CT Programmer

Buy, Sell, or Hold Fertilizer Stocks: Agriculture Bust (Part II)

PS: The outlook section that I referred to in the hyperlink to Yara's quarterly report is on page 14.

Buy, Sell, or Hold Fertilizer Stocks: Agriculture Bust (Part II)

There's another slightly ominous sign in YARA International's (YARIY) 2Q report released recently. Even though their income was up 3x over 2Q07, and up something like 2x over 1Q08, they said that the high price will cause some farmers to switch to soy beans, and there will be more natural crop rotation to soy beans following the surge in corn. Soy requires less fert and potash. Also, they expect in the short term demand for potash to be curtailed a little bit, since farmers can cut back on potash easier than they can on nitrogen fertilizer, so that will mitigate the price of potash. For YARA that's not too bad, because potash is just one of the slices of the pie, and they expect fert and urea price increases to offset that (refer to www.yara.com/en/invest...). I don't know how much of POT's pie is just potash or if they do other fert's. I don't hold POT. But as potash prices decline, YARA tends to move lockstep with POT so I expect a general decline or leveling off even for them for the next quarter or even the rest of the year. But once the record profits keep coming in, that will change. They're just making too much money to ignore.

Buy, Sell, or Hold Fertilizer Stocks: Agriculture Bust (Part II)

I think the author is right in that ag stocks are likely to keep dipping a bit. How much is anyone's guess. PE of 5 --- no way. These companies have too much cash flow to dip like that. Oil refiners dropped to 5 because they're just breaking even. Not ag. But the ag/fert companies can't keep going gangbusters doubling each quarter either. It has to cool off at some point. I think you've had a lot of money wash out of financials when they tanked, and that money got plugged into commodities and ag. Now its moving back out because people are thinking that despite their strengths, oil, metals and ag have overheated. And other sectors are looking more promising. Plus, not everyone wants to put all their eggs into one asset class. Short term I think it will correct. But I'm in it for the long term (I hold YARIY). I have seen it peak at about 200% return, and its now down to about 133% since I got in June 2007. But I've got years until retirement so I expect 1000% by then. People have to eat.