Ag Suppliers Turning Green

12/16/2009 9:20 am EST


Eoin Treacy

Global Strategist,

Recent strength in agricultural commodities has yielded gains for Canadian and German fertilizer shares, writes Eoin Treacy of Fullermoney.

The US dollar has had its largest rally since June over the last two weeks and the question is justifiably being asked as to how much farther it is going to go. A marked loss of downward momentum has been evident since October, and the Dollar Index found support in the region of the upper side of the 2008 base in late November.

The current rally is testing the most consistent feature of the Index's medium-term down trend. A sustained move above 77 would suggest that a more pronounced dollar rally is under way and in the meantime a downward dynamic is required to indicate anything more than temporary resistance around current levels.

Dollar weakness has been a tail wind for commodity markets, but now that the currency is rallying, the effect on commodity prices has not been evenly spread. Gold and oil have shown the clearest inverse correlation to dollar strength, and while the weakness cannot be [attributed] exclusively to the dollar's strength, the lack of similar weakness in other commodities is noteworthy.

The recent pullback in silver, platinum, and palladium prices has not been as pronounced as in gold. The industrial metals have all firmed and aluminum broke upwards. Cocoa and orange juice made new recovery highs [recently]. Sugar continues to push back towards its highs, rough rice continues to extend the upward break, cotton is trending consistently higher, and coffee made a new recovery high last week. Palm oil has rallied back to test the May highs. Corn, soybeans, and wheat remain within their bases.

The fact that most commodities remain so firm against a background of a dollar rally suggests more is at work behind the scenes than a simple hedge against currency weakness. Commonality also suggests that even though gold has had a larger correction, this is probably a larger pause in the overall advance [rather] than an outright reversal.

Fertilizer companies appear to be benefiting from the firm tone exhibited by soft commodities. Agrium (NYSE: AGU) and Mosaic (NYSE: MOS) both broke upwards from multi-month trading ranges recently and the upside can continue to be given the benefit of the doubt, provided they can sustain the advances. Potash Corp. of Saskatchewan (NYSE: POT) is testing the May high, and a downward dynamic would be required to question potential for further upside. [Germany's] K+S Group (OTC: KPLUF) broke upwards from its base in late November, retested [a support] last week and would need to sustain a move below that level to question scope for further up side.

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