Tuesday, May 27, 2008

WSJ: Lofty Prices for Fertilizer Put Farmers in a Squeeze

Front page article in Wall Street Journal = short term top in group? Usually. :) Since the front page article on the NYTimes [Apr 30: Finally (A Year Late) Fertilizer Hits the Front Page of the NYTimes] these stocks have gone nowhere. Remember the risk factors I outlined a week before that article came out [Apr 23: Potash Hits $1000 on Spot Market]. I still believe we have another large move in this group later in the year, but they are consolidating some enormous moves and certainly can move to the downside in the near term. Now I guess I have to be on the lookout for when coal begins to hit the front pages of these newspapers - then we have to begin to really worry ;)
  • 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)
Folks this is just the beginning; political stupidity is not an American trademark. We will see knee jerk reactions as shortage after shortage -- err I mean, after price gouging after price gouging of readily available product -- hits the world. Countries will become nationalistic and protective, which will only exaggerate the problems further. As this plays out, someone - somewhere overseeing all this from above will be snickering to self at the behavior of human kind. This is so predictable, that it is and will continue to be sad to see it play out.

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

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