Will Bauer

Is Fertilizer Starting to Stink?

Hmmm...gee...let's see...Provided potash prices remain high - and there is every reason to believe they will with Uralkali now plumping for a 2009 $1K/mt contract with China and the possibility that up to six per cent of world production (arising from POT's mines currently idled by the strike) is temporarily gone (until the strike ends) - if I wait a year, that puts POT's predicted profit per share at about $21 US (based on analyst estimates for 2009)...so a P/E of 15X trailing earnings would send the share price a year from now to over $300. Not only that, let's now add in a 2009 5% share buyback like 2008's or some purchasing of additional companies using 2008 profits (or both)...hmmm...that makes about $320/share. Sounds good - I'd take that bet...and I have. Better yet, if people actually start valuing POT like some of the ridiculous retail chains or credit card companies out there and it sells for 25 times *forward* earnings, things will go absolutely crazy (in a good way)...but I'm happy with the notion of $300/share based solely on the bet that the 9M or so Mt of world under-supply of potash keeps the 2009 price at ca. $1K/Mt. ...And this doesn't even start to account for their expansion in production capacity, some of which will be available for 2009/2010.
IMHO, POT is about as solid a winner as I've ever seen...with a very plausible growth scenario over the next four years...which is why people call it *investment*, as opposed to month-to-month, week-to-week, or day-to-day speculation.

Potash Corp.: Sitting on the Long-Term Trendline

David,
I agree but would add that the recent $US rally *and* significant POT selling may well be simply a case of hedge fund deleveraging. It has long been the case that a good investment pairing is short USD + long commodities (oil, ag, gold). With the significant pressure in terms of increased margin limits et al., it is quite possible that the recent USD run-up is a case of them covering their shorts to lock in profits and reduce margin usage.
There is certainly *nothing* that has changed in terms of the fundamental macro-economic problems confronting the US dollar (of which there are so many I don't know where to start in enumerating them!)...so I would expect the USD to weaken over the next few weeks/months and commodities (including equities like POT) to begin to strength once again!
Once again, NOTHING has changed to make the US dollar (or US economy) healthy...this is just a temporary negative spike.


On Aug 12 10:05 AM David White wrote:

> The big reason for the decline in commodities recently seems likely
> to have been the US dollar strengthening. The led to investor exiting
> their commodity futures hedges against the dollar. Today the EURO
> is up against the dollar. Not coincidentally POT has started to go
> up again. The strength of the US Dollar does appear to be the key
> issue in commodities prices these days. Also by now a lot of people
> have already exited their hedge (of the dollar) trades. This was
> creating a short term temporary spike downward in demand on most
> commodities. If the US dollar is now wavering, hedgers might try
> to re-enter. This would spike prices the other way. If the US dollar
> strength is still improving overall, enough hedgers may already be
> out of the market to allow commodity prices to rise. Demand is actually
> increasing for most commodities. Oil demand may be the one commodity
> demand that is most tied to economic performance, especially US economic
> performance. For the "food" commodities the demand should still be
> great. The temporary downward spike in demand may be nearly over
> if most of the hedgers are now out???? If so, this would allow the
> Ag stocks to begin their rise.