As reported from Reuters, the CEO of Potash has recently stated that he believes that the next five years could be "the greatest period of growth" for the company in its history. He goes on to say: "We have a lot of pricing power. We're nowhere near peak pricing." Given recent fertilizer price increases, demand, and stock price activity, this certainly seems like a bold statement. As seen in the daily and weekly charts below (from stockcharts.com), the price activity for Potash has been outstanding. The weekly chart shows a nearly perfect 45 degree line uptrend for both the weekly price and its 50 and 200 week averages.
Charts like this are both exciting and scary. While the chart looks good technically, logic tells us that what goes up must surly come down - or at least take a breather. While not apparent on the weekly chart, the daily chart does show some consolidation before moving back up, albeit somewhat volatile. If the stock can hold above the $210-215 level, then investors may have a little more confidence that the uptrend will continue. Recent comments from the Potash CEO should certainly help provide some short-term buying interest in the stock. If he is correct, and fertilizer prices truly are going up and demand does stay strong, than Potash and its competitors (Mosaic and Agrium) should continue to outperform.
Rainfall has been over 3 times the normal amount in the Midwest the last few weeks, with more rain on the way. The heavy rains are affecting corn and soybean yields, with just 74% of corn emerged from the ground, and only 32% of soybeans emerged. Farmers are now at a point of needing to make a decision of whether to take the Government subsidized crop insurance and keep the ground idle, or plant and take the risks of lower yields, which could be potentially as low as 75% of normal yield levels. As much as 500,000 to 3 million acres may become idle. Analysts are already cutting corn crop yields by 4 bushels per acre. As ethanol production continues to increase, expect corn prices to rise, with consumers feeling the effects at both the pump and in the grocery store.
Companies to watch that may be impacted include Archer Daniels Midland (ADM) and Bugne (BG). Others that are likely to continue to benefit from rising demand for food commodities include fertilizer companies such as Mosaic (MOS), Potash (POT), and Agrium (AGU), chemical and seed companies such as Dow Chemical (DOW) and Monsanto (MON), and agricultural machinery makers such as Deere (DE). On the direct downside are the users of corn, especially the restaurants and food producers with lower margins and less pricing power, such as Darden (DRI) and Tyson Foods (TSN).
Recently there has been a lot of discussion as to whether the run-up in commodity prices is a bubble or not, or whether there is a fundamental factor at work, primarily a sustainable supply-demand imbalance.
A recent WSJ survey found that 51% of those surveyed said that demand from China and India was the prime factor for high energy prices, with 41% blaming demand for rising food costs. Supply constraints were listed by 20% as causing higher food prices, while 15% felt that supply was resulting in higher energy prices. Only 11% felt that a speculative bubble was in the works.
So what should we take of this? Those surveyed felt that the supply-demand imbalances were the major cause of higher commodity prices, and not speculation. Furthermore, demand is driving the growth and higher prices, and not simply lower supply. This is something often debated, but those surveyed felt differently on average - we have enough for now to go around, people are just demanding more of it. This makes sense to me, given that China and India are continuing to increase their energy needs to grow their economies and increase the standard of living for their citizens. This higher standard of living is putting further pressure on food commodities, no only to consume directly, but also to feed livestock as the demands for protein-based foods increases in these areas of the world. Supply may eventually become more of an issue, but demand appears to be driving prices.
As with any survey of economist and analysts, there were "two-handed" inconsistencies. The same survey group felt on average that the price of crude oil would fall to about $105 by the end of next month, and to about $93 by the end of 2008. Demand is high, supply in check, but prices will fall? Possibly, and this course is the argument surrounding the falling dollar. But this is not what the responses feel. Only 15% believed that currency (i.e., dollar woes) were causing higher energy prices, and only 7% felt they were contributing to higher food prices. This is somewhat surprising given the amount of talk recently about how weakness in the dollar is contributing to the high cost of crude oil, with some estimates showing nearly 50% of recent price increases resulting from the falling dollar. 
In the end, even with the discussions of crude oil prices being too high, and pronouncements of $150-$200 a barrel prices in the next 6-24 months (bringing back images of Internet valuation calls in the late 1990s - where a yearly price target was raised one day, only to see the stock move to that new level a few days later), it is still difficult to foresee a complete collapse of commodity prices, at least a sustained collapse over the long-run. Will there be sell-offs and short-term corrections? Yes. Will there be volatility? Absolutely. Will there be adjustments as the dollar strengthens? Most likely. But will there be a total collapse in demand? It is doubtful. Demand destruction is always a worry, but people will always want to eat, and emerging countries will need energy to continue their growth, just as the United States has in the past, and will continue to in the future.
So as commodity investors, in particular energy investors, what do we do? The safer investments may still be in the "consequence" plays, i.e. the seed and fertilizer companies for the food commodities, and natural gas for the energy plays. The Potashes of the world still have tremendous demand and pricing power. Natural gas, while also having a nice run-up recently, is still trading at a lower BTU multiple than crude oil. Using historical comparisons, natural gas still has room to move to the upside, even with crude oil leveling off. If crude reverses its upward trend, this lower than historical multiple may also cushion the fall of natural gas if crude oil was to begin selling off.
The moves in energy have no doubt been sharp, and the prices do seem high, but this may in fact be the issue that we struggle with when considering investments in commodities. We have not seen $125 crude oil before, and the recent spike does seem over-extended, so it certainly seems scary. Of course, if crude oil was a stock, and the company had the same level of demand, pricing power, growth forecast, future supply issues, and strong technicals, many of the same investors might be jumping into the stock, while at the same time shying away from crude oil. Of course, commodities and stocks are very different animals, and stocks also top and end badly, or at least have large corrections, even for good companies (i.e., Google), but the analogy is not totally lost. The key is to eliminate the emotion as much as possible and examine the fundamentals and technicals for what they are. When they change, they change - and this could happen today, tomorrow, or next year. But when they are in place, they are hard to ignore. Right now they look pretty good.
