Yesterday morning, The Mosaic Company (NYSE:MOS) released its fourth-quarter earnings figures. While net profits slumped nearly 80 percent, the report reaffirmed my conviction that Mosaic is the best large-cap fertilizer investment.
Mosaic’s net earnings fell significantly from $615 million in Q4 of 2012 to $129 million in Q4 of 2013. This massive decline was due almost entirely to the weakness in fertilizer prices. The company’s average realized phosphate price slumped from $532/ton in Q4 of 2012 down to $381/ton in 2013. Its average realized potash price fell from $435/ton in Q4 of 2012 down to $303/ton in Q4 of 2013. Since production costs remained relatively flat, this decline more or less went directly to the company’s bottom line.
Nevertheless, there are reasons to be optimistic that the fertilizer market will rebound in the coming quarters and years. The significant price drop during the summer of last year occurred as Russia’s largest potash producer — Uralkali (or, URALL) — left the Belarusian Potash Company (or, BPC) — a potash “cartel.” Fertilizer prices had already been relatively weak over the past couple of years, but with the breakup of the Belarusian Potash Company, its members were free to flood the market with potash.
But despite this short term set-back investors need to note the following. First, demand for fertilizers has been steadily rising over the long term as fertilizers are used by farmers in order to increase crop yields. As the world’s population rises without a parallel, a rise in the amount of arable land farmers need to become more efficient. This has created demand for fertilizers, and the price of fertilizers has been rising over the long-term with intermittent setbacks such as that seen during the 2008 financial crisis and the more recent one resulting from the breakup of the BPC.
Second, the breakup in the BPC affected potash, not phosphates. Phosphate prices had been falling with potash prices and they continued to fall in sympathy with potash prices following the BPC breakup. However, the supply of phosphates has a very different dynamic than that of potash, and Mosaic has more exposure to the former than it does to the latter. The key difference is that there is no cartel such as the BPC or “Cantopex” (the Western equivalent of the BPC to which Mosaic belongs), but there is a supply constraint in that most of the world’s phosphate production, and reserves are found in Northwest Africa. This makes phosphate reserves and production in North America especially valuable — not just because of their proximity to Western Hemisphere farmers, but also because of the remote yet distinct possibility that geopolitical turmoil in Northwest Africa can severely limit the global phosphate supply.
Mosaic’s management seems to realize what I do, namely that the set-back in fertilizer prices is only temporary, and that phosphates do not have the same supply/demand dynamics as potash. This is evidenced in the company’s recent purchase of CF Industries’ (NYSE:CF) phosphate business. It is also evidenced in the company’s aggressive stock buyback in the face of share price weakness and weak earnings. While these transactions have lead to an increase in the company’s outstanding debt they speak to management’s competence in building a strong balance sheet when fertilizer prices were robust in 2010 – 2011 and deploying that capital more recently with fertilizer prices significantly weaker.
While fertilizer prices may remain weak in the near term there is little doubt that they will rise longer term, and the Mosaic Company is extremely well positioned to benefit from this secular bull market in the coming years.
Disclosure: I am long shares of the Mosaic Company.