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.