Citigroup Bullish on Potash

I ran into a useful excerpt from the Business Insider that I would like to share with you:


With potash prices riding high, and fertilizer fundamentals growing strong, Potash Corp (POT), is expected to have a strong second half this year.
Citi analyst P.J. Juvekar explains why:

•Fall is expected to be a strong season for fertilizers after Spring application came in 10% lower that expected because of a slow start to planting. With grain prices riding high, farmers are expected to usmore fertilizers to maximize yields.

•Supply of Chinese diammonium phosphates (DAP) and urea exports may be restricted because of the nation's sliding scale tariff policy. Urea exports are projected to decline to 5 million metric tons, from previous 7mmt, while DAP exports are expected to fall to 2mmt from 4mmt last year.

•The DAP market is also expected to be tight because of a ruling that has barred phosphate mining company Mosaic from mining in South Fort Meade. The Mosaic Company (MOS) may also have to buy large quantities of phosphate rock which is likely to constrain the market making room for Potash Corp (POT).

•Rising spot prices and the floor price for potash set by the China contract bode are expected to maintain price momentum. India imports all of its potash but even with a lack of contract settlement there, high global demand has kept the market tight. Potash Corp is looking for $590/st price for shipments later this year and expectations are that a portion new prices will be accepted by Q4.

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 may have released this information prior to this post to affiliates or parties that have financial interests in trading on this information. 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 of the above positions in her personal account as of July 14,2011.

Corn prices caught a break from China

In a previous post, corn (futures) prices plummeted on a USDA survey that reported more acreage planted than anticipated. July corn futures price dived from almost $8 to as low as $6.15. This sharp dive in crop prices also dragged down most of the agriculture-related stocks.

However, corn prices rebounced sharply to $6.75 after a report from USDA on US trade data and exports sales released on Wednesday and Friday respectively revealed that China bought 540,000 metric tons of corn from the US just last week, much more than the USDA's forecast of 500,000 tons for the whole year.

China is known to be the largest corn consuming country in the world. However, its timing to import corn has been elusive. USDA, as well as analysts will fumble to revise their exports estimates to China upward significantly.

From Wall Street Journal

The USDA is slated to update its outlook for China's corn imports in a crop report Tuesday. The agency will likely raise the forecast by 3 million to 4 million tons, said Shawn McCambridge, senior grains analyst at Jefferies Bache, a brokerage in Chicago.

USDA chief economist Joe Glauber wouldn't preview next week's report, but said the staff "will certainly be looking at this information" on recent China corn purchases.

"The fact they are in the market is significant," he said. "We expect them to be a bigger and bigger player in the corn market."

Market analysts are also now increasing their China corn import projections. Sudakshina Unnikrishnan of Barclays Capital predicts that China will import about 5 million tons in the 2011-2012 crop year. A month ago, she said she would have forecast about 2 million tons of imports.

"You don't know when or where they are going to make a big splash," said Paul Christopher, international markets strategist at Wells Fargo, "but they will,"

The fact that the Chinese is in the market is certainly bullish for agriculture related stocks such as POT, MOS, AGU, CF.

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 of the above mentioned positions in her personal account as of July 8, 2011

Two conflicting cases for fertilizer stocks this week

Two pieces of news moved stock prices of fertilizer companies this week .

As most of us probably have noticed, stock prices of fertilizer companies move closely together with crop prices (especially corn prices) in the short-term. Surveys by the U.S Agriculture Department (USDA) reported on Thursday that U.S. farmers planted far more corn than expected this growing season. This report sent corn prices plunging and sparked speculation that upward pressure on food prices may be coming to an end. Corn futures for July delivery tumbled to 9.9% to $6.29 a bushel after falling as low as $6.15 on Thursday. Shares of agriculture stocks were affected despite a 4-day rally for Dow Jones Index.

From Wall Street Journal,

USDA's conducted during the first two weeks of June found farmers had planted 92.3 million acres of corn, the second most since World War II after 93.5 million acres in 2007. ..........

As recently as June 9, USDA officials had guessed that excessive rain and widespread flooding this spring limited farmers to 90.7 million acres. But a separate USDA report also found supplies were bigger than expected in early June, signaling relief for food companies, livestock producers and consumers.

In the meantime, fertilizer stocks found strength in Canpotex's success in negotiating a price hike of potash with China. The agreed-upon price of $470 per tonne was $70 higher than last year. Many had expected $450 per tonne. This contract signalled tightness in the supply of potash and continued strong demand from China, the largest fertilizer consuming country in the world.

