Why Is Mosaic Looking to Sell Its Nitrogen Segment?

In the news on Tuesday, we saw that Mosaic (MOS) was looking to unload the Nitrogen segment of its business. As per CNN, the company is seeking the sale of Saskferco, "a private company primarily owned by Mosaic and Investment Saskatchewan, a provincial corporation that seeks to boost Saskatchewan's economy."

At first glance this might not be anything to scoff at. But, at the same time, part of me wonders if the Nitrogen segment of its business is not seeing the same continued strong demand as its potash and phosphate segments. Mosaic said that it is looking to sell this segment so that the company can focus on the expansion of its primary business in phosphate and potash.

Maybe Mosaic just wanted to separate itself from the Saskatchewan investment company who represented the other half in the joint venture of Saskferco. Yet, part of me wonders if the company has noticed a developing trend within the industry. After all, the company is smack dab in the middle of fertilizer's secular growth. I'm going to go sort back through its earnings reports (along with other fertilizer companies) to see if the Nitrogen segments in any of these companies were showing signs of slowing or flat out hurting earnings. We know these companies are facing rising input costs. But, that has not been a detriment to them because their revenues are rising faster than their input costs. I'm wondering if possibly, the input costs associated to Nitrogen specifically are finally starting to affect the bottom line in that segment.

Again, I might be reading into this too much. But, it almost seems as if the company might be 'cashing out' at the top of the Nitrogen trade, while it thinks the underlying trend in potash and phosphates will continue. This would not surprise me one bit as they have a front row seat to the agricultural boom we are witnessing.

My bets all along have centered on potash; phosphate and nitrogen were just added bonuses. I'll report back with what I find, if anything. At any rate, good to see them focusing on what I believe to be the main secular growth trend here: the potash itself. That is the nutrient with the brightest future simply because it has the most pricing power. There is ridiculously strong demand for it and very low supply of it. Moreover, additional supply is many years away from coming online (due to construction of mines etc). Most likely, this is just a case of me over-analyzing things. But, hey, due diligence is my middle name!

 

Disclosure: The author owns MOS.

Comments

[Shimmysays:]

Nitrogen fertilizer pricing environment tends to be more volatile than potash and phosphates. That said, at this point the prospects for the nitrogen market look good. Just monitor corn, which is the most nitrogen-intensive crop. Floodings in the US and China have been driving corn futures significantly higher over the past few weeks in anticipation of poor corn harvests. Over the long-run, potash and phosphates are a better bet, but it may be easier to sell the nitrogen business when the environment for that market is positive.

In terms of nitrogen fertilizers, Yara Intl (Norway) is the largest global player. It seems that analysts are starting to upgrade earnings numbers for this one. The prospect of robust double-digit earnings growth for both this year and single-digit multiple valuations make it look very attractive in a hot market.

2008 Jun 26 11:37 AM

[suhaas:]

While the fields are flooded, there is no crop and no need for fertilizer. No wonder all fertilizer stocks are tanking, nitrogen or potash.

2008 Jun 26 01:00 PM

[Market Folly:]

suhaas - what you are forgetting though is the demand for fertilizer overseas. even if there is no need for it right this moment in the states, they need it elsewhere and are gobbling it up. they have pricing power. so, say the US flat out didnt want to pay for it anymore (vs them not needing it due to floods), the same scenario would play out... they'd take it overseas and sell it there.

2008 Jun 26 01:35 PM

[Medici:]

Argentina, South America and Much of Latin America's demand for Fertilizer is just begining. Flooding in the Midwest would have a minimal impact at best on fert prices.

2008 Jun 26 06:25 PM

[sliman:]

Yara International (YARIY) is not as well known here and is still inexpensive. It has a world wide network of sales in fertilizer. I'm long.

2008 Jun 27 05:40 AM

[Tony Daltorio:]

I agree with your comments on Yara (YARIY). I am long the stock and wrote a piece on the company for this site.

2008 Jun 27 08:34 PM