October 9, 2008
Party may soon be over for high US fertiliser prices
Farmers could soon see a respite from high fertiliser prices as Mosaic Co. one of the two largest fertiliser makers by sales, warned last week that phosphate prices were leveling off, causing its stock price to plunge immediately after.
The company''s stock has also been halved from a high of US$160 in June to close at a pitiable US$35.75 yesterday. Still, this would be closer to its price level at the same time last year of US$60 and similar to its pricing in June 2007, before its stock skyrocketed.
The sell-off came despite the company''s report of robust fiscal first-quarter earnings growth. Mosaic said fiscal first-quarter earnings almost quadrupled to US$1.18 billion.
Phosphate contributed more than half of Mosaic''s quarterly
revenue of US$4.32 billion.
Mosaic expects the average price of phosphate to be around US$1,020 to US$1,080 a tonne, similar to US$1,013 this quarter, after a series of price increases last year.
In response to an "excess" of phosphate on the market, Mosaic, the leading producer, reduced its production and raised its projection for sales volume of phosphate for the year.
Investors previously has had great expectations of the sector. Analysts are now comparing the fertiliser sector to the technology bubble in 2000, when investors flocked to technology stocks only to exit en-masse when the bubble burst.
Farmers could not bear the weight of ever-increasing costs forever, especially as
grain prices fell by nearly half in recent months and credit tightened.
In fact, the agricultural sector may have suffered a more severe beating from the stock market than the now-famous financial companies themselves.
Stocks of the other giant
fertilizer maker, Potash Corp. of Saskatchewan (POT) also saw its stocks nosedive from a high of roughly US$237 in June to a low of US$86.86 at the close of Oct 7.
Even the vaunted seed- processor
Monsanto Co. (MON) was 41 percent below its high even as it again boosted its fiscal-year outlook.
The first signs of trouble came last week, when Citigroup warned that the price of urea, another grade of fertilizer, had fallen sharply.
Inventory got a bit full, Mosaic Chief Financial Officer Larry Stranghoener conceded.
The news, coming together with the overall falloff in commodities prices, caused buyers toremain on the sidelines and not make new purchasing commitments, he added.
Despite recent selloffs, Stranghoener said a sharp drop in grain and oilseed prices is unlikely and therefore the company''s business would not be affected.
"We believe the long-term fundamentals for agricultural economics are excellent. There''s still not enough
food in the world," he said.
Still, at least one ratings agency was not convinced. Merrill Lynch cut its investment rating on the agricultural chemicals sector because of signs of weakness in phosphate and potash.
Merrill also warned "a global recession, particularly in Asia, represents a risk to
corn prices, as it could lead to reduced demand growth."
Citigroup chief US equity strategist Tobias Levkovich, dismissed the bullish argument on agricultural stocks since prices depended on supply and demand. When demand falls off, there is abundant supply and prices fall.
Still, Mosaic insists that price increases for potash will continue.
For the current quarter, Mosaic projects an average potash price of US$560 to US$620 a tonne, up from the previous quarter''s US$488.
Analysts are skeptical about potash prices rising when phosphate prices are levelling off since both are used on the same
crops.
Apart from investors'' selloffs in commodities and agricultural stocks and the fact that farmers are finding it increasingly hard to get loans in a tight credit market, a potential bombshell has yet to drop - Farmer Mac (Federal Agricultural Mortage Corp), the cousin of Fannie Mae and Freddie Mac which helped farmers buy land, is said to be in trouble in the stock market.
Farmer Mac faces heavy losses due to huge holdings that have lost value, including preferred stock of Fannie Mae, which was seized by the government last month, and Lehman Brothers Holdings Inc, the collapsed investment bank.
If Farmer Mac was unable to raise capital, its regulator, the Farm Credit Administration, could downgrade its rating for the first time in its history, which would affect its ability to make new loans.