Over the past few years, the shares of fertilizer producers have been mixed. Companies such as CF Industries (NYSE:CF) that had implemented growth plans when the market was weak and had the luxury of falling input costs to dampen the blow of lower fertilizer prices have performed very well. However, companies such as Mosaic (NYSE:MOS) have performed poorly. It is leveraged to the prices of phosphates and potash, and with these prices falling, this decline went directly to the company’s bottom line.
Then last year the potash producers were dealt an enormous blow when Russian potash producer Uralkali decided that it was not going to abide by its agreement to limit production and that it would start to produce as much as it wanted. Being one of the world’s lowest cost producers Uralkali was in an enviable position insofar as it could do this without jeopardizing its profitability.
This move sent shares of global fertilizer producers down dramatically, although this turned out to be an incredible buying opportunity. Nearly a year later these stocks have almost fully recovered, and while it has had to claw its way higher, it appears as though the shares of Mosaic and its potash-producing peers have broken out.
Of the companies in this space, my favorite is Mosaic for a couple of reasons. The first is that Mosaic gets more sales than its peers from phosphate-based fertilizer products. Nevertheless, when the Uralkali news broke last summer, the stock was hit just as hard as its peers because all companies that produce potash were lumped together by short-sighted traders. Phosphate-based fertilizers are as essential as potash in improving crop growth, and yet unlike potash most global phosphate reserves are concentrated in one part of the world: Western Africa. As the dominant phosphate producing company in North America, Mosaic is positioned to benefit should West African supply dry up for whatever reason.
The second is that during the latter stages of the fertilizer bear market, Mosaic was making deals in order to expand its business. It was able to do this because it had saved up its cash during the boom in 2009 – 2010. Last year, the company bought CF Industries’ phosphate business. It also bought back a lot of stock over the past year or so. Finally, the company has been expanding in to South America — and in Brazil in particular — in order to develop a fertilizer distribution center there. This will make it the leader in one of the fastest growing global agricultural commodity exporters in the world, and the company will benefit enormously.
Given these points, I think Mosaic is probably the best positioned fertilizer company to benefit from the inevitable boom in the sector. While investors are worried about a potash glut, this is already priced into the market. Furthermore, there is no such glut in phosphates, and as investors begin to make the difference, they will see the potential in Mosaic shares. Finally, while agricultural commodities have been on a wild ride over the past decade, it has been generally trending higher as the amount of food needed to feed the world has been increasing with the global population. Eventually this will drive prices higher, and that will give fertilizer companies such as Mosaic more pricing power than they have today.
Mosaic shares have been struggling with the $50/share level for some time, although last week it finally broke out and held that level. The stock traded 4 percent higher for the week on volume of about 5 million shares per day versus an average of less than 3 million shares per day. This means that there are people with a lot of money who believe that Mosaic is a bet worth making even if this means driving the stock to a new high for the year. I think this is a worthwhile bet.
Disclosure: Ben Kramer-Miller is long shares of Mosaic Company and CF Industries.