Tickers: POT, AGU, MOS, MON, UNG
The market is at an interesting inflection point. Wednesday gives us a the ADP Employment report, the GDP report, and a Fed rate decision. In the mean time, there is a move into tech from dollar related equities and commodities, such as the agriculture plays, energy plays, and large cap internationals (that may see a wash for any Fed cut - dollar move). Finance and market geeks love this kind of stuff, even though the hours and even days before can get kind of boring as the market waits for the Fed news. Given that GDP and an employment report are also coming out beforehand, and that the market has been doing some sector rotation in advance of the Fed decision, things have at least been a little more interesting, and somewhat of a preview of what is to come.
Up first will be the ADP Employment number, which while sometimes predictive of the Friday jobs number, has also been a somewhat unreliable indicator. The market is expecting a -60,000 loss.
Next will be the advanced GDP report for Q1. The market is expecting a 0.5% value for GDP. Given that is number can be "inflated" a little, it will be important to dig into the details. Since recessions are defined by two negative quarters of GDP, there is certainly interest in having a positive GDP, even if small. It is not that the number will be faked, but high inventories in particular can cause the number to look better than it actually is. High inventories affect the calculation by raising the number, but as any business knows, excess inventories is not usually good. Not only do they cost more to insure and store, but just because an inventory item is complete and ready to sell does not mean it will translate to accounts receivable anytime soon while it sits on the shelf. Economist, and the market, will be watching the inventory levels.
Later in the afternoon we will get the Federal Reserve decision. The Fed Fund Futures are pricing in a near certain chance the Fed will cut by 25 bps. Anything more would certainly not send a good signal. No cut, and probably even a 25 bp cut with a tightening bias would be bullish for the dollar, and subsequently negative for those stocks and commodities that have benefited from the lower dollar - such as agriculture plays, energy plays, and large-cap industrials with large international exposure.
Of additional interest in the Fed announcement will be the number of dissenting votes, if any. The money market futures are already pricing in rate hikes next year, so chances are there may be some dissent if we get a cut, as with the last few meetings. What may bring everyone to the table in agreement is a change in bias - allowing the Fed to further highlight that the tide has changed.
As already mention, the market is anticipating an end to the rate easing cycle. Combined with the recent Barron's article discussing how the dollar may have finally hit bottom, traders have already begun to cycle out of commodities, which have run-up considerably since the beginning of the year, and into select technology stocks that have recently reported good earnings and/or have given good guidance.
Put options on the USO crude oil ETF have also been increasing, with 2/3rds on the short side, while the DUG Ultrashort oil ETF has seen triple normal volume. While a long shot, recent chatter in Washington about the problems caused by Ethanol could cause the bottom to fall out further for the soft ag commodities, although that may be expecting too much in an election year. Commodity related stocks, such as Deere have sold off, while the fertilizer companies, such as Mosaic, Potash, and Agrium are also correcting after recent parabolic moves. Nonetheless, downward moves might be short lived if demand for grains continue to increase, regardless of Fed decisions and dollar moves. Crude oil and natural gas will also see demand and supply pressures, with crude seeing some of the dollar premium taken out as the Fed begins to tighten, or imply an end to easing. Of course contrarians may be smiling, given how the increased short positions in oil could go badly for the longs if the market does not get what it wants.
Only time will tell. It should be an interesting summer, regardless.
Tickers: AGU, POT, MOS, DUG, USO, DE
Intrepid Potash raised $960 million in an IPO priced Monday, with 30 million shares going out at $32 per share. The final price was $3 above the top of the expected range of $27 to $29, which itself had been raised. The stock traded up over $50 a share for a short time today (as of posting time). Intrepid Potash (IPI) accounts for about 1.5% of global potash production. Potash (POT) is also up over 1% today, although Agrium and Mosaic were relatively unchanged, and slightly down (again, as of post time). Potash, Agrium, and Mosaic are each having a simply parabolic April. It will be interesting to see if IPI will join them, or mark a short or longer-term top. Relative strength for each is pointing for a correction, at least short-term.
Ticker: IPI, POT, AGU, MOS
Mosaic Q3 net income increased to $520.8 million from $42.2 million, while revenue is up 68%. Sales increased 68% to $2.15 billion from $1.28 billion. Mosaic recently announced a long-term potash capacity expansion in Saskatchewan, Canada.
As a side note: An analyst on CNBC, discussing the Mosaic numbers, recommend Compass Minerals International (CMP) as another play in the area, in addition to Potash and Agrium.
Tickers: MOS, POT, AGU, CMP
The U.S. Department of Agriculture is estimating that U.S. farmers will plant 8% fewer acres of corn this year. Farmers are shifting to higher-priced soybeans (us 18%) and wheat (up 6%). The journal is reporting that "A smaller corn crop is good news for farmers who could reap $6 a bushel this season, up from around $2 a couple years ago, if prospective corn acreage remains at the forecasted level and if a soggy spring keeps farmers in the Corn Belt out of the fields until later in the season."
In a previous post we mention how rain could caused soybeans to be planned instead of corn since they can be planted later. As such, the long corn, short wheat spread is still in play. As expected in the market, the seed and fertilizer companies are doing well, while those that need corn, such as the food producers, are taking a hit. Ironically, the ethanol companies are also finding margins squeezed as their feed-stock cost increase. Maybe Washington will final see the current folly of putting corn in our tanks, and not in our stomachs.
Agriculture Tickers: MON, POT, MOS, AGU
