It was just about 10 months ago when Jill Malandrino and I put together an article on the fertilizer group, our best idea for 2012. We followed up with a webinar a few months later detailing our trade ideas (check out the link below). For the most part they did NOT disappoint, the group having performed far better than the SPX 500 and in the top 10% of other sector performers. Of course, this is not the sexiest group - this is not Apple (AAPL), Ralph Lauren (RL), Google (GOOG) or even McDonalds (MCD). However, we don't really care much about looking good (or smelling good for that matter -- fertilizers have a very heavy stench), rather it's about finding the best ideas that make us money. Fertilizer names have been strong in 2012 (and there is probably more to come before year end) and we look for that performance to continue in 2013.
The big news early summer of course was the weather. Severe drought conditions caught farmers off guard and crippled an already tight crop of grains. Corn levels ended at multi-year lows while soybean and wheat prices were elevated due to low inventory levels. The rains came later in the summer courtesy of some hurricanes but it was too late to make a difference. Farmers with any decent crop at all will get top dollar - corn reached near record highs over the summer. We expect to see farmers plant heavily into the 2013 season and hopefully they will see a better climate.
Demand for grains remains robust worldwide. China, India and other Asian countries consume more grains per capita than any region in the world. Feed is in enormous demand. Farmers will meet the demand but what will deliver the best crops is the addition of fertilizer. Historically, we have seen huge demand for fertilizer in the spring time, companies such as Mosaic (MOS), Agrium (AGU), Potash (POT) and CF Industries (CF) ramp production this time of year and coupled with the usual long term contracts from China and India have a good feel for pricing their product. Pricing for 2012 has been strong even as inventory levels were elevated early in the year.
2013 should see no different but what may change for these companies are inventory levels. In 2012 MOS and POT talked repeatedly about holding tight inventories after they were left with huge supplies when demand was light in the first part of the year. We expect this to keep pricing levels elevated and tight as lead times are shortened.
Key themes going into the end of the year and into 2013 will be India, China and application. Signed contracts with China and India won't necessarily translate into upward earnings revisions, but they could eventually lead to sharper decline in inventory drawdowns which could limit further price declines; and 2) farmers opting to fully maximize potash application despite soil tests that might indicate otherwise. And speaking of revisions and earnings, even at the levels most of the stocks are trading out now, there is still a good 15%-20% upside to consensus price targets as well as ours.
Our best plays for the next year include MOS, AGU and CF -- all three near annual highs so far. Jill and I will talk at length about these names, trade setups and other ideas during an exclusive webinar next week, October 10 at 6pm EST. Don't miss it!
As a refresher, here is the replay from our first webinar in May detailing our thoughts on the fertilizers. CLICK HERE FOR THE REPLAY.
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