One Industry That Will Do Wonders For Your Portfolio: Part III

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In Part I of this series, the key players in the global fertilizers and agricultural chemicals industry were introduced, while Part II looked at demographics affecting the industry, key inputs used, and valuation metrics. In Part III, we’ll take a look at hedge fund sentiment surrounding the industry’s most popular stocks, and will employ Porter’s Five Forces framework to gain a better understanding of its underpinnings.

Hedge Fund Sentiment

Lone Pine Capital is the largest hedge fund in Monsanto (NYSE: MON). From the first to the second quarter of 2012, Stephen Mandel, hedge fund manager for Lone Pine Capital, increased his interest in Monsanto by 24%. Monsanto is Mandel’s fourth largest holding, accounting for 3.93% of his portfolio. Fisher Asset Management, though not technically a hedge fund, has the largest holding in Syngenta (NYSE: SYT). Through the second quarter of 2012, the fund has increased their shares held by 8%. Jana Partners is the largest hedge fund in Agrium (NYSE: AGU). Barry Rosenstein, the fund’s manager, bought 6.5 million shares of Agrium during the second quarter of 2012. Agrium now makes up 23.51% of Jana Partners’ portfolio.

Adage Capital Management is the largest holder of Potash Corp. (NYSE: POT). Phill Gross and Robert Atchinson, hedge fund managers for Adage, are the biggest bulls in Potash. The fund has increased their holding in Potash by over 30% year-to-date, and now own 6.4 million shares. Of the funds we track, Carlson Capital holds the most E I Du Pont De Menours (NYSE: DD). Clint Carlson, hedge fund manager for Carlson Capital, decreased his shares in Du Pont by 16% during the second quarter of 2012.

Porter’s 5 Forces

Competitive Rivalry

The chemical agriculture fertilizer industry is internationally diverse with various competitors located in different areas of the world. Different countries demand different chemicals used for fertilizing their crops. Larger companies in the industry operate in many countries and focus their internal growth efforts in countries that are expanding their agriculture production. The supply-demand balance in the industry, and therefore also the fertilizer prices, cannot be influenced by any single producer. The fertilizer industry operates in a global market, where only companies that manage to increase productivity can prosper in the face of global competition.

Threat of New Entrants

Changing consumption patterns opens opportunities for structural changes in the markets. Our analysis suggests that relatively smaller firms can now better compete with the giants in the fertilizer market. Nearly half the fertilizer production comes from smaller companies; this shows that the door is always open for new entrants to come into the market and snag market share from the larger fish, so to speak.

Bargaining Power of Buyers

Farmers are the primary buyers of products that come from this industry. Many analysts believe that whenever there are significant rises in grain prices, the fertilizer companies raise prices in order to get a larger share of the farmers’ profits. In 2008, corn prices rose to more than $6 per bushel due to an increased demand for corn in ethanol production. Subsequently, fertilizer prices rose to all-time highs before dropping back to normal levels by the summer of 2009 once corn prices readjusted. Farmers do not have buying power, because fertilizers companies hold the valuable ingredient necessary to improve crop yields.

Bargaining Power of Suppliers

The chemical agriculture industry is labeled in the “perfect” category of competition. Theoretically, perfectly competitive industries are known as price takers, and cannot influence the price that is paid for their product. Therefore, firms in a competitive environment are more hard-pressed to reduce costs and become more efficient. A firm that makes inefficient decisions incurs losses because it cannot transmit its extra costs to the consumers.

Threat of Substitutes

Advances in agricultural technology—including, but not limited to, the genetic modification of food crops—have made fields more productive than ever. Farmers grow more crops and feed more people using less land. They are able to use fewer pesticides and to reduce the amount of tilling that leads to erosion. Scientists are attempting to introduce advanced crops that are designed to survive heat waves and droughts, resilient characteristics that will become increasingly important in a world marked by a changing climate. Genetically modified (GM) agriculture has various benefits, but is still in the product acceptance stage. It’s important for companies in the chemical and agriculture fertilizer industry to be aware of the situation, and understand that if GM crops become safe and cost effective, demand for fertilizer could diminish.

For an extended look at how the world’s most successful money managers are trading these companies, continue reading at Insider Monkey.

This article is written by Mike Pate and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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