WE'RE BUYING FOR SPRING, NOT FOR FALL
• We are initiating coverage of the major North
American fertilizer stocks. As a group, the Ag Science
(fertilizer, seed, and pesticides) stocks look attractive.
Among fertilizer stocks, we rate Agrium, PotashCorp,
and Terra, BUY. We rate Mosaic, and CF Industries
Neutral.
• Fertilizer Fundamentals Remain Strong, but Second
Half Disappointment May be Substantial. China
negotiations are likely to end soon, probably at a modestly
higher price given the pressure on food prices in China
(and the need to increase grain output quickly and
substantially), but elsewhere, credit and protein remain
big issues that are likely to keep fertilizer buying from
fully rebounding in the second half of the year. Brazil and
Eastern Europe in particular are likely to struggle with
farm economics (during the traditional low season in the
US). We expect the second half to disappoint even
reduced expectations in volume terms, but we do not
think that will hurt the stocks much – especially if crop
yields continue to disappoint. We think investors should
have exposure to fertilizer over the summer.
• In a Major Reversal, Nitrogen (N) Looks More
Attractive for Long-Term Investors, Phosphate (P) &
Potash (K) Look More Like Trades. Historically, N was
for hedge funds, and P&K were for grown-ups. But we
expect North American nitrogen producers to enjoy an
extended period of above-trend profitability, driven by
increased gas supply and lower relative costs. Relative
gas costs have been trending down, while incremental
demand for gas is likely to be higher elsewhere. While
energy and transportation costs may remain volatile,
North American producers are unlikely to move back to
high cost status, meanwhile, potash has become eventdriven,
and phosphate is struggling for credibility.
• Valuations Still Look Attractive, But Risk/Returns
Are Very Different. All of our covered fertilizer stocks
show enough theoretical price upside, but the risk/reward
balances are highly divergent. PotashCorp’s stock
valuation has become increasingly tied to one negotiation,
for less than a fifth of the company’s output - that gets
negotiated by somebody else. Investor expectations for
Mosaic are not generally high, but the record of earnings
disappointment is lengthy, and the company’s strategy has
become less clear. Agrium is in a better position than CF,
whether its bid prevails or not. CF is trying to grow
quickly and appears to be taking more risks along the