Are Fertilizer Companies Set to Rebound?

Potash Corp. of Saskatchewan [[POT]], The Mosaic Company [[MOS]], Agrium Inc. [[AGU]] and other fertilizer producers may be sitting near their 52-week lows, but many experts insist that demand for fertilizers will rise when the credit markets are expected to improve over the next year. So, what’s the best way for investors to play these stocks going forward?

The unprecedented reduction in fertilizer use by farmers on a global basis comes largely as a result of the lack of credit. Many farmers are unable to obtain the credit needed to purchase fertilizer while others are holding out until the last second for fire-sale prices. Meanwhile, international demand has dried up thanks to a perfect storm of events – a drought in Argentina and the freezing of credit markets in Brazil and Russia.

The result had been disastrous for fertilizer companies in the fourth quarter of 2008. Nitrogen sales fell 20 percent while potash and phosphate sales declined nearly 50 percent. However, the three companies insist that the trend is demand deferral rather than demand destruction – that is, the sales will come back strong when the markets improve. The only demand destruction was seen in corn, which fell due to lower oil prices.

Many experts agree that nitrogen prices may have hit their lows as demand for the farmer’s choice fertilizer is expected to rise ahead of the growing season. Meanwhile, potash prices actually moved to a record high of $872.50 per ton at the Port of Vancouver for overseas sales. Regardless, the stocks themselves seem to correlate with corn and oil demand rather than their financial results. As a result, investors may have to wait for a recovery in these commodities before the stock soars.

One way for investors to buy into these stocks now at a fraction of the cost is through buying long-term options called LEAPS. These options provide investors with all the upside of the underlying stock at a fraction of the upfront cost. The result is a leveraged position – lower cost for the same gains – with less money at stake to lose in the event of further price erosion. The trade-off is that, if the price drops below the strike price, investors could lose their entire investment.

See “Using LEAPS as a Stock Substitute” for more information on this strategy or check out our new e-book, Trend Trading on Steroids, for our preferred strategy using LEAPS to profit off long-term trends.

Fertilizer Companies See a Greener Future

Potash Corporation of Saskatchewan (NYSE: POT), the Mosaic Company (NYSE: MOS), and Agrium Inc. (NYSE: AGU) may have been popular stocks last year, but they aren’t faring too well in today’s down economy with all three names trading well off of their 52-week highs. However, many investors believe that the trio is overdue for a recover amid continued strength in pricing despite lower volumes.

Demand for the fertilizers made by these three companies is driven by crop prices, which are currently at high levels thanks in part to ethanol production. However, a lack of growth in demand has forced all three companies to make substantial cuts to their 2009 output. Unfortunately, this is bad news for profits if margins remain the same, but the companies are hoping to raise their prices to compensate.

Demand is also expected to pick up in the middle of 2009. Potash CEO Bill Doyle said in a statement that, “We see demand accelerating through the balance of the year as farmers deplete existing stocks and work to rebuild global grain inventories from extremely low levels … We will have the capability to ramp up production in 2009 as necessary to meet demand.”

Potash, Mosaic, and Agrium are also currently in negotiations with China on prices and volumes for 2009. The prices negotiated with their joint international marketing unit, Canpotex Ltd., will help set a expectations for investors going forward. However, shares have already rallied substantially on speculation that the pricing will be higher than the market is expecting.

Investors looking to take advantage of the potential bullish trends in these three stocks may want to take a look at long-term options called LEAPS (or long-term equity anticipation securities). LEAPS work just like a normal stock option, but do not expire for 1 to 2 years out in the future. As a result, long-term investors can pay a fraction of the cost of underlying shares for the rights to buy at a certain price.

See “Using LEAPS as a Stock Substitute” for more information.