a greedy plant. It needs all kinds of fertilizer. soybeans less so. however, the soils in Central Brazil need lots and lots potash.

china needs lots and lots of potash. they have few reserves of this critical mineral. own what China needs!

POT stock moves with ag price expectations. by the time the earnings come in, the party is mostly over. I see soybeans and corn making a bottom in early October, 2009. China is on a fantastic soybean buying spree this year. Even wheat is starting to move on bad harvest conditions for spring wheat, late frost in Australia, a bad harvest in the Ukraine and drought in Western Australia. I think next year, ag stockpiles will be low and farmers will be planting like crazy again.

Oct 20 02:34 PM