Fertilizer ~ market folly

Friday, July 18, 2008


UBS is either still behind the times or they have finally started creating earnings models that are at least somewhat accurate. Only reason I point this out is because they have raised price targets on Potash (POT) and Agrium (AGU) yet again. Just last month, UBS raised its price target on Potash from $250 to $285. Then, today (not even a month later), they are out raising their price target on Potash from $285 to $320.

Additionally, a month ago UBS raised the target on Agrium (AGU). They raised its price target on the stock from $95 to $118. And, not even a month later, they are out boosting price targets today on the name again, this time from $118 to $130.

So, in 2 months time, UBS has raised POT's price target from $250 to $320 and AGU's price target from $95 to $130.

Clearly, some people (analysts, ahem) have been underestimating the true pricing power the fertilizer names have. Very limited supply + very strong demand = fertilizer company pricing power. Its really a simple concept, yet analysts and investment firms are just now latching on to the true potential these producers have. The prices simply keep going up because there is huge demand for it worldwide. Not to mention, an already limited supply becomes that more valuable because new supply cannot be brought to market for years (2012-2015) due to how long it takes to bring a new potash mine online.

Combine all of the above with the fact that these fertilizer companies are now selling potash to Asian buyers at a spot price of $1000 per tonne and you've got a huge recipe for success. Even with a slumping American economy and an overall bear market, there are bright spots to be found. Use any weakness in these names to add (or establish) your position.

This is the definition of secular growth.


Jeff said...

I saw that news about the $1k/tonne. I'm almost as bullish as I was, last year before the news about the deal signings in india/china. And it's nice to see the stocks have pulled back. As for pricing power, perhaps they are actually applying econ 101 to their analysis on elasticity of supply and demand.

market folly said...

haha yea no joke re: econ 101. taken analysts forever to just get back to the basics

Anonymous said...

Hey.... did you see the article on Seeking Alpha re: The Ag Boom Goes Bust

What's your take? How much lower before you get nervous?

market folly said...

no i didnt see it but just glanced at it since you mentioned it.

i'm not nervous simply because i have stops in place, well below the 200 day ma. i'm in this for the long term. only reason i will exit is if i see a material shift in demand or change in underlying fundamentals.

market folly said...

we'll see here in the next few days after MOS and POT's earnings if input costs are materially affecting things.

keep in mind that next quarter as well will have much lower nat gas prices for inputs as natgas has come off quite a bit in the past month.

Anonymous said...

MOS..... double bottom forming? What's your take?

market folly said...

i think you're focusing too much on near-term price movements. if you're going to trade MOS trade it. I'm invested in it... only concerned about longer term price moves. buy on major dips, sell on new highs.

POT's quarter and guidance was awesome... MOS should be much of the same when they report.

Anonymous said...

I bullish on MOS. Looking for a good earnings release coming up.