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Update Potash of Saskatchewan (POT) in my Jubak's Picks portfolio
06/14/2012 6:05 pm EST
There’s really nothing new in yesterday’s report—except that it came from the industry association. I think we can now say that forecasts of surplus capacity by 2015 are now the conventional wisdom.
Which makes your life kind of simple if you own any fertilizer stocks, such as Potash of Saskatchewan (POT), a member of my Jubak’s Picks portfolio http://jubakpicks.com/ : How do the long-term and short-term trends net out?
In the short-term I think investors are looking at a record year for planting in the United States. At least that’s what the U.S. Department of Agriculture said in its most recent crop planting report on March 31. Farmers, then, planned to plant 92.2 million acres of corn, the second largest planting since 1944. Acres planted to soybeans would fall by 1% from last year but still be the third largest planting on record. Wheat plantings were forecast to increase by 8% from last year.
The next report is due on June 29 and if the March projections hold up I think fertilizer stocks will rally—if only because they’ve been pounded so heavily this year. Potash of Saskatchewan, for example, is down 31.5% for 2012 as of June 14 and down 17.6% since I added it to Jubak’s Picks on April 4.
Against the background of long-term forecasts of surplus capacity, I think investors have over—reacted to normal seasonal cuts in prices. Potash, for example, set prices effective June 11 that were about 9% lower than a year ago. Not good news certainly, but the company also said that it would restore some of the price cut in the Midwest on July 21. That makes it more likely that the move is a promotional cut to encourage sales in the weak summer selling season rather than a portent of price slashes to come.
Guidance from another fertilizer company, Agrium (AGU), on June 12 that said the company expects earnings from continuing operations to come in near the top of its forecast range of $4.18 to $4.78 a share for the second quarter would seem to bolster that interpretation. In its guidance Agrium note that it was seeing higher than expected prices for some fertilizer products. On June 6 Agrium announced that it was raising its semiannual dividend by 27.5 cents to 50 cents a share for shareholders of record on July 1. That doesn’t sound like a company worried about a near-term drop in prices.
Although prices for fertilizers are down from their peak in 2008, they are substantially above their trough in 2005. Potash, for example, sold for nearly $1,000 a metric ton in 2008, but went for less than $200 a ton in 2005. The current spot price is $469 a metric ton.
To get a sustained rally in the sector, though, I think investors will have to see announcements like those we’ve seen recently from the iron and copper mining sectors that promise delays or outright cancellations to projects that would add capacity. That will take some of the longer-term worries out of play. Right now plans to expand capacity would add 17% to 25% to global nitrogen fertilizer capacity by 2015 and 42% to potash capacity by that year. The International Fertilizer Association, meanwhile, projects that potash demand will increase by just 14% by 2015.
Fears of over-supply are real, I think, for the nitrogen fertilizer segment where cheap natural gas and national economic agendas in the Middle East are likely to keep projects moving ahead even if they aren’t justified by projected demand. Potash doesn’t face that same dynamic—companies looking to expand production are still primarily interested in making a profit rather than following government objectives of building up industrial sectors and increasing jobs irrespective of costs.
The danger for potash producers is that the current orderly cartel that controls global production will face competition from new suppliers. Some nitrogen fertilizer producers, seeing the looming over-supply in their own sector, have announced that they will invest in new potash capacity.
I’m going to wait to see what the U.S. Department of Agriculture has to say about planting levels in another two weeks.
Then, I think, I’ll have a better chance of weighing the short- and long-term in the fertilizer sector.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Agrium and Yara International as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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