In my opinion, share prices of fertilizer stocks will go through a streak of volatility and possibly weakness as crop prices, especially corn prices are testing their support. Once corn prices find their support, say, between $5-$6, the tightness in supply of fertilizers should regain importance. After all, it is generally believed that the economics of using fertilizers makes sense as long as corn prices stay above $3.56, soy bean $8.49, wheat $6.73.

Note: Canpotex is a potash consortium formed by Potash Corp (POT), Mosaic (MOS) and Agrium (AGU). It controls 70% of the world potash trade.



Disclosure: The blog author does not own any of the above positions in her personal account as of July 3, 2011

Crop prices rise

As the market went through a couple of weeks of choppy and mostly downward sessions, shares of fertilizers companies such as POT, MOS, CF seems to have navigated it quite smoothly these few days. One of the key reasons is prices of crops such as corn, wheat, soy bean have resumed upward trend again after participating the commodity sell-off in the last couple of weeks. The much talked about planting delays in North America since April has finally taken a toll on crop futures prices.

From Agriculture.com,

Time is running short for John Brink to plant his corn crop.


The southern Illinois farmer had put just about 7% of the crop in the ground as of Friday following weeks of delays due to rain. This is a sharp contrast from typical years, when he would normally have finished planting already.

"We are way behind," he said via cellphone from one of his fields.
Farmers across the Midwest have similar stories. Wet weather has kept them out of their fields and pushed corn prices back near all-time highs set last month.

The clock is clicking. If the weather is not clearing up soon, farmers may have to give up planting this season altogether. Corn futures price July contract is on its way to break historic high. Again. Shares of fertilizer companies, farming machinery companies are almost in tandem with crop prices , especially corn prices, in the last few months. Although my conjecture is that the broader market may face a bumpy road into the summer, and most likely a downward one, shares of agricultre-related companies can find some support in strong crop prices, albeit with increased volatility.

To see relationships between crop prices and fertilizer companies, please see related posts:
3 cases for POT

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 of the above mentioned positions in her personal account as of May 26, 2011.

3 Cases for POT

Potashcorp (POT), the largest fertilizer company in the world with dominant presence in potash fertilizer, is a winner riding the agriculture boom for years to come. There are at least half a dozen of reasons why it is a good play but three should suffice to make a case:

1. A surge in more protein-oriented diet in developing countries

This notion is not new. With substantial increase in income and wealth, meat consumption in China has increased by 600% in the last 30 years and there is no end to this growth in sight. According to a study from Purdue University, Chinese pork demand is projected to be 68 million metric tons in 2015. This is a large increase from 2003, when pork consumption was 45 million metric tons, and a 32% increase from 2010 levels.

The demand for a more protein-oriented diet and to a lesser extent, ethanol fuel has been and will be the driving force of a secular growth in agricultural industry. To increase the yield per acre, fertilizers are essential.

2. Barriers to entry means high margins


Other than nitrogen, soil nutrients such as phosphate and potash are scarce resources especially the latter. Only 12 countries have potash mine and about 50% of the world capacity is in the hands of three major players, namely Potashcorp (POT), Mosaic (MOS) and Belaruskali. New capacity takes years and billions of dollar to come in place, giving existing players plenty room to enjoy huge profit margins leveraging the economies of scale in face of heightened demand for the materials.

3. Hot money is favorable to commodity

With the US government printing money and tightening unlikely to be soon and severe, plenty of liquidity is left pursuing riskier assets especially commodity that is mostly denominated in US dollar. That includes agricultural products and thus providing incentives for farmers to apply fertilizers. Materials that go in these fertilizers are just as likely to enjoy the commodity fever. Currently, potash, phosphate fertilizers are priced at roughly half of its peak in 2008 when the crisis brought down everything. It is foreseeable for these commodities to go up by at least another 50% in the next 12 months.

In sum, POT with its overriding presence in fertilizers is set to ride the multi-year agriculture boom and the stock price is likely to go along with 50-100% upside (It is currently at $56). That said, these are not without risks. One of the near-term risks include hard landing in the US or China, drying up excess liquidity quickly once again. As I am writing, stock and commodity markets are going through a technical pull-back that may take a few more sessions to settle. For friends who shy volatility may want to wait till the dust is settled.

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  positions in POT in her personal account as of  April 14, 2011

POT Saw a Dry Season

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.

Outlook
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.

My Takes
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
3. Inventory
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






 

What is Behind the Fertilizer Rally?

