In the most recent bi-weekly Illinois Crop Production report we received additional conviction for earnings upside for related fertilizer producers, including phosphate and potash producer Mosaic Company (MOS) and urea, ammonia and UAN producer CF Industries Holdings (CF).
|January 20th: Illinois Production Report|
All fertilizer prices rose in the bi-weekly Illinois Production Report released the 20th (see table) as corn hit its highest level in 30 months last week. The index for Rural Mainstreet, a survey of Midwest bankers, moved up to 59.3 in January, above the 55.4 in December and much higher than the 41 in January 2010 (a reading above 50 is bullish for the next six months). It was the highest level the index has reached since midyear 2007.
The farm equipment sales index remained high at 74.6 and the banker’s confidence index rose to 63.4 from 62.2 in December. A 31% lift in farm income this year offers upside for the North American spring application season, further evidenced by mid west banker sentiment and farm equipment sales, which continued higher in December as combine sales rose 37.4% and tractor sales rose 21.4% year-over-year last month (source: Association of Equipment Manufacturers).
On the January 5th Mosaic conference call, the company cited “strong global phosphate and potash demand,” thanks in part to a “great North American fall application season with demand outstripping production.” Mosaic also said it expects the trend to continue in the quarter. The company reported average realized DAP prices exceeded the top of their guidance and phosphate finished goods inventory reaching record low levels, despite high capacity utilization at their plants – bullish for pricing, which they guided to $510-540 per ton this quarter for DAP.
As the inventory surplus of 2009 has drawn down and farm income and optimism has risen, we expect acreage upside in 2011 on the heels of higher grain prices. The improving profit situation at producers including Mosaic and CF Industries will help them improve their balance sheets and invest in additional capacity, investments necessary to help meet the growing global demand for improving crop yields.
Disclosure: Author long MOS, POT, IPI and CF