Thursday, April 22, 2010

Barron's: "Consider Plowing Into Fertilizers" and "Use Options to Bet on Fertilizer Stocks" (AGU; MOS; POT)

A Barron's down on the farm twofer.

Credit Suisse likes Potash Corp. of Saskatchewan and Agrium.

Credit Suisse

BASED ON OUR FARM TOUR through Illinois and Iowa earlier this month, we came away feeling that market concerns in the fertilizer industry are overblown, and recommend that investors take advantage of the recent weakness in the fertilizer sector. Farmer willingness to return to normal fertilizer-application rates should drive solid demand for the spring, and fertilizer prices are likely to edge higher as spring planting gets under way.

Farmers are optimistic based on supportive crop prices and reasonable fertilizer costs. At current December corn futures prices of $3.80 to $3.90 per bushel, farmers remain highly profitable and intend to apply normal, and in some cases above-normal, amounts of fertilizer given supportive crop prices, the relative attractiveness of fertilizer prices compared to last year, and the need to catch up for last year's reduced applications.

Retailers are stocked for first inventory turn but remain cautious. Retailers are comfortable with the current level of fertilizer prices and their ability to pass them through to farmers but would prefer to end the spring season empty given the large inventory writedowns experienced last year. Retailers told us that they have stocked up for about half of their normal fertilizer needs for the spring, which is enough for the first wave of demand by farmers, and they will wait to draw down their inventories before ordering more.

Seed dealers and retailers indicated that selling Monsanto (ticker: MON) seeds was a struggle this spring season. Farmers were uncomfortable with the premium price points being charged by Monsanto, given the lack of substantive yield data on the new Roundup Ready 2 Yield soybean varieties and SmartStax corn hybrids. Competition remained fierce by major seed producers like Pioneer [a unit of DuPont (DD)] and NK Seeds [sold by Syngenta (SYT)] as well as smaller regional seed companies. Farmers that we spoke to believe that Monsanto likely has the better technology but want to see proof before more fully adopting Monsanto's products....MORE


Iceland's active volcano could help shares of Potash and Mosaic.

SHARES OF U.S. FERTILIZER PRODUCERS P otash Corp. of Saskatchewan (ticker: POT) and Mosaic (MOS) have declined more than 15% from their March highs, primarily because grain and nutrient prices have been flat to lower.

This weakness has occurred even though the spring planting season is just beginning and nutrient inventories remain historically lean.

Meanwhile, although knock-on effects of the volcano eruption in Iceland are difficult to quantify, a number of linkages suggest at least a temporary effect on agriculture that may benefit U.S. fertilizer producers.

With Potash and Mosaic both oversold technically and flirting with support at their 200-day moving averages, we believe this confluence of factors will drive shares higher in the intermediate term.

We recommend positioning for both stocks to appreciate toward the high end of their respective ranges over the past several months via bull call spreads.

The bull call spreads are established by purchasing the lower strike options while simultaneously selling the higher strike options, with the maximum gain being the spread between the two strikes.

In Potash, the June 110/120 call spread is offered at $3.00 and makes a maximum of $7.00 with the stock 120 or higher at expiration. In Mosaic, the June 55/60 call spread is offered at $1.18 and makes a maximum of $3.82 with spot 60 or higher at expiration....MORE