Holding the line at 200-day moving average during record harvest, plantings
What was looking like a bold recovery in Potash (NYSE: POT) shares this year has turned into a cliff-hanger for investors as the stock has made its way all the way back down near its 200-day moving average, which sits just below $105. While other big agricultural names like Archer Daniels Midland (NYSE: ADM) and Monsanto (NYSE: MON), and even fellow fertilizer specialist Mosaic Company (NYSE: MOS), are already deep in their own bear markets, it’s a good time to look at the fundamental and technical pivots that may make POT move one way or the other from the 200-day moving average cliff.
The downgrades of POT and MOS by Goldman Sachs last week had several points about grain fundamentals in their rationale. According to Jared Levy’s article on April 14th, Goldman analysts cited “weak volumes, weather-related planting delays, rising input costs, and lower corn prices. They lowered their 12-month price target on POT from $131 down to $123.69 and targeted it at a 16x p/e multiple.”
Levy wrote, “GS goes further to say in the report that they believe potash prices have bottomed both in the U.S. and international markets. So they see slowing pricing momentum, but robust fertilizer demand? I have to question that logic, but I think I see what they are getting at – steady demand (maybe), and flat to moderate prices. Brazil seems to be the potential catalyst for a move higher in potash prices; they typically buy most of their volume in the second and third quarters.”
If I put some value on Goldman’s analysis (and I usually do when it comes to commodities), I would use their slight downgrade as a buying opportunity and a trading opportunity, looking for POT to hold the line at the 200-day moving average once again—even though this logic defies what I see on the charts. POT has been down here now at least four times since last July and stocks—or any instrument, for that matter—that flirt that much with their 200-day are just dying to go through it. Here’s a look at the volatility—and the trading opportunities—this name has given us for the past year.
Bumper Harvest, Incredible Plantings
Most analysts, myself included, talk about Chinese demand for commodities—in this case soybeans and fertilizer—when we make the fundamental arguments for a owning a stock like POT. But in the shorter-term, you also have to look at seasonal drivers in the grain markets themselves. And this year has two unique elements to watch.
First, South America is in the middle of a record harvest for soybeans, with production forecast at a record 54.5 million metric tons (mt) according to the Buenos Aires Cereals Exchange. That’s well over the previous record of 48.8 mt set in 2006-07. To date, only 44% of the bumper crop has been harvested and corn is also registering record yields with only 55% of the crop in. Wet or otherwise inclement weather is the major obstacle to realizing these harvests fully and that is why the prices of corn and soybeans on the CME Group grain floor will twitch accordingly as new ideas and estimates about supply get factored in and out.
Second, the North American planting season is believed to be one of the best in decades. With a “Goldilocks” amount of precipitation and warmth so far this year, farmers have been out in the fields early. This is another supply weight on both grain prices and fertilizer, as these markets tend to look out several quarters into the middle and end of growing seasons for what stocks and demand will look like....MORE