- At a time when food prices are soaring world-wide, so is the price of fertilizer, producing huge profits for leading fertilizer makers and stirring anger among farmers in the U.S. and India.
- Fertilizer prices are rising faster than those of almost any other raw material used by farmers. In April, farmers paid 65% more for fertilizer than they did a year earlier, according to the U.S. Department of Agriculture. That compares with price increases of 43% for fuel, 30% for seeds and 3.8% for chemicals such as weedkillers and insecticides over the same period, according to Agriculture Department indexes.
- Those skyrocketing costs are making it harder for farmers to expand their harvests in response to the global food crisis that has sparked rioting, rationing and export controls in many countries.
- Farmers say too much market power is concentrated in the hands of a small group of companies in the U.S., Canada and Russia that dominate global production of potash and phosphate. (Hmmm... should we break up the potash "cartel"? Somehow this concentration of power was not an issue a few years ago when these companies were scraping to make a profit, eh?)
- In a May 8 letter to North Dakota's three-member congressional delegation, he accused fertilizer companies of "price gouging," and asked for an investigation. (Americans continue to grapple with a "World of Shortages" and "everything revolves around me" thinking. They have yet to wake up to the global competition for resources; resources they could once consume in massive quantities with no real large scale alternative consumers of said goods. Remember, to most Americans if it does not happen in America... well it is not happening. So all those other consumers of said commodities? - they don't exist. So it must be price gouging. Works in oil, works in food, works in fertilizer, works in copper, works in iron ore, works in everything - it's all price gouging. Or speculators. Well, I look forward to seeing our fertilizer CEO's dragged up to Capital Hill - Lucy's got some 'splainin to do!) On Friday, Sen. Byron L. Dorgan, a North Dakota Democrat, said he is asking the Federal Trade Commission to scrutinize the industry's business practices.
- Major fertilizer producers deny any allegations of gouging. They say they are simply raising prices to reflect tight supplies and growing demand after years of relatively low prices. (same damn excuse as those "greedy oil companies")
- But there's an unusual piece in the pricing puzzle: In several countries, obscure laws shield makers of potash and phosphate from certain antitrust rules. In the U.S., for example, phosphate makers are among a handful of industries empowered by the 1918 Webb-Pomerene Act to talk with competitors about pricing and other issues.
- In India, the head of one of India's largest buyers of fertilizer is appealing to the United Nations for help. "The fertilizer prices are artificially going up due to the manipulation of traders and suppliers," said Udai Shanker Awasthi, president of Indian Farmers Fertilizer Co-operative Ltd., in an interview Friday. (has Economics 101 been outlawed in our schools - globally?)
- Brazil's government is considering nationalizing the country's fertilizer deposits to help reduce farmers' production costs. (seems to be working wonders in country after country, in the oil sector - why not fertilizer - just 1 more inefficient nationalized competitor to deal with)
- Fewer than a dozen countries have substantial potash reserves, while more than 160 countries consume the fertilizer.
- In the U.S., Potash Corp. and Mosaic are the sole surviving members of a phosphate export cartel called the Phosphate Chemicals Association. Under a 90-year-old law designed to promote American exports, the companies are allowed to legally market and sell their product overseas as a single entity at a price set in consultation with one another. Similarly, Canada has Canpotex, and Russia has Belarus Potash Co., another export cartel. (I like cartels; as long as I'm on the investing side of them)
- "That's the whole key that we're running into this year," said John Hawkins, a spokesman for the Illinois Farm Bureau. "The barriers that we have seen in the past between domestic and international prices have just fallen down. We're now participating in a global fertilizer market." (finally, someone gets it)
At this point I have about 15-17 industry groups I can see being trotted up to Capital Hill for "investigative hearings" as price increases continue into the years to come. Because as we all know it is either "price gouging" or "speculators" causing all the issues. (I'm sure the West's central bankers won't be trotted up to ask why they are exaggerating all these shortages with a global flood of paper currency) Why are we not dragging US farmers up to the halls of the Senate for their 'price gouging' on wheat, corn, and soybeans? Oh yes - they have votes in the coming election. Sorry for asking! I look forward to the day seeing the average inward looking US politician sparring with the average Greek drybulk shipping magnate over how they are price gouging the Baltic Dry Index rates. Or the average Peruvian copper miner. Or the average Brazilian iron ore miner. Or the average Thai rice grower. God help us.
