Potash's New Hit Highlights Fertilizer's Risks

And the hits keep on going... note, I continue to love the fertilizer story long term but we have multiple risks - in increasing order of probability

1. All the stocks are overextended as heck on charts
2. A lot of newbie investors who jumped in of late, who have very little conviction and will sell at first drop of -7% in their trading account
3. If, as I expect, Federal Reserve finally says something about inflation and signals they are done with cutting rates after next week, the dollar finally bounces - at least a little - this will hurt commodities
4. If Western governments have any moral backbone they will at least jawbone pulling biofuel subsidies... this would cause backlash reaction in fertilizer even though biofuels are just a small piece of the puzzle. (again this is a minor risk at this point, especially with US elections coming but maybe Europe will react first?) While the biofuel situation is not the major driving factor of agflation that does not matter - perception is everything and go back to point (b) a lot of new investors to a hot sector who know little about the long term situation and just are going by sound bites "rice riots" "fertilizer is hot" "Neil Cavuto even likes fertilizer" - they will panic.

It reminds me of solar in fall 2007 when all the hot money flew in and destroyed all those late to the game within weeks of when the "new crowd" joined the party.

And as a cherry on top there is always a neat little signal that its getting frenzied - I wrote about this in November [Nov 10: Chinese Big Caps Struggling Since Petrochina Shanghai Debut] Wouldn't the Intrepid Potash (IPI) IPO just fit perfectly with all these other short term tops I listed below? I got bearish on all those groups once we saw those "events" and within days in some cases we began quite savage selloffs. It almost seems ... too convenient...

Sometimes, in retrospect, we can look back at a moment in time that seems either outrageous or telling, and see a warning signal is flashing in the middle of a mania. I have pointed this out in previous entries ranging from

The Macau gambling stocks (Steve Wynn cashout), on the heels of private equity 'cash out' via Blackstone IPO (BX), on the heels of Sam Zell cashing out at the top in commercial real estate during the private equity feeding frenzy [A Top in Casino Names?]

The Chinese small cap bubble frenzy earlier in October [This Day in Bubbles Series]

The dry bulk shipping frenzy [A Chorus for Dry Bulk Shippers - Enough Already?] and [A Near Term Drop in Dry Bulk Shippers?]

And our most recent frenzy, that of the solar companies [Closing LDK Solar on the Mania that is Solar] and [Suntech Power Up 8%.... on a Downgrade]

The fundamentals remain tremendous in agriculture, but nothing straight up; the reaction to Potash's (POT) blowout earnings will be very interesting - everyone knows the numbers will be tremendous but how will the stock react - once EVERYONE knows something there is very little "surprise"... or maybe these are just ramblings of an investor "wishing" the fertilizer stocks would fall 30% so I can load up (again).

But here are more fundamentals to whet your appetite

• Russian potash miner Uralkali (URKA.MM) has said it will charge about 50 percent more for spot sales of the mineral fertiliser to Asia from July 1, citing tight supply as global demand rises.
• Uralkali (URKAq.L) said its export trader, Belarusian Potash Co (BPC), would raise its spot price to Asian markets to $1,000 per tonne on a cost and freight basis.
• Prices to Brazil from July 1 would rise to $1,000-1,010 per tonne, an increase of 65-66 percent on the current quarter.
• Moscow-based brokerage Troika Dialog said the Chinese and Indian contracts had absorbed a substantial proportion of world supply, meaning less would be available for spot sales to Brazil and Southeast Asia. "There is a supply-side deficit prevailing on the global potash market as the two largest consumers, India and China, have both recently concluded yearly agreements for supplies of potash (at conditions almost certainly dictated by producers)," Troika said in a note.

Disclosure: Long Mosaic, Potash in fund; long Mosaic in personal account

Comments

[Trader T]

Nice summary.

[TraderMark]

Yes it worked out nicely. I am scaling in a bit here today on the sell off in these names. Hoping for more selloff over coming week, to provide more attractive entries

But by Dec 31, 2008 I expect much higher prices.

[AtlanticAve]

TraderMark, I appreciate your thoughtful analysis. I had been waiting for over a month for a dip to buy into this sector. I got my toes wet today. My general understanding of this sector is that the forward P/E's of many of these companies (POT, MOS, CF, etc.) are still rather modest given the price-hedging of their product to their buyers over the next year. Is this a correct assessment?

It will be interesting to see if this is another dip which springboards us higher (like Mid-March) or if the downturn will be more severe.

Either way, I'm prepared. If the sector falls further, I'll purchase more. If it goes up, I'll enjoy my modest gains.

[NormanLepoff, M.D.]

Good article. Thanks.

[TraderMark]

Atlantic,
I share your strategy
I layer in AND out of positions

I have been layering out (too early) of fertilizer over the past week, with last piece out Tuesday

I started back in yesterday, especially MOS which I find more undervalued than POT. I missed CF this morning at $130 :)

The market could push these up 15% in the next week or down 15%, I have no idea. As with you, I'll enjoy my gains if they go up from here, and will have cash ready if the market drops them.

The only systematic risk will be point 4 above, and even then it will be one of perception as opposed to a real degradation of the story. If/when 4 happens we will have a major selloff which needs to be bought. The growth of middle class, loss of arable lands, worsening weather in the globe, etc etc does not change. We are just helping cause even more horror with stupid biofuel policies. Anything to win votes.