Has Fertilizer Market Hit the Fan?

10/03/2012 10:26 am EST

Focus: COMMODITIES

Jim Jubak

Founder and Editor, JubakPicks.com

Despite higher grain prices and record demand, larger economic concerns stand to depress the fertilizer industry, writes MoneyShow's Jim Jubak, also of Jubak's Picks.

Fertilizer producer Mosaic (MOS) gave us some bad news today, in the company’s report of first-quarter (fiscal year) earnings.

Earnings of $1.01 per share were significantly worse than the Wall Street consensus of $1.16 a share. Revenue fell 18.7% year over year, to $2.5 billion. The consensus projection had been $2.68 billion.

Then we got bad news for the entire fertilizer sector in the company’s conference call. Although Mosaic predicted that demand for potash fertilizer would hit a record 58 million to 60 million metric tons in 2013, in the shorter term distributors are deferring buying.

The distributors’ read of the market is that with more production capacity coming online, and with China and India delaying their contract purchases, there will be plenty of supply—perhaps at lower prices—later in the season.

During the conference call, an analyst asked Mosaic why fertilizer prices haven’t moved higher to follow rising grain prices, as they did in 2008. The company’s answer was:

  • farmers and distributors see greater certainty of supply, so they are deferring purchases
  • subsidies for purchases have declined in China and India
  • distributors are taking a cautious attitude toward building inventories, given economic uncertainties and the possibility of lower prices later in the year

In other words, despite higher farm prices, this time it’s different. At least in the short run.

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 not own shares of Mosaic as of the end of June. For a full list of the stocks in the fund as of the end of June, see the fund’s portfolio here

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