Macro Wrap – Fertilizers Not So Fertile, $POT, $MOS, $CF, $AGU

by Enis October 15, 2013 7:48 am • Commentary

While the broader market has embraced a confident, optimistic bent in 2013, fertilizer companies have been mired in a swamp of pessimism.  The major trouble hit in late July when the Russian-Belarussian potash cartel announced its disbandment.  (Yes, this really happened…and I wonder how many unknown pockets of the global economy are still in the hands of cartels).  Russian firm Uralkali warned that potash prices could fall 25% as a result.  Since then, the headlines have resembled a spy thriller, with the Uralkali CEO still stuck in Belarus under house arrest.

Potash, the largest North American potash producer, fell about 25% over the next 2 days.  Mosaic, the second largest regional producer, fell a similar amount.  But after the initial shock, the stocks stabilized, and traders became more optimistic that the worst-case scenario for potash prices would not come to pass.

Intrigue aside though, the breakup of the Russians and White Russians coincided with a large fall in corn prices over the last year.  The weekly chart shows that corn is now at its lowest level since 2010:

Corn second month contract, weekly chart, Courtesy of Bloomberg
Corn second month contract, weekly chart, Courtesy of Bloomberg

The drop in corn prices has simply added salt to the wound for the phosphate producers, who are operating in a sector with oversupply and increased competition.  Not surprisingly, POT and MOS have also hit their lowest level since 2010.

Now, traders generally find ample bad news at low prices, and abundant good news at low prices, so is this a buying opportunity in the fertilizers?  We put on a successful bullish trade in CF in August, which had more to do with Dan Loeb’s activism and a nice technical setup than the fundamental backdrop.

But POT investors took another hit on Friday, when POT cut its profit forecast due to a very weak demand backdrop as farmers held off on buying fertilizer after the cartel’s breakup, waiting for lower prices.  The fundamentals are still trending in the wrong direction, especially for the phosphate-focused names.

However, for those looking to buy the dip in the sector, we still prefer the nitrogen-producers, first CF, then AGU.  Valuation is cheaper and competitive pressures are less severe, particularly for CF.  As for POT and MOS, their travails in the swamp of pessimism seem to be far from over.