Agribusiness stocks that provide fertilizer and other chemicals to farms are getting pulled up by the roots this morning. The biggest potash names on Wall Street including Mosaic (MOS), and Potash Corp. (POT) are all down by double digits in pre-market trading, and Agrium (AGU) was set to open Tuesday solidly lower, too.
The broad-based Market Vectors Agribusiness ETF (MOO) is down too, but its diversification has kept it to “only” a roughly 6% decline so far. And related agricultural plays like Monsanto (MON) and Syngenta (SYT) are down in sympathy, but not overly so because they are not direct players in potash.
The inciting news was Russian fertilizer giant Uralkali predicting increased global competition that cuts potash prices by $300 per ton by year’s end — but that the chemical giant will run at full capacity anyway.
In other words, there will be increased competition and a glut of supply that is sure to result in a race to the bottom in pricing … not good.
Couple that with the fact that natural gas is a key part of the agricultural chemicals business and that gas prices are on the rise, and you have a recipe for disaster.
Potash, Agrium and Mosaic were big momentum stocks during 2007 and 2008 as the economy was humming along and inflationary pressures of a weak dollar were propping up commodity prices. Farmers were seeing record prices for crops, and thus were buying potash and other fertilizers at a brisk pace.
Then the bottom fell out of the commodities market. POT stock, for instance, went from $77 to $17 in six months.
If you were burned by agriculture stocks in 2008, don’t fret that this is another meltdown of epic proportions. However, it’s worth noting that these declines are certainly part of a larger downtrend, with ag stocks already in the red across the past 12 months despite a big rally for the broader market.
Some will say the damage here might make these picks attractive, since the world is going to keep eating corn and soybeans and the valuations of these picks are now pretty darn cheap with soon-to-be single-digit P/E ratios for Potash, Mosaic and Agrium.
But don’t try to buy the dip here. There are serious headwinds on input costs, demand and margins. Yes, these picks will stay profitable and stick around for some time … but given the opportunity elsewhere on Wall Street, why mess with this sector?
- Details of the Uralkali warning on potash. (MarketWatch)
- How natural gas affects these stocks. (Market Realist)
- Of course, the increasing demand for food worldwide makes a compelling long-term argument for these picks. (CGAIR.org)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.