Remember the Frog in the Pot

2010 Forecast Update

I was going to write this piece yesterday, even though I was 90% sure the markets would open down today and not let up.

I made a Q1 market forecast at the end of 2009. My forecast was and continues to be aimed broadly at keeping investors out of trouble, and also to predict developments in the agriculture, biofuels and fertilizer space, my areas of expertise.

Let’s review the forecast, keeping in mind stock and commodity markets enjoyed an enthusiastic out of the gate New Year’s rally that is quickly losing steam and over the past few days, been turning down sharply.

• Stronger USD. The USD index (DXY) is about 78.45, basically even, although the euro has taken it on the chin – down to below $1.41 from $1.435 US. USD strength has been the surprise story. My thought is not only do you lend to a borrower that needs the money badly, but when they are in hock bigtime, you can get even better real rates of return.

• Lower gold and commodity prices Gold is marginally the same at $1100 and (GLD) closed at $107.37 down $1.57. WTI Oil has tanked after a spirited rally above $83 US and is marginally down from year-end levels. Commodity prices reflected by the GSCI Total Return ETF (GSG) are marginally down (the index is 70% crude).
• 5-7% US stock market correction. The S&P500 is also even at about 1,117.50 as I write this but declining over the last few days. (SPY) closed at $111.70 down $$2.19.
• Us fertilizer prices for Spring 2010 delivery already seeing peak. This was a very general statement and prices are very much location dependent and also quotes are different from volume actually transacted. My main focus has been on Nitrogen, and we certainly are seeing weakness in UAN prices with little volume transacted. However, DAP (diammonium phosphate) at Tampa has certainly shot above $400 US/mt due to export demand and consequently Tampa NH3 (ammonia) has also tightened in supply as it is a precursor for DAP production.
• Whether this translates into higher negotiated prices for domestic ammonia going forward is debatable, due to import competition, which is also a thorny subject as the Ukraine, a big supplier, is in the throes of elections and dependent on Russian natural gas prices.
• Regarding potash, PotashCorp (POT) recently listed granular MOP (muriate of potash aka the chloride salt, the most popular form of potash)prices at $420/ton at all their US warehouses. Whether there will be good demand at that price we'll have to see. On the international front, The Mosaic Company (MOS) CEO said they aren't even going to negotiate with the Chinese on potash at the BPC 2010 negotiated price of $350/mt (of course they will). My feeling is farmers will be careful in their buying of fertilizers yet again due to the low crop prices (see below), higher diesel prices and other inputs.

• (Expect) Corn and bean prices to decline due to bumper crops and stalled RFS mandate. Yes this is correct. New 2010 crop corn futures prices are down 10% since the Jan 12 USDA report and new 2010 crop soybeans are down 8.3%. Some doubt the USDA report that caused this dramatic downturn, but there is no doubt, there is currently a global bumper crop in maize, oilseeds and wheat. Rice also declining in price. In fact all agricultural commodites except sugar and live hogs. I should mention that we cover forest products and timberland and lumber stocks have been having a great stealth rally. The ultimate carbon sink? Trees.

• Agrium is unable to redeem the CF poison pill or influence its Board. This is still pending, as Agrium (AGU) intends to file a resolution to redeem the pill at the CF Industries AGM, date unknown. They also extended the deadline of the offer for CF, but did not change the terms. AGU closed at $60.76 down $1.12 and (CF) closed at $98.73 down 76 cents. Pretty good performance on a down plus 200 Dow day and opportunity to take profits and limit losses is still there.
• Terra finds a second bidder or decides to take an enhanced CF offer. This was wrong – so far, but higher UAN supply and a higher USD may dampen the fervour of any new suitor, especially offshore. CF has officially withdrawn their bid for Terra. However, (TRA) has been hanging in there on significant volume at $33.25 down only 5 cents today, suggesting some feel it is cheap or could be the object of another bid by another party. But given my market view, I think another bid is doubtful.

Where do I think things are headed now?

Even if the stock market comes back today, tomorrow or even next week, I recommend reducing your stock positions, particularly in gold and fertilizer stocks.

How low things go depends on China, and I am not much for betting on developments in foreign countries.

Remember the frog in the pot of warm water, sitting happily while the temperature is slowly raised, too weak to jump out of the pot.

Better hop out now.

Disclosure: Short TRA