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Fertilizer Stocks Acting Like Shit – Paul Price and Ilene – Market Shadows

POT, MOS, AGU  chart (1)

News that Russia’s Uralkali will pullout of the potash pricing cartel sent shares of Mosaic (MOS) and Potash (POT) plunging almost 30% in pre-market trading on July 30, 2013. Since Tuesday’s early tumble, share prices have firmed up. The price of another company that sells potash, Agrium (AGU), fell about 5% and drifted lower.  Paul couldn’t resist buying more shares of MOS and POT in Tuesday’s premarket shitstorm.

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Chart from Yahoo

Stocks of fertilizer companies hammered

MINNEAPOLIS — On Tuesday the fertilizer hit the fan.

Share prices of nutrient companies were demolished as investors reacted to news that a big Russian fertilizer company [Uralkali] would stop cooperating in a pricing cartel. The move is likely to slash prices for the fertilizer potash. Investors worried that it will slash profits for potash companies, too.

The Mosaic Co. saw its shares fall almost 25 percent before recovering slightly. Potash Corp. of Saskatchewan Inc. was down 23 percent. The declines wiped more than $13 billion from the stock market values of six large publicly traded potash companies.

Potash is a major fertilizer, used by farmers worldwide. It has been selling for almost $400 per ton. Some analysts believe the price could fall below $300 now. (Stocks of fertilizer companies hammered)

Market Shadows’ Virtual Value Portfolio holds MOS, AGU and POT. Market Shadows’ Virtual Put Selling Portfolio had sold one put on MOS and one put on Agrium Inc. (AGU).

An end to the powerful potash cartel would mark the beginning of a price war and hurt the earnings of these companies.

Michael Babad of The Globe and Mail questioned whether Uralkali’s plan to break up the cartel is a “high-stakes game of chicken,” or an industry changer?

For now, the jury is out…

To recap, Uralkali and Belaruskali had together been one of the world’s two potash cartels, the other being North America’s Canpotex.

Traditionally, one had followed the other in major pricing deals.

But yesterday, the Russian cartel, BPC, collapsed as Uralkali pulled out, the suggestion being it wants to spur demand by cutting prices for the key ingredient in fertilizer. There had also been complaints that its partner, a Belarusian state-owned firm, had been operating outside their agreement.

Uralkali, backed up by analysts, forecast that potash prices could plunge by up to about $100 (U.S.) a ton. Its decision won’t only affect its own prices, but also those of the Canpotex group, made up of Potash Corp. of Saskatchewan, The Mosaic Co. and Agrium Inc…

‘Although we believe Uralkali has been frustrated with Belaruskali and Canpotex playing on the margins of an oligopolistic industry, we believe Canpotex has been equally frustrated with BPC producers,’ analyst Joel Jackson of BMO Nesbitt Burns said today.” (Potash shares crushed: Is Russian cartel dead, or is breakup a ‘high-stakes’ bluff?)

Would this move really benefit Uralkali?

The company wants to grow its market share but it does not produce nearly enough potash to meet worldwide demand. Cutting prices, and profit margins, to gain market share may not be in its best interests. Uralkali would be selling more but earning the same, or less, than it is currently.

The most likely outcome is a concession by the other cartel members to cede some additional share to the Russians while agreeing on a price point that is not too far below what had been in effect before. EPS will be hurt somewhat but the shares prices of POT, MOS and AGU probably overreacted on the downside. Good-quality companies rarely deserve to be marked down by 25% – 30% on any specific news story, short of fraud.

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Research outfit Morningstar had rated both stocks with four stars (out of five) prior to the news out of Russia. The long term fair values left room to adjust earnings downwards. We expect analyst downgrades, but higher share prices after last week’s dramatic sell-offs. Standard & Poors maintained a fair value for MOS at $60.00 while carrying a $46 12-month price target for POT. Both companies have been raising dividends. At $29, POT yields 4.8%. At $40 MOS pays 2.5%.

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The key to investing is having confidence in the value of the company you buy shares in. If we didn’t already hold shares of MOS, POT and AGU in our virtual portfolios, or hadn’t already sold puts, we would do so now.

Disclosure: Paul is Long MOS, Long POT, Long AGU


Syndicated repost courtesy of : Market Shadows
The opinions expressed are those of Market Shadows and the author, not those of the Wall Street Examiner. The Wall Street Examiner provides market commentary content for Market Shadows without compensation at this time but with the expectation of possible future consideration. The Wall Street Examiner does not participate in stock or options selection or strategy recommendations for Market Shadows and makes no representation regarding the accuracy or validity of the ideas expressed in the post. No recommendation or endorsement is intended or implied. This post is presented for informational purposes. Do all necessary due diligence before considering any investment.

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