Tuesday, November 04, 2008

Nitrogen Expectations Reset, Upgrading AGU, CF and TRA to Buy - Citi

Citigroup is upgrading AGU, CF and TRA to Buys from Holds following the recent share price declines. Due to price volatility, their risk assessment is Speculative. While they lowered '09 estimates stand below consensus, which the market already views as too high, valuation on all three stocks seems attractive. Firm believes the majority of the fertilizer and corn price declines may be behind us and continue to prefer Top-Pick POT due to production discipline in potash.

Deep Recession Scenarios – While not base-case, Citi estimates that the '09 global grain stocks-to-use ratio could rise to 18.4% from 17.0% if corn use in ethanol remains flat YoY and could climb to 19.0% if feed demand also plateaus.

Stocks Discount $2.75 Corn – Revised '09 fertilizer price forecasts imply that the average retail cost to a US corn farmer would total $0.98 per bushel of corn grown, a historically high level, while the equities discount fertilizer cost falling to roughly $0.60/bu, which would be more consistent with a $2.75/bu corn price.

Ethanol Points to $4 Corn - Near-term, Citi sees corn prices continuing to track ethanol, since the marginal bushel of corn appears to be consumed in fuel production, with a high YTD correlation of 0.93. Firm estimates that ethanol plants can breakeven at $4.27/bu corn.

Cattle Points to $3 Corn - Longer term, the sustainability of $4/bu corn will depend on meat prices. Live cattle futures of $0.94/lb support $3.09/bu corn and they estimate cattle prices need to rise to $1.21/lb to support $4/bu corn.

Despite the strong bounce from the "bottom" over the past week, the North American fertilizer producers have still traded down by over 50% since nitrogen and phosphate prices began to decline in late September. While the equities never baked-in record spot prices and margins, the stocks suffered nonetheless, regardless of whether the company produces nitrogen, phosphate or potash, which have vastly different supply characteristics and margin structure.

Notablecalls: I really don't know how investors or traders should go about this call. Remember the morning Citi downgraded CF end of Sept? The stock took a 20pt+ dumper. Will we now see a 10-15pt rally in the name on heels of the upgrade? I just don't see it.

Give me some feedback.

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