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Mill manager Josh Wheeler examines a pile processed potash at the Mosaic Potash Colonsay mine storage facility in Colonsay, Sask., September 24, 2009. (DAVID STOBBE/Reuters)
Mill manager Josh Wheeler examines a pile processed potash at the Mosaic Potash Colonsay mine storage facility in Colonsay, Sask., September 24, 2009. (DAVID STOBBE/Reuters)

ETFs

An ETF that reaps benefits from fertilizer stocks Add to ...

Once again, fertilizer stocks have come into season. Fertilizer equities have a history of moving higher from the last week in June to the middle of September. For Potash Corp. (NYSE:POT) and Mosaic Co. (NYSE:MOS), the trade has been profitable in 15 of the past 20 periods; Agrium Inc. (NYSE:AGU) posted gains in 14 of the past 19 periods. Average gain per period was 7.16 per cent, outperforming the S&P 500 index by 6.98 percent.

Profitability of the industry in recent years has been sensitive to volatile fertilizer prices. Prices of the most significant type of fertilizer, diammonium phosphate (DAP) plunged from $480 (U.S.) per metric tonne in June of last year to as low as $350 in November, but subsequently recovered to $500 in March, 2014. The price is now hovering around $450, as of the end of May. Prices collapsed last summer when a price fixing arrangement between producers in Russia and Belarus broke down. Subsequently, they reached an agreement and prices returned to previous levels.

Demand for fertilizer is rising. Demand is driven by grain prices and the size of the annual grain crop. Grain prices bottomed in March of this year and early signs in North America indicate a likelihood of a bumper crop, a scenario that is bullish for fertilizer prices later this year.

A word of caution: Consensus shows that second quarter earnings by major North American fertilizer companies will be significantly lower than the same period last year when fertilizer prices were high before they collapsed. However, year-over-year gains will be substantial in the third and fourth quarters when fertilizer prices recover from depressed levels.  As much as 71 per cent of the profits of fertilizer companies are derived during the second quarter, which is reported in July and August, fueling the start of the seasonal trade.

The easiest way to invest in the fertilizer industry is through the Global X Fertilizer/Potash ETF (NYSE:SOIL). The ETF holds a basket of 22 international fertilizer stocks including CF Industries, Mosaic, Agrium, Terra Nitrogen, and Potash Corp. Alternately, an investment in a basket of DAP producer stocks is possible. DAP producer stocks that currently have the best technical profiles are Potash Corp., Agrium and Mosaic.

On the charts, SOIL has an improving technical profile. Following the collapse in the first half of 2013 during the fertilizer price debacle, SOIL formed a base pattern between $10.40 and $12.00. Last week, units moved above the pattern, typical of the price action at this time of year.

Disclaimer: Comments, charts and opinions offered in this report by www.timingthemarket.ca and www.equityclock.com are for information only. They should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed. Don and Jon Vialoux are Research Analysts with Horizons ETFs Management (Canada) Inc. All of the views expressed herein are the personal views of the authors and are not necessarily the views of Horizons ETFs Management (Canada) Inc., although any of the recommendations found herein may be reflected in positions or transactions in the various client portfolios managed by Horizons ETFs Management (Canada) Inc.

 

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