Dahlman Rose, a boutique investment research house in NYC, came out with a big fertilizer buy recommendation this morning. So although oil was down over $1 and the DJIA was down 138, fertilizer stocks have rallied. However I think half the rally has already occurred.
This is what I wrote on Seeking Alpha in my comments to my previous article written June 18 in the afternoon:
We have a rally on corn, whether from short covering due to the Greek vote (my guess) or from drought forecasts or from just too little hedge fund long positions. July Corn $6.00 1/4, up 20 3/4, 28 3/4 cents on Sep and Dec. 28 cents for March 2013.
I am buying TNH here at $185-6 as it is down $3.50 and has lagged this rally.
RNF up 76 cents to $24.35, I think it could fade here but you can buy it anywhere here. They confirmed guidance of $2.33 for the next 3Q's.
UAN is up $1.17 at $21.31, I am not a big believer in this one.
CF Industries at $171.22 up $6.11 which we still have some clients holding who missed the sell at $180.
I don't have any targets on any of these. I think it is a dead cat bounce personally.
You have the acreage and stocks report on June 29 which will give a boost to the USDA's alter ego, the NASS, whose reputation is intact for sure. Informa thinks the corn plant is almost 1 million acres bigger than the 95.9 million acres estimated for March 1.
So Dahlman was only a week late it appears.
The timing of their bullish call wasn't too complicated, because corn, beans and wheat are all up big time in early morning trading, due to Midwest drought concerns. December corn is up almost limit (40 cents) at $5.94 but is now at $5.88 with 15 minutes until open outcry trading begins.
DR previously went negative on ferts due to concerns about a big corn crop and a "Priced to Perfection" argument, for big nitrogen fertilizer producers such as stocks such as CF Industries. But they made their call just before the markets went into a tailspin. I believe they got lucky when the Greek "skata" and French "merde" hit the proverbial fan.
So they've got these changes today:
CF Industries (CF) going from SELL To BUY with $200 Target (not sure of the time frame). Currently $184.46 up $6.77.
PotashCorp (POT) from SELL to BUY with $49 Target. Currently $41.11 up 77 cents US.
Agrium (AGU) from HOLD to BUY with $98 Target. Currently $85.07 up 33 cents US
Mosaic Co. (MOS) from Hold to BUY with $60 Target. Currently $51.32 up 74 cents.
Rentech Nitrogen (RNF) from Hold to BUY with $29 Target. Currently up $27.33 up 99 cents.
A few points:
The US corn crop has been experiencing a bipolar drought - NorthWest states (Dakotas, Minnesota, Wisconsin, Michigan, Nebraska, NW Iowa, all are fine on soil moisture. SouthEast States (SE Iowa, South Illinois, Indiana, Missouri) are experiencing increasing drought.
North Carolina, Pennsylvania, Tennessee, Kentucky, have been relatively OK on moisture. We had in Florida and South Georgia but that was alleviated by rain over the past couple of weeks,. Now they plus Alabama and Louisiana are drenched by rain from Hurricane Debbie.
My thinking has been, if the soil moisture of the big corn states are OK, the crop will come out large overall.
In most of the biggest corn crop states (Iowa, Nebraska, South Dakota, North Illinois, the corn crop is doing reasonably well.
In the mix here is that pollination, which requires daytime and nighttime temperatures to be neither too hot (>85F) nor too low (<50), to maximize yield, has come early and is happening now.
We'll have to see what the USDA Crop Progress report says this afternoon. Corn crop condition has been deteriorating with the epicentre where Missouri, Iowa and Illinois meet. Look particularly at the corn condition in the biggest states that produce it, not the smallest.
Dahlman Rose analyst Charles Neivart argues the stocks have to go up no matter what happens at this point. They are either at a floor due to undervaluation (on what measure I am not sure), or the corn crop is going to be weather impacted.
Good points. But corn is only indirectly an impact on the stocks.
Margin and demand for the fertilizers is directly key - stocks go up in anticipation of more demand due to the corn price. But they don't sell corn.
Agrium is probably the most dependent on all the major US crop prices as farmers buy more seed, chemicals and fertilizers with more jingle in their pockets.
Ammonia in the Gulf is at $700 (versus less than $400 at year end) due to delayed US restart by PCS and problems with various international producers.
That's good for nitrogen prices, bad for Florida phosphate producers as they use ammonia. Mosaic Company is short over a million tons of ammonia a year. Corn should help refill demand for fertilizers this fall but urea prices are still tumbling with imports on the way.
The Indian rupee has been a weak spot for the phosphate and potash producers - I've talked about the currency weakness in both the rupee and Russian ruble on Seeking Alpha and to my clients.
We have stayed out of POT and MOS for these reasons with good relative performance sticking to nitrogen stocks.
Even nitrogen producers are not out of the rough though: dry urea prices, down from the $700 April peak are now bid in the mid $400's. UAN NOLA barge prices are bid at $260, well off the mid $300's we saw earlier this year during the Spring rush.
Big merchant ammonia producers such as CF, Terra Nitrogen, CVR Partners and LSB Industries (LXU) should do relatively better than expected. But some of these are going into Q4 maintenance downtime or had an accident. So nothing is a slam dunk for late 2012 earnings.
Conversely, hedge funds have sold crop futures for several weeks and are under invested. They are piling in here I would think. But smart stock investors will trade the most liquid fertilizers until their Q2 earnings and distribution dates are closer.
It looks like we have a rally in the ally - Hold on to CF, TNH, RNF and even trade them leading up to the NASS June 29 report.
But don't get married to them.