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Recently, record-setting earnings have been the norm for fertilizer producers, however, late last month the markets were roiled by a quarterly earnings report by Mosaic, the world’s largest phosphate producer, which showed that profits missed analyst’s earnings per share (EPS) expectations.
By Leia Toovey – Exclusive to Potash Investing News
Immediately, rising input costs were blamed on the shrinking margins. In a statement, Mosaic claimed that “the cost of sulfur and ammonia, two important materials used to make fertilizer, jumped 41 percent and 54 percent, respectively, between quarters.” When Mosaic’s earnings were made public, the fertilizer stocks as a whole suffered, with analysts concerned that shrinking profit margins would impact the entire sector.
Fertilizer production is very energy intensive, with production requiring significant amounts of sulfur, ammonia, and natural gas. In the past, rising input costs have eroded profit margins, but usually, an increase in prices of these required inputs is offset by an increase in the selling prices for fertilizers. Sometimes, though, producers can be “squeezed” in the time gap it takes for either fertilizer prices to follow rising input prices, or vice versa. Back in 2008, fertilizer producers grappled with rising input costs as the prices of, natural gas, ammonia, and sulfur, all necessary for fertilizer production, rose sharply, while demand for the nutrients fell as the recession hit the markets. Despite missing EPS estimates, year-on-year, earnings were up 77 percent, due to increases in potash and phosphate selling prices. A clear signal that fertilizer producers are rising in concert with rising input costs, therefore, the panic was a bit overdone.
Potash Corporation of Saskatchewan (NYSE:POT) is not concerned with rising costs, and actually anticipates improving margins over the near future due to an “economy of scale” in terms of potash production. The company has stated “With demand expected to rise, we believe our expanding potash capability provides a unique growth opportunity. The powerful levers of selling more volumes at higher prices, with the potential for lower per tonne operating costs, offer significant gross margin potential in the years ahead. Beyond the opportunity for margin expansion, the potential for lower per-tonne mining taxes and improved earnings from our equity investments provides significant growth potential.”
Traders more bullish on agriculture sector
According to data compiled by Bloomberg this month, traders have more bullish expectations for the agriculture sector, as a whole. Options traders are snapping up protection against declines in agricultural stocks at the fastest rate in four years. Puts to sell the Market Vectors Agribusiness exchange- traded fund outnumber calls 2.1-to-1, the widest gap in almost a year. The ratio has jumped from 0.74 on October 14 for the biggest increase since January 2008.
Investors poured $217 million into the agribusiness fund during the past month, the second-most among all US-listed global equity ETFs. The fund tracking 43 agribusiness stocks, including Potash Corporation of Saskatchewan and Monsanto (NYSE:MON) has rallied 13 percent so far in October. In September, it plunged by 17 percent.
Company news
The world’s largest potash producer by output, Uralkali (LSE:URKA), plans to increase capacity by approximately 80 percent over the next decade, to capitalize on growing demand for the crop nutrient. Last year, the company’s capacity was 10.6 million tonnes, and under the current expansion plan, will increase to 19 million metric tons in 2021. The company will meet its expansion goal by increasing capacity at its Berezniki and Solikamsk mines by 4.5 million tonnes a year and by adding 4 million tonnes of capacity through the addition of new projects. The price tag for the expansion plan is $5.8 billion, and funding will be from cash flow and loans.
Meanwhile, yesterday an antitrust watchdog opened a probe into Uralkali over increases in its domestic prices for potash, after receiving complaints from unidentified customers. The accusations are that the recent price increases do not correspond to Uralkali’s cost growth and there are signs that the prices are “monopolistically” high, the Federal Anti-Monopoly Service said today on its website. In response, Uralkali said it will provide full cooperation for the investigation. Earlier in the month, a class action suit alleging price fixing by the world’s top potash producers, including Uralkali, was tossed out of an US court.
Securities Disclosure: I, Leia Toovey, hold equity interests in Potash Corporation of Saskatchewan