Potash: Will there be growth in fertilizers?
Fertilizer stocks are at their cheapest valuations in 2 years.
Fertilizer stocks should be major beneficiaries of a rally in agricultural sector equities later this year. In fact, declines in the past year have reduced valuations to levels last seen more than two years ago.
At these levels, fertilizer stocks are more than pricing in the recent decline in agricultural commodity prices, and further downside appears limited unless there's a new global recession.
Potash Corp. of Saskatchewan (POT) is our top pick among fertilizer stocks because it offers exposure to three major crop nutrients: potash, phosphate and nitrogen.
The company controls nearly a quarter of the world's total potash mining and production capacity and is by far the largest player in this market.
The potash market is an oligopoly, with the six largest players essentially controlling the market. These companies have proved adept at managing supplies in recent years, maintaining pricing and margins by shuttering production facilities following declines in demand. And Potash Corp.'s mines in Canada are among the lowest-cost sources of this key fertilizer in the world.
The company suffered a weak fourth quarter, as Asian demand slowed and dealers and distributors delayed new orders because of economic uncertainty. However, management suggested that despite a decline in its fertilizer sales during the fourth quarter, actual applications of fertilizer by farmers remained strong, an indication that producers and distributors have been drawing down their inventories.
The U.S. Dept. of Agriculture raised its estimate of last year's corn crop in recent months, but poor growing conditions throughout much of last season stressed crops and hurt yields.
Farmers are expected to aggressively plant acreage this year in an effort to offset that showing. The company expects this to lead to more robust sales as the year progresses and dealers restock their inventories.
The bad news about near-term potash demand appears to be baked into valuations, and Potash Corp of Saskatchewan should be bought at current levels.
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