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Shares of fertiliser companies like Mosaic and Potash are down today after being downgraded by Citigroup’s PJ Juvekar.The gist: These stocks have had an incredible run, all the good news is priced in, and the economics at this point down’t encourage further fertiliser usage, even if crop prices get higher.
After a Great Run, a Pause to Refresh – fertiliser equities have been among the best performing stocks over the past eight months. Stock prices in our fertiliser universe have increased on average more than 100% since last July compared to a gain of ~27% for the S&P 500. We are not turning bearish on the fundamentals of the fertiliser cycle, which remain robust as we confirmed during our recent trip to Brazil. However, we think much of the good news is factored into current equity prices. realised fertiliser prices will improve as old contracts run off and more product is shipped at newly announced higher prices, boosting earnings. But this trend is reflected in high P/E multiples for the group. Lacking well-defined near-term catalysts, we see growing risk that the stocks could trade sideways into the summer. As a result, we move from Buy to Hold for both POT and MOS.
High Grain Prices Spurred Application, Diminishing Returns Ahead? – While grain prices remain firm, there is a diminishing impact of increasing farmer income on fertiliser application, in our view. When corn moved from $3.50/bu to $7/bu, there was ample incentive to invest in more fertilizers to improve yields. At current corn prices, growers are incentivized to apply all the fertiliser they need to boost yields. If corn prices rose from $7/bu to $8/bu, farmers may not apply even more fertiliser. The incremental dollar may be invested elsewhere, such as in new machinery or land. Land prices in key cornbelt states are rising at a double-digit rate and expectations for further increases have risen sharply.
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