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Agrium’s annual meeting in Calgary, Friday, May 11, 2012. If you’ve been waiting for the shine to come off of fertilizer stocks, the time has arrived. (Jeff McIntosh/The Canadian Press)
Agrium’s annual meeting in Calgary, Friday, May 11, 2012. If you’ve been waiting for the shine to come off of fertilizer stocks, the time has arrived. (Jeff McIntosh/The Canadian Press)

For the patient investor, fertilizer collapse means opportunity Add to ...

If you’ve been waiting for the shine to come off of fertilizer stocks, the time has arrived.

Producers are suddenly unwanted good-for-nothings, now that the market has thrown aside the bullish arguments that once made these stocks look like ideal plays on the future of our planet and the nine billion people expected to be living – and eating – here by 2050.

But for anyone who thrives on bad news, these beaten-up stocks have rarely looked more attractive.

To be sure, the news is very bad. On Tuesday, OAO Uralkali, the world’s largest potash producer, walked away from a cartel – er, marketing group – with the new strategy of selling more potash at lower prices. The company expects potash prices to fall at least 25 per cent as it ramps up output by more than 20 per cent over the next two years.

The move rippled through the global fertilizer industry, which had previously benefited from the hefty prices that cartels can provide. Among the Canadian casualties, Potash Corp. of Saskatchewan Inc. fell 16 per cent and Agrium Inc. fell 5 per cent.

The shocking decline underscores a remarkable longer-term decline for Potash Corp. in particular. The stock sat atop the benchmark S&P/TSX composite index in 2008, when the shares traded at a lofty $244 (before a subsequent 3-for-1 split). They have since fallen about 60 per cent.

Still, the move by Uralkali provided the coup de grâce in terms of investor sentiment.

Analysts are slashing their expectations on Potash Corp. following the news, sending the average 12-month target price down more than 10 per cent, to levels seen during the depths of the financial crisis in 2008. BMO Nesbitt Burns analyst Joel Jackson cut his target price by 35 per cent, to just $30 (U.S.), titling his research note “The End of the Potash World as We Know It.”

The nosediving share price suggests that investors agree with this assessment, shredding the underlying bullish arguments that once made fertilizer one of the hottest commodities going.

During the heyday for Potash Corp. and other companies, the prevailing view was that the global population was rising and growing more affluent, requiring greater efficiencies from relatively scarce available farmland.

Fertilizer was seen as a key part of the solution. And its role was enhanced by the belief that it was in short supply and controlled by relatively few companies and their marketing groups, who could control price and supply.

As recently as 2010, BHP Billiton Ltd. offered $130 a share for Potash Corp. in a hostile takeover attempt, in the belief that these trends would persist. Bill Doyle, Potash Corp.’s chief executive, dismissed the offer and said that the company’s value “far exceeds” $170 a share. The current share price is now 45 per cent below Mr. Doyle’s value threshold, after adjusting for splits.

If fertilizer companies were frothy investments when these bullish arguments were taken seriously, then what are they today when shortages have turned into gluts, cartels have given way to competitive markets, foreign suitors have withdrawn and sky-high share prices are in the gutter?

It is difficult to see the triggers that would send share prices noticeably higher any time soon. After all, overwhelmingly bad news can act like a wet blanket, smothering all optimism.

But the global requirement for fertilizer is sound and likely to grow increasingly urgent as the population rises, giving producers a relevance that will not fade away. That should translate into steady returns over the longer term.

The hype that once defined these stocks has ended, which isn’t a bad thing. Momentum-chasing investors have fled, allowing patient, opportunistic ones to move in.

 

 

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