Citigroup is out with a Fertilizer call upgrading Potash (NYSE:POT), Mosaic (NYSE:MOS) to Buy from Hold and Agrium (NYSE:AGU) to Hold from Sell.
Looking Past the China Contract — In recent months investors have been sharply focused on the upcoming China potash contract and the risk potash prices could fall below last year’s $575/t level. However, the bigger risk in Citigroup's view is that the Ag complex will continue to rally on stronger grain fundamentals. There are three key reasons grain prices are moving higher, thus creating an environment for multiple expansion for fertilizer stocks:
- Grain Supplies Remain Historically Tight — Last week’s USDA report indicated lean grain inventories, including significantly tighter corn stocks-to-use (16% vs. 20-year avg. of 24%). In our view grain prices don’t have a “cushion” – another major weather event or poor crop for a major producer (US, Ukraine, Argentina) could move corn prices closer to the $5.00+ range we saw last summer.
- The US Planting Season Is Seriously Behind Schedule — Wet cold weather has significantly delayed much of the US corn crop. The latest crop progress report indicates corn plantings are 62% complete, behind the 85% average rate for 2004- 2008. Soy plantings are lagging as well, at 25% vs. the 44% average rate.
- Broader Market Stabilization & Easing of Deflation Concerns — Potash prices held up well during the worst of the credit crisis and market collapse. With the easing of credit conditions and stabilization of some industrial and consumer markets, downside risk is lessened.
- Upgrading POT, MOS to Buy, AGU to Hold — This is a part of a global call, with their European counterparts upgrading potash producers K+S and ICL.
Notablecalls: I suspect a lot of shorts piled into POT yesterday and may be scrabling for the exits early on.
The call makes sense but they are a bit late in my book. Nonetheless, POT & MOS will see buy interest at least early on.
Can POT do $115 today?
Of note, Citigroup is downgrading Monsanto (NYSE:MON) to Hold from Buy as:
a) they are concerned that a onslaught of Chinese glyphosate will pressure near-term earnings; b) the stock is close to their price target of $95. MON has outperformed the group this year (+27% YTD vs. the S&P Chemical Index +20%); they are switching their preferred way to play the Ag cycle from MON to fertilizer producers POT and MOS.
Looking Past the China Contract — In recent months investors have been sharply focused on the upcoming China potash contract and the risk potash prices could fall below last year’s $575/t level. However, the bigger risk in Citigroup's view is that the Ag complex will continue to rally on stronger grain fundamentals. There are three key reasons grain prices are moving higher, thus creating an environment for multiple expansion for fertilizer stocks:
- Grain Supplies Remain Historically Tight — Last week’s USDA report indicated lean grain inventories, including significantly tighter corn stocks-to-use (16% vs. 20-year avg. of 24%). In our view grain prices don’t have a “cushion” – another major weather event or poor crop for a major producer (US, Ukraine, Argentina) could move corn prices closer to the $5.00+ range we saw last summer.
- The US Planting Season Is Seriously Behind Schedule — Wet cold weather has significantly delayed much of the US corn crop. The latest crop progress report indicates corn plantings are 62% complete, behind the 85% average rate for 2004- 2008. Soy plantings are lagging as well, at 25% vs. the 44% average rate.
- Broader Market Stabilization & Easing of Deflation Concerns — Potash prices held up well during the worst of the credit crisis and market collapse. With the easing of credit conditions and stabilization of some industrial and consumer markets, downside risk is lessened.
- Upgrading POT, MOS to Buy, AGU to Hold — This is a part of a global call, with their European counterparts upgrading potash producers K+S and ICL.
Notablecalls: I suspect a lot of shorts piled into POT yesterday and may be scrabling for the exits early on.
The call makes sense but they are a bit late in my book. Nonetheless, POT & MOS will see buy interest at least early on.
Can POT do $115 today?
Of note, Citigroup is downgrading Monsanto (NYSE:MON) to Hold from Buy as:
a) they are concerned that a onslaught of Chinese glyphosate will pressure near-term earnings; b) the stock is close to their price target of $95. MON has outperformed the group this year (+27% YTD vs. the S&P Chemical Index +20%); they are switching their preferred way to play the Ag cycle from MON to fertilizer producers POT and MOS.
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