The largest potash fertilizer producer in the world, Potash Corp of Saskatchewan (POT) announced that its net income dropped to $248.8 million, or 82 cents a share, in the three months ended Sept. 30, a very shartp decline from $1.24 billion, or $3.93, a year earlier. Analysts on average expected earnings of 81 cents a share, according to Thomson Reuters I/B/E/S. The company expects fourth-quarter earnings of 65 cents to 85 cents a share. Analysts are expecting $1.24, according to Thomson Reuters I/B/E/S. The company also expects full-year 2009 earnings to be at the low end of its previously forecast range of $3.25 to $3.75 a share.
This was obviously a very dismal result however very few people were surprised as potash prices dropped from as high as $1000 a ton last year to barely $500 this year. Most kept their eyes focused on what the management had to say about the future.
POT currently expects 2009 potash shipments of 3 million to 3.2 million tonnes. In 2008, the company produced 8.7 million tonnes of potash. The company expects global potash demand of about 50 million tonnes in 2010, which is at the low end of the 50 million to 55 million tonnes range forecast in September. In July, the company saw 2010 demand at between 55 million and 60 million tonnes.
Agricultural market is expected to be tight going forward.
"We’re in the midst of the slowest harvest since 1985, as of October 18, 17% of the crop have been harvested versus the five year average of 46%. The crop is only 83% mature and right now certain consultants believe with the freeze that we had earlier this month that are around 215 million bushels have been lost, maybe up to a billion bushels have been affected......In terms of the corn price, December corn was 304 in early September, $4 yesterday. .." said Bill Doyle, the CEO of Potash Corp.The contract with China remains to be the key catalyst in the remaining of the year. Closing the deal is expected to eliminate uncertainty among smaller buys regarding the future price of potash fertilizer and starts replenishing the stock. Bill Doyle said that the inventory of China is about 2.5 million to 3 million tonnes now. "When they get to 2 million, they will buy," said Doyle. He expects the deal to be closed by the end of this year.
Echoeing the recent Mosaic (MOS) ' s earnings release and the recent rally of fertilizer, the near term catalysts of fertilizers are:
1. China negotiation
2. Crop prices
4. Merger& Acquisition (M&A)
While the timing of negotiations with China is uncertain, an end of the negotiation given the current inventory of China is highly likely. As far as crop prices are concerned, according to the Organisation for Economic Co-operation and Development (OECD), FAO and the Food and Agricultural Policy Research Institute (FAPRI), world stocks of most crops are not seen as evolving much during the next five years and prices are likely to remain strong. In addition, International Fertilizer Association (IFA) expects the demand for fertilizer in 2009/2010 to increase modestly by 2.6% to 165.4 MT. IFA also forecasts the demand to recover in 2011. However, this is likely to be offset by new production capacity that will come into operation in 2011.
While I don't speculate on M&A myself, having a speculation on a stock serves as a positive catalyst.
All in all, while it is too early to get aggressive on fertilizers as the economic recovery is unclear and the market may be in danger of a correction after rallying more than 6 months, I do see modestly favorable return/risk profile to accumulate these stocks on dips during market corrections.
Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.
Disclosure: The blog author does not own any positions of MOS or POT in her personal account as of October 25,2009