After Fertilizer Blowup, Look for Ag Bargains
A horrific drop in certain fertilizer company shares this week reminds us that investing in agriculture stocks can be a tricky proposition, even when the world’s food consumption is rocketing higher. Those quick 20%-plus declines in shares of companies like Potash of Saskatchew (POT), Mosaic (MOS) and Intrepid Potash (IPI) could be a blessing for shareholders in certain other ag equities.
The sharp declines followed a plunge in the price of potash, a key fertilizer ingredient produced in abundance by Saskatchew, Mosaic and Agrium (AGU). (Intrepid is a much smaller player.) Those three giants dominate the North American export market through the partnership Canpotex, and they split about 70% of the world’s market with the Belarusian/Russian consortium Belarus Potash Co. Together, Canpotex and BPC have long controlled potash prices in much the same way OPEC dominates oil prices. BPC effectively announced dissolution on Tuesday when its largest partner, Russian company Uralkali, said it will pull out of the partnership. Potash prices are expected to fall some 25% as Uralkali tries to gain market share, which isn’t good for the broader agriculture ETFs either.
Much of the agriculture sector got hammered by the surprise, and investors might want to take the opportunity to look for bargains. Falling fertilizer prices are actually good for many companies that rely on strong planting seasons, and the cheaper price of growing crops encourages farmers to plant more.
Monsanto (MON), for example, makes vastly more money in genetic seeds than anything to do with potash. It’s also one of the most highly recommended stocks around, commanding some 16 buy recommendations among the 22 analyst who follow it. Tractor maker Deere & Co. (DE) is on sale now with a forward PE ratio below 10 and a 2.5% dividend yield. CF Industries (CF) produces nitrogen-based fertilizer. Activist investor Third Point jumped into it earlier this week to push for a larger dividend. Agrium will be hurt by lower potash prices, but it actually produces more nitrogen fertilizers.
Of course there are other possibilities, and any investment will take more company research and investment analysis. Prices of corn, soybeans and the other products farmers sell will influence their enthusiasm for bigger fields as much as the cost of fertilizer. Valuations among companies in the sector vary widely.
Agriculture is a difficult sector play. As individual companies though, there’s still a lot for investors to like about companies in the business of feeding a growing world.
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at firstname.lastname@example.org. You can also request a demonstration of YCharts Platinum.