Can This Fertilizer Stock Maintain its Momentum?
Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Fertilizer companies should get ready for some hard scanning by investors in the weeks to come, for reporting numbers and providing outlook in what could be termed as one of the most unpredictable and trying times sure won’t come easy. After the drought, eager ears will be tuned to what these companies have to say about how demand will shape up in the next few months till we hit the next spring planting season.
I am certainly excited, and can’t wait to see how fertilizer players have fared in the last quarter. I don’t judge a company’s worth based on its quarterly releases, but I can’t ignore the useful insights it gives on how the industry is shaping up, particularly when the industry in question has been in the spotlight. Knowing what to expect also prepares me better. One of the first fertilizer companies to check in next week is Mosaic (NYSE: MOS), and if you ask me, I am not expecting too much.
Mosaic’s first-quarter phosphates sales volumes could be down as much as 15% to 20% compared to last year because of two reasons – the company started the quarter with low inventories in hand, and production was limited further because of major turnarounds scheduled at its Florida phosphates plant. Input cost pressures are likely to weigh on margins as well.
The only spark could be phosphate (DAP) prices, which have firmed over the past quarter. Sequentially, Mosaic’s first-quarter DAP price could be up as much as 10%, though that would still be down by roughly the same percentage from the year-ago period. So even if things appear better on a sequential basis, the overall mood will be somber as any uptick in price can offset low sales only to a limited extent.
The wait could get longer
The scene is unlikely to be any brighter in Mosaic’s potash segment. Interestingly, industry potash inventories in North America have declined steadily since May. In August, they were down 9% sequentially. While this is good news, potash prices continue to remain range bound and haven’t kept pace with the surge in grain prices. I am expecting Mosaic’s first-quarter potash prices to be lower than last year by a low single-digit percentage, but the decline could be steeper sequentially.
Demand for the nutrient hasn’t been too strong either, especially when critical markets like India and China continue to hold back purchases. Though industry domestic sales for phosphates in July and August climbed 32% from the comparable period last year, exports remained weak as evidenced by the 38% sequential slump in Canpotex shipments in August.
It is critical to look at Canpotex’s numbers when we talk of potash, simply because all three members of the cartel, PotashCorp (NYSE: POT), Mosaic and Agrium (NYSE: AGU) sell half or more of their total potash through it. Of the three, PotashCorp bears the heavier brunt of any slump in orders as it owns more than 50% of the cartel. Yet, being the second-largest stakeholder in Canpotex, Mosaic isn’t insulated either. Unfortunately, 2012 has been a bad year for Canpotex. Apart from a contract from China earlier in the year, the only good news has been a fresh 5-year contract that came from Indonesia some days back. But India, a key buyer, remains on the sidelines (20% of Mosaic’s potash is marketed to India). PotashCorp, which is also the world’s largest potash producer, doesn’t expect much from India this year, but feels another contract from China could be possible.
What’s driving optimism?
But there’s one nation that is likely to be the savior for all these companies – Latin America. All hopes are pinned on the market as it steps into its peak planting season. According to Agrium, although Brazil’s import for potash and phosphates this year has remained below last year’s levels, there has been an uptick in recent months. Agrium further feels a surge of 25% in cash soybean prices for September should be a strong incentive for Brazilian farmers to plant more of the crop – a sentiment others are echoing too.
Peer CF Industries (NYSE: CF) expects robust demand from the nation to offset any likely weakness in domestic phosphates demand during the second half of the year. Better prices helped the company export 59% of its phosphates in the last quarter compared to just 45% a year ago. Backed by robust Latin American demand, CF didn’t rule out the possibility of an increase in phosphate export prices during the second half – something that should be music to Mosaic’s ears. Mosaic and PotashCorp are even expecting ‘at near or record’ nutrient demand from Brazil this year. How Mosaic’s orders books are filling up will be one thing I am going to look out for in its earnings report.
As Mosaic’s first quarter marks the beginning of a new fiscal year, expect a lot of updates on investment plans and outlook. The company is about to begin a potash capacity expansion program of over 1 million tonnes. Whether this and its other project to restart its South Fort Meade mine near Florida (which remained inoperative since 2010) are on schedule should be clear from the forthcoming earnings call. The excitement is higher after Mosaic’s settlement of a key litigation with PotashCorp wherein it will be able to export an additional 1.3 million tonnes via Canpotex from 2013, among other benefits.
The Foolish bottom line
Remember, Mosaic derives most of its revenue from phosphates, and the market for the nutrient seems to be in a faster revival mode than potash right now. Mosaic is even expecting record phosphate shipments for the full year. Its innovative fertilizer product, MicroEssentials, has been a hit and could play a key role in pushing up the company’s revenue in 2013.
Record-high crop prices and in-place crop insurance programs have encouraged many to expect high (even record) farm income this year followed by an increase in demand for nutrients. Whether Mosaic echoes the sentiments will be interesting to see. Stay tuned as I give you reasons that make, or do not make Mosaic the perfect long-term bet. The best and easiest way to do it is by adding the stock to your personalized stock watchlist. Click here to add Mosaic.
Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool owns shares of CF Industries Holdings. 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.