There are a few reasons that drive up fertilizers stocks such ash POT, MOS, IPI, AGU,CF
1. Corn price breaks out
Crop prices dictate whether it is worth it for farmers to apply more fertilizers to get better yield. Corn is one of the crops that are fertilizer intensive and its price is a crucial factor in fertilizer demand.
The most recent quote of December 2009 corn contract at Chicago Merchantile Exchange shows that corn price has just broken out near-term. [Click to enlarge the diagram]

2. China may sign the contract by January
The negotiation over potash prices with China has been dragging on for most part of this year. The last important contract signed by India in July, another major fertilizer buyer, with Russian potash producer had a price tag of $460 per tonne, sharply off the contract price that was over $600 last year.
Another major deal is said to be inked soon. Belarusian Potash Company (BPC) is in the final stages of a Chinese supply deal. The pricing of the 860,000-ton order has not been disclosed, but, in a separate deal, 300,000 tons will be shipped to Vietnam for $500/ton next year.
This deal is expected to set the tone for a major deal between major producers such as POT with China that is expected to close by the end of January.

3. US Dollar weakness
US Dollar has been going down, breaking new lows every couple of weeks. Weak dollar means high prices of hard assets such as agricultural products, basic materials, precious materials, etc.

4. Take-over target
With resuming liquidity, merger and acquisitions are back to business. The,Australian giant miner, BHP with $18 billion cash has been rumored to eyeing POT to add to its potash portfolio as its Brazilian competitor, VALE is doing the same.


You may also be interested in articles in the same category:

http://cocacolabuffet.blogspot.com/search/label/Agriculture

Dry Summer for MOS

As we are stepping into one of the most crucial earning seasons in years, I am going to track the earnings of a series of companies, starting from one of the largest fertilizers producers in the world, MOS.

MOS released a disappointing earnings report after the market close yesterday. The company announced  net earnings of $100.6 million, or $0.23 per diluted share, for the first quarter ended August 31, 2009. These results compare with net earnings of $1.2 billion, or $2.65 per share, for the first quarter ended August 31, 2008. Revenue fell by 66% to $1.46 billion. Analysts had been expecting EPS of 35 cents on revenue of $1.54 billion.

• Phosphate and Potash Prices Down Sharply. Volume Started to Stabilize

The disappointing result is attributable to sharp declines in phosphate prices, potash prices and potash sales volume. The average first quarter diammonium phosphate (DAP) selling price, FOB plant, was $276 per tonne, compared to $1,013 a year ago and $345 per tonne in the fourth quarter of fiscal 2009. Phosphates sales volumes were comparable with a year ago at 2.1 million tonnes. The average muriate of potash (MOP) selling price was $382 per tonne, compared to $488 a year ago and $540 per tonne in the fourth quarter of fiscal 2009 and total potash sales volumes were 0.8 million tonnes, compared with year-ago first quarter volume of 1.9 million tonnes, but up from 0.6 million tonnes for the fourth quarter of fiscal 2009

• Market Reaction Down First and Up Later. USD Weaknesses Helped

Yet, the price movement of MOS depicts the all too unpredictable post- ER market reaction. The stock price went down immediately after the release in the extended hour trading but soared as much as 5% as the weak US dollar lifted the entire basket of commodities.

• Management Optimistic on Outlook

Despite the dismal earnings release, the management keeps its optimistic tone as usual, citing expected increase in the usage of fertilizers, global economic recovery, and decreasing inventory.

The company expects farmers to increase in demand in anticipation of high crop prices in 2010 as farmers make up for under applications of fertilizers in the late 2008 and 2009. Global economic recovery is expected to continue the trend of better diet (more protein diet) in densely populated emerging markets such as China and India. Inventory of phosphate in North America is at the lowest since May 2006. Inventory of potash is also working down from its elevated level earlier this calendar year. The distribution pipeline has been largely emptied.

• My Takes

1. The "better diet in emerging markets" theory has been the bull case offered by the management through its boom and bust , so I don't think this is the "marginal " component that will make a difference in coming months .
2. Very lean inventory, on the other hand, is something to get excited about as this was the most important drag on pricing power. Phosphate inventory looks good now. One down, another one to go. Inventory of Potash is a key to the sector in coming months.
3. The optimism of management is to a large extent dependent on expected high crop prices in 2010. From the May 2010 futures contract of wheat and corn, this seems to be possible but I wouldn't get too excited until I see some real movements due to the volatility of these commodities.

In a nutshell, things are getting interesting in this sector but I would stay on the sideline until I see some real movements in either crop prices or fertilizer prices.

Disclaimer: 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 MOS in her personal account as of October 6, 2009