Food prices still are skyrocketing, yet the rally for one key component — fertilizer — might be petering out. Farmers’ fields are saturated, making it difficult for fertilizer producers to hike prices, one analyst wrote Wednesday. Meanwhile, share prices in fertilizer companies have doubled since July.
Citigroup downgraded top producers Potash Corp. and The Mosaic Co. to “hold” from “buy,” Wednesday, and reduced his price targets for their shares.
“Much of the good news is factored into current equity prices,” Citigroup Global Markets analyst P.J. Juvekar wrote. “Lacking well-defined near-term catalysts, we see growing risk that the stocks could trade sideways into the summer.”
Investors dumped those and other fertilizer stocks Wednesday afternoon, sinking prices by as much as 4 percent.
Food prices have been rising fast as bad weather crimps supply and a growing middle class in developing nations consumes more. The costs have pushed an estimated 44 million people into extreme poverty and are near the historic highs of 2008, according to the World Bank, just as a world-wide recession began.
For a while, fertilizer stocks followed suit. Prices doubled since July, while the broad S&P 500 market index gained 27 percent during the same period.
One reason: During the recession, farmers postponed purchases of potash, a scarce fertilizer ingredient that survives in the ground for several years. With recovery afoot, they replenished stocks of the mineral to make fields more productive.
Meanwhile, exploding middle-class populations in China and India are demanding more meat and diverse produce, both of which require fertilizer-fueled farms. And in North America, famers are spending more on high-tech equipment and genetically engineered seeds. They use more fertilizer to make sure those investments pay off.
That’s kept the industry strong, Citigroup said. Fertilizer companies are shipping their product at new, higher prices under contracts negotiated in recent months. That should boost earnings considerably, the analyst said.
But he said the high share prices already reflect those strong results.
In addition, he said, grain prices already are high enough that farmers are using as much fertilizer as they can. And investing the extra revenue in land or machinery might make better business sense for farmers.
When corn prices doubled, to $7 per bushel from $3.50 per bushel, farmers had ample reason to invest in fertilizer to increase yields, the analyst said. Now land prices in the corn belt are increasing at a double-digit annual rate. If farmers collect another dollar per bushel of corn, they might boost crop yields another way: by buying more land to farm.
If demand increases only modestly, potash producers might skip further price increases, Citigroup said. Rapid price hikes led to a collapse in potash prices in 2008, he noted. This time, producers are more likely to go slow, encouraging wholesalers and farmers to stock up fully before the fall planting season, he said.
Potash Corp. of Saskatchewan sank $2.09, or 4 percent, to $56.20. Shares of Mosaic fell $1.30, or 2 percent, to $79.91.
Shares of Agrium Inc., based in Calgary, Canada, decreased $1.26, or 1 percent, to $91.58. Shares of CF Industries Holdings Inc., based in Deerfield, Ill., fell $1.61, or 1 percent, to $127.33. Intrepid Potash, based in Denver, dropped $1.32, or 4 percent, to $36.20.