Long a lot of fertilizer for a long time in fund; long Mosaic in personal account - cautious on the sector for now as I cannot model stupidity very well in terms of stock price; super bull for the long run
5 comments:
very interesting. my limit order on MOS at 115ish from a while back finally got hit today. scaling in and out as always while maintaining a core position. you know this all to well yourself.
but, i'm beginning to wonder when this sector becomes a true "trade the perception not the reality" trade. (not talking about the minor selloffs we get every few months) because its evident that the prices keep accelerating because there is simply the demand somewhere in the world at all times. then add in the supply shortages on top of that. but, even though we know we might be right on the money with this macro thesis, eventually the street will 'correct' the sector in terms of curtailing future growth.
now, i'm not talking about some of the "oh its the end of the world" selloffs we get every few months. i'm talking the end game trade in this sector where even though long term fertilizer prices will rise and so will demand until further supply hits the market, the street will effectively sell that news rather than buy it. i know i'm not being too clear but hopefully you know what i'm saying? there's obviously no way to know what time this will happen.. i'm thinking early-mid 09? but, i just thought it was worth starting to ponder. i think the next set of earnings reports will really give us a gauge in terms of the street's reaction. now that everyone knows about this story (for the most part), will the companies earning record profits yet again be enough to appease the street?
don't get me wrong i'm with you 100% on this fertilizer play and have been in POT and MOS in one form or another ever since last august. but, i'm starting to think down the line in terms of an exit strategy for this trade/investment. because like all things, eventually this sector will tap out. the fundamentals could still be firing and the macro equation could make perfect sense to us, but to everyone else on the street, they sell the perception not the reality, and then we're essentially swimming upstream against everyone else selling and would be forced to sell.
sorry for the ridiculously long post, i'm mainly just thinking out loud here, but i know you've said you'll be scooping up ferts on all the near term major selloffs, but when do you think it gets to the point where you won't be able to fight the current of "trade the perception" even though reality is telling us another story. i have a feeling this is exactly how it will play out eventually. so, are you saying 1-2 years from now when this starts to occur, you will be buying the ferts in mass? because as more supply finally hits the market down the road, or if government finally changes their ethanol tune, then we've got a clear cut signal. i'm just worried that at some point out of nowhere, one of these mini selloffs will then trigger a more massive selloff in which the entire street changes tune and the unwinding of the trade will occur. and, even if the fundamentals of the trade are still in tact, the street starts to "sell the news" every single time and reality won't matter anymore.
at the very least its interesting to ponder about. i guess all i'm trying to say is that i don't think 3-5 years from now that the fundamentals will be able to hold strong enough to warrant the street buying the reality and instead, they will sell the perception.
if there's one thing i've really learned from some of these types of trades/investments, its that you've got to "trade the perception, not the reality". because even if you're right you could still get swept away because you're just a minnow in a pool full of sharks and your opinion doesn't matter haha. mini selloffs don't concern me right now, just like you. i'll be buying those pullbacks. but, at some point, this will unwind just because the street does what it does. question is, when?
interested to hear your thoughts on all this, and i'm going back to re-read your fert posts because i'm sure you've mentioned some of this stuff before i started reading.
ps- sorry if this posts multiple times, my browser is f'd up.
Hi mad,
Scarily I know what you are saying ;)
Yes I have written that exact same thing - in the end these price rises cannot continue. And when companies stop growing at 200% and "drop" to "only" 50% well you know Wall Street - that is the end of the world.
In the end fertilizer prices will be at elevated levels, and these companies will be cash cows. When that transition happens in reality, when that transition becomes discounted, and what multiple the market puts on near monopolies with limited new production ability if anyone's guess but if you look at these stocks on 2008/2009 estimates they are not exactly cheap. I look at MOS and I see a 11 PE ratio. Should it be 7? Even if growth 'slows' to 30% YoY? If these companies were 40 PE ratios (future) I'd have more of a beef there. But yes, no company can grow like that forever. At $60B market caps if these things doubled and doubled again they would be $240B market caps.
Perception is reality is something I've typed about 100x in the blog :)
It doesnt matter what you think; it matters what the perception is. Bottom line.
Unless your a deep value investor who is willing to wait many years/decade for the market to come around to your point of view ;)
that should read on 2008 estimates they are not exactly expensive.... I suppose they could trade at 5 PE ratio, the drillers trade for 10-11 many times.
When do fertilizers become a bubble... that pops? That's the question I guess. I think pondering about it, is all fine and dandy, but we really need to see the fundamentals progress in line with estimates. Sooner or later, the estimates will far outpace reality, and then its everyone for themselves. When you hear analysts using metrics like population growth in 2050 to justify estimates, or better yet - CNBC puts on a potash spot price on the screen - you know its trouble. But right now, that doesnt seem to be the case. So, lets just revisit the idea every quarter and be on watch when we enter that no-mans-land of speculative bubbles.
An interesting discussion by all. Have been long MOS,POT,& MON for 18 months to 36 months respectively, recently taking profits on all three while maintaining a core position with a stop. My family have all farmed corn and beans in Iowa for generations, and every year it takes a little more fertilizer and a little better type of seed to maintain yields. Can't imagine that would be any different anywhere else in the world. a good story for future growth if true even with recent run ups by the late money, (can't bring myself to say dumb). Normally I would have just taken my profits, paid my taxes and moved to another segment of the market, but I am indecisive here. I am tempted to say that these are "range" trades over the next six to eight months, taking advantage of the volatility to make a little on the 10 percent swings. Points of view.
Additionally my relatives were late getting the corn into the earth because of cold weather and the crop is late coming up because of wet weather. Corn will be great next year as well because when this happens yields are sometimes off.
Post a Comment