Wednesday, June 17, 2009

Potash (POT) With Another Production Cut Hammering Fertilizer Names

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We are back to the world of thesis versus reality. It's a world we've been living in since I started this blog - people front running a recovery that constantly is out of reach; it's been Groundhog Day (the movie) repeatedly. In the thesis world speculators drive stocks up on the basis of what they believe will happen in the future, while ignoring the facts on the ground - even things the CEOs themselves say. Because they know better as forecasters of the future. In the reality world, companies report... well, reality. I won't bother you with the FedEx (FDX) report this morning which is a lot better proxy on the economy than 99.9% of government reports because it's an actual company that has to deal with the real world, unlike the fantasy of government numbers. For about the 4th? time in the past 18 months, they are pushing guidance down...

As you know the commodity trade has been the big winner... very crowded; it's 2007 all over again. If only these companies would not open their mouths and report on reality we could keep bidding up stocks in this group for no reason other than "everyone else is buying so I must too". Mosiac (MOS) and Potash (POT) have been reporting poor numbers for about 3 quarters now, while constantly saying the turn is "just around the bend". Then the next quarter the turn has not come. I have now come the point I doubt their words because they keep saying one thing, and another happens. Today, the fertilizer names are taking a hit because Potash (POT) says they are cutting back production yet again.... but not to worry, this will just lead to even larger demand "soon". (Groundhog Day)
  • PotashCorp today indicated a further reduction in 2009 potash production of 0.8 million tonnes, bringing curtailments this calendar year to 4.7 million tonnes and total curtailments to 5.5 million tonnes since August 2008.
  • Lagging demand due to an extremely slow US spring season and extended negotiations with offshore buyers are the reasons behind the shutdowns. However, with the world's soils and supply chain nearing depletion after almost a year of deferral, we expect demand to return in second-half 2009 as Brazil approaches its major application season and India and China inevitably return to the market.
  • This unprecedented period of draw-down throughout the supply chain, coupled with the expectation of lower global crop production and higher crop prices, is expected to lead to an even stronger rebound in 2010.
It's a darn shame these companies have to report actual business metrics because if they did not, speculators could run these stocks up another 50-100% based on thesis. Because when you create reasons for stocks to go up based on opinion, rather than fact... no price is too high.

I say all this with the background of potash being my favorite long term commodity - and I own these names...

Long Potash, Mosaic in fund; no personal position

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