the social scientist.

A Personal Thank You to Momentum Investors

Carl:

Agreed, probably no farmers operate at peak efficiency in terms of fertilizer application, and in the tropical world they use little on poor soils. As tropical farming becomes increasingly commercialized, it will need to become less labor-intensive and more energy-intensive (i.e. mechanized). This raises the cost of all other inputs (except labor), especially those in short supply (i.e. oil).

My scenario above is just modeling to illustrate that there is a limit to the price that a supplier can charge, even on a scarce resource that they control. If they charge too much, demand will go down, even for something essential. The price cannot rise faster than the price of the product that the input is producing (if production is already at peak efficiency). So their revenue growth has limits, and the intriguing question is, what sustained revenue growth rate is the price of POT's stock pricing in?

Another thought: last I knew, dryland wheat farmers use no or little fertilizer, because soil nutrients are not the limiting factor on plant growth - water is. Fertilizer does no good unless the crop is irrigated. This places another restriction on the degree to which fertilizer use can be expanded in the future.

POT is a solid company with good prospects to increase sales and profits, but surely it is long-term overpriced. I have no positions in POT, and never have or will. I just noticed that it's price to sales ratio is way out of line relative to the other fertilizer stocks, presumably because of it's potash resources, and because I know a little about agricultural economics.

A nutty stock, by the way, is the James River Coal Company. A huge run-up in stock price, but a loss over the last fiscal year. Price to sales about 3, but price-to-book at 15. Yes, coal prices are going up, but coal is NOT a scarce resource. There is plenty of competition in this endeavor.

A Personal Thank You to Momentum Investors

the law of diminishing marginal returns, indicates that as fertilizer is increased per acre the increase in yield associated with a unit increase in fertilizer gets smaller. Optimal yield is where the marginal cost per acre equals the marginal revenue per acre.

lets say that all other things being equal, an extra 0.1 ton of potash costing $20 produces an extra yield of 10 bushels worth $20 (at $2 per bushel). This is the ideal production level for the farmer, because if he/she increases potash by another 0.1 tons the yield increase may be only 7 bushels worth an extra $14, and resulting in a $6 loss on the extra fertilizer.

Are farmers aware of this? Probably not, but after one year of using extra fertilizer and seeing their farm income decrease, they are obliged to cut back on fertilizer use.

So now let's raise the crop price to $7 per bushel. At the fertilizer levels of before, the extra $20 of fertilizer per acre produces an extra $70 of output (10 bu. x $7). And another 0.1 tons at $20 produces another 7 bushels worth $49 = a marginal profit of $29. So the farmer pours on the fertilizer.

But, potash being a scarce resource quickly soars in price. If it goes to $70 for 0.1 tons, and the farmer gets 10 extra bushels worth $7 per bushel, that's $70, and there is no gain in increasing fertilizer applications and yields.

If you think about it, if the percentage increase in fertilizer price equals the percentage increase in crop price, there is no gain to the farmer from increasing fertilizer applications, in which case fertilizer demand does not increase, and the price for the fertilizer comes down.

Has the price of potash risen as fast as the price of corn? - no, but what future price for potash have speculators (they're not investors) discounted in the price for POT? Inane prices. For those of you who have never heard of Scott Neely of Sun Microsystem, I suggest you look up his statement about the price people were paying for Sun at one time (in 2000). It was more than 10 times sales revenue. POT is selling for 14 times trailing revenues. Those revenues are growing rapidly because of price increases, but do you see a 7-fold increase in revenues in the next few years to bring the stock price back to a reasonable level?

Neely said, if there was no cost to making our product, so that all our revenue was profit and we engaged in no research, but still managed to maintain our revenue, and we distributed ALL of that revenue to you the stockholders, it would take 10 years to return your investment. What were you people thinking?

Well, windinmyface, like you they weren't thinking. If you can follow my economics, you must realize that you take your profits now, and don't worry about the stock going to $500. It might, but it's going to go way below it's current price at some time. If you don't follow my economics, why are you betting real money in the stock market. You're up against some very good players. I suggest you read stuff on trading psychology - you evince all the traits of a gambler in denial. And POT is a trading momentum stock, you don't buy and hold it, and you only buy dips with tight stop-losses, which means you don't hold it overnight.


It will crash like Taser. don't know when or from what height, but it will, and a few like Toro will smile, and say thank you suckers.