We bought into Terra Nitrogen (NYSE:TNH) in the $139 area and CVR Partners (NYSE:UAN) - which sold last time at over $27 but bought this week below $24 - as corn was up finally and the DJIA rallied.
Both fertilizer MLPs offer an approximate 8% yield based on expected 2011 cash flows and distributions. The market is still trying to figure out what the 2012 crop year is going to shape up as.
I made a negative call on Agrium (NYSE:AGU) on September 16 on BNN TV and have written about my bearish overall stance on commodity stocks in here. This was based on technical and historical factors as outlined in that interview. But the reasons for the even greater relative decline in fertilizer stocks became apparent after the fact, which is usual.
It’s my feeling last week’s heavy downside in fertilizer stocks was exacerbated by what was now obviously an impending and finally announced 20.7 million secondary share issue by the Mosaic Company (NYSE:MOS).
Call me a skeptic, but I have to wonder how much deal co-leads J.P. Morgan and UBS knew about the coming issue, certainly to be priced way below the market to attract buyer interest, outside of their own underwriting departments, probably leading to aggressive selling in other fertilizer names by their trading desks.
The Mosaic issue was designed to fulfill institutional demand for its shares upon its inclusion into the S&P 500 price index and follows on a similar but smaller share float which disrupted the fertilizer stock space back in June.
It looks like the stock offering has been placed with a big volume Friday (over 30 million shares) and the stock was up Monday (closed at $58.76 up $1.06 versus the $57.64 issue price).
On Friday, Mosaic simultaneously announced first quarter fiscal year 2012 net earnings as well, no doubt to fulfill full disclosure requirements for the share deal. Net sales in the first quarter of fiscal 2012 increased 41% to $3.1 billion and net profits increased 77% to $526 million with EPS up 75% to $1.17. Full results will be released Wednesday after the market closes.
So look for a short-term rally by Agrium, CF Industries (NYSE:CF), Mosaic and Potash Corp (NYSE:POT) plus the two names mentioned above. If I am wrong or the Greek situation goes south again, the latter offers some downside protection.
An emerging threat to fertilizer stocks especially those dependent on the U.S. corn belt is the new TCX ethanol technology which is ethanol made from synthetic or “syn gas” by Celanese (NYSE:CE). This ethanol can be produced cheaply (claimed $60/bbl oil equivalent cost) and does not disrupt feed supplies.
It’s a lot cheaper than corn based on natural gas, coal or petroleum coke.
However, syn gas ethanol wouldn’t qualify as a biofuel under the RFS so it’s a non-starter in the U.S.
If the RFS were ever canned, syngas could compete with corn ethanol, either made domestically, or imported from China, where Celanese aims to set up plants.
We are looking for a general relief rally this week as the situation in Europe and Greek default are probably already discounted in stocks.
But we would be selling by Friday as the first week of October has the usual market-enthusiasm dampening numbers (ADP, non farm jobs, etc).
Disclosure: I am long TNH, UAN.