With stories of the widespread U.S. drought in the news every day, have we missed the big move in fertilizer stocks? Or is this just beginning of a huge bull run?
When the weather turned from bad to worse in early June, investors began to stock up on fertilizer. In just a month and a half, names including Mosaic (MOS) rose 21% and Potash (POT) jumped 15%. Despite the recent gymnastics, these stocks have not been great investments. Year-to-date, the group is up less than 5% and on a year-over-year basis, these names are down anywhere from 20% to 25%. But I don't think the run is over. I think Potash can reach $60 (a 36% increase) and Mosaic could get to $70 (a 27% pop).
According to the U.S. Drought Monitor, about 56% of the U.S. is experiencing drought conditions and there is little, if any, relief in sight. Since the U.S. Drought Monitor began keeping records, the previous drought record was 2003, when 54.79% of the lower 48 states were experiencing drought. According to the Department of Agriculture, approximately 30% of the U.S. corn crop is in poor condition. Indiana and Illinois have been particularly hard hit -- 60% of Indiana's corn crop is ruined and almost half of Illinois crop is in very poor condition. The poor condition of not only corn, but also soybeans, almost guarantees higher food prices later this year.
While the stocks have been terrible buy-and-hold investments, they have made great trading vehicles. Since fertilizer prices have become unpredictable -- due to oversupply and fluctuating foreign demand -- dealers have been reluctant to hold much inventory. The current period seems to mirror the 2010-planting season. As the sun baked the Midwest and corn crops died, prices rose. Farmers from unaffected areas rushed to buy fertilizer to take advantage of the higher corn prices. The stocks began moving up by July. By February 2011, POT shares had doubled from its summer low. During the same time frame, MOS shares rose 125%.I think the current situation is similar to the summer of 2010. Potash inventories peak in May and June and decline all summer. By fall, dealers are out of stock and prices are high. Because of high demand, producers jammed through a $50 price increase per short ton in early September. Although dealers have more inventory this year than 2010, I think the drought is much worse than 2010 and corn prices will continue to move higher.
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