Shares in fertilizer companies soared Friday after the U.S. Department of Agriculture dramatically lowered its corn production forecast, sending corn prices higher and raising expectations that fertilizer will be in high demand to boost yields.
The move supports Potash Corp. of Saskatchewan Inc. CEO Bill Doyle's contention that the price of potash - a key mineral used in fertilizer - is set to take off as demand increases in developing countries and farmers everywhere seek to boost crop yields.
Mr. Doyle has said BHP Billiton Ltd.'s hostile takeover bid of $130 (U.S.) per share significantly undervalues the company, and told The Globe and Mail newspaper Thursday that Potash Corp.'s share price would "blow the doors off" its record high of about $240 if the company were to stay independent.
Shares of Saskatoon-based Potash Corp. added $4.13, or 2.9 per cent, to $145.03 in afternoon trading on the New York Stock Exchange.
Other fertilizer companies took an ever bigger leap after the U.S. government took a sickle to its crop forecast. Agrium Inc. stock jumped $5.57 (Canadian), or 7.3 per cent to $82.26 - a multi-year high - while CF Industries Holdings Inc. soared more than 11 per cent to $109.65 (U.S.) and Mosaic Co. gained more than 7 per cent to $65.95 on the New York Stock Exchange.
"This is due to the news that the U.S. Department of Agriculture said wheat stocks and corn stocks are going to be lower than previously thought," said Raymond Goldie, an analyst with Salman Partners in Toronto.
The Department of Agriculture forecast corn production of 12.7 billion bushels this season, down 4 per cent from its September forecast and 3 per cent lower than last year's record production of 13.1 billion bushels. Average yields per acre are expected to hit 155.8 bushels, 5.4 per cent off last year's record of 164.7 bushels per acre.
Mr. Goldie likened the rising price of potash, nitrogen and phosphate - all minerals used in fertilizer to boost crop yields - to the price of copper, which has been on a tear recently. Growth in developing countries is fundamentally changing the demand fundamentals of several commodities, meaning prices may stay high for the long term.
"When the price [of copper] finally hit $2 a pound and started going above that, you started hearing people say, 'It's going to go right back down below $1 which is where it's been for decades,"' Mr. Goldie said.
"But more and more there came a point of view that this was a permanent increase in prices."
Today, the price of copper is hovering around $3.70 per pound.
If the same is true of the ingredients used in fertilizer, fertilizer producers' stocks will be revalued at a higher level as investors realize prices aren't going anywhere.
Mr. Goldie said his model of Agrium shows that the company's stock price should be significantly higher than it is.
"The assumption I make is that the price of potash doesn't go any higher and it doesn't go any lower either. It stays where it is in inflation-adjusted terms forever and that says to me that Agrium's shares are worth $100 a share," he said.
This is about 20 per cent higher than the company's current share price.
Agrium's stock also received a boost Friday from news that its friendly $1.1-billion takeover bid for Australian grain handler AWB Ltd. got support from independent investor advisory firm Lonergan Edwards & Associates, which called the offer "fair."
Last week, the Australian Foreign Investment Review Board cleared the takeover proposal, which still needs the approval of shareholders.
Fertilizer companies' share prices were also boosted by a report from Reuters that international mining giant Rio Tinto PLC is interested in acquisitions in the potash sector. Rio Tinto has said it's not interested in competing with BHP for Potash Corp.