Ag bubble bursts -- stocks dive
2.Fertilizer, Pesticide Stock Prices Fall Due to Excessive Supply, Reduced Demand
1.Monsanto raises its earnings outlook, again
By Jeremiah McWilliams
ST. LOUIS POST-DISPATCH, 10/03/2008
Monsanto Co., the Creve Coeur-based agribusiness giant, lost one-sixth of its market value on Thursday as spooked investors worried that a drop in demand would hurt agricultural companies.
Investors immediately drove Monsanto's stock down by 21 percent on Thursday morning after a Merrill Lynch analyst said profit growth from Roundup may slow. Analyst Donald Carson wrote that profit gains from Roundup may be peaking because the cost of phosphate rock has surged ten-fold, according to Bloomberg News. He downgraded Monsanto to "neutral."
Monsanto mines elemental phosphorus, which is a key ingredient in Roundup.
To reassure investors and staunch the morning's rapid sell-off, Monsanto came out with solid financial projections, again raising its financial guidance for fiscal 2008 and citing a strong wrap-up to the year from sales of Roundup and other herbicides.
Monsanto's shares recovered somewhat from their steep drop before gradually drooping in the afternoon. The company's stock closed at $82.01, down more than 16 percent on the New York Stock Exchange. The drop was the steepest in Monsanto's eight-year history since being spun off from Pharmacia, and erased about $8.7 billion in market value.
Monsanto disputed Merrill Lynch's interpretation of Roundup's prospects. In a news release Thursday morning, Monsanto said it now expects earnings per share from ongoing business to be about $3.64 for fiscal 2008, and revised its reported earnings per share guidance to be about $3.59. In mid-September, the company said it expected ongoing earnings to be $3.58 to $3.60 per share, with reported earnings between $3.49 and $3.51 per share.
The company indicated a large part of its growth would come from Roundup, although its seed and traits businesses also are expanding. Monsanto will report full-year results on Oct. 8.
Morgan Stanley analyst Vincent Andrews called the morning's rapid selling "unwarranted," arguing in a research note that demand for Roundup will stay up because of farmers' need to kill weeds and boost their crop yields.
In a news release, Monsanto said phosphorus-related costs represent less than 10 percent of its cost to make Roundup. Monsanto also controls its sources of elemental phosphorus, said vice president Kerry Preete.
Monsanto on Thursday raised the Roundup business' goals for the 2009 fiscal year, as well as the division's 2012 long-term targets.
Roundup's expansion is being driven by farmers planting more of Monsanto's Roundup Ready crops ”” such as corn and soybeans ”” that are genetically modified to withstand the herbicide, Preete said. Also, the high price of diesel fuel for tractors makes some farmers turn to crop-spraying and away from tilling as they battle weeds, he said.
Previously, Monsanto said Roundup's contribution to gross profit in 2009 will be between $2.1 billion and $2.2 billion. The company now says Roundup will generate between $2.3 billion and $2.4 billion in gross profit in the 2009 fiscal year. Gross profit is generally calculated as sales minus costs that are directly linked to those sales, such as labor and raw materials.
Monsanto also increased Roundup's 2012 gross-profit target to $1.9 billion from its original target of $1.8 billion. Monsanto projected that demand for glyphosate-based herbicides such as Roundup will continue to increase globally through 2012.
2.Fertilizer, Pesticide Stock Prices Fall Due to Excessive Supply, Reduced Demand
The bubble has burst for fertilizer and agricultural chemical stocks, with former stock-market star Mosaic Co. off by a third in Thursday trading and others hard on its heels as excess supply and reduced demand slow the pattern of price increases on farm chemicals.
The blowback has also hit firms such as farm-equipment giant Deere & Co., off 9.3 percent at $42.
Mosaic, one of the two largest fertilizer makers by sales, was off 31.4 percent to $46.33 midday - and has lost two-thirds of its value since mid-June.
Thursday's decline came despite the company's report late Wednesday of robust fiscal first-quarter earnings growth as it also warned that prices of phosphate, a particular grade of fertilizer, were leveling off. That sent hedge funds and Wall Street brokers fleeing from the sector, where consistent price increases had resulted in great expectations.
The action in fertilizer stocks in particular is comparable to the technology bust of 2000 to 2001, when profitable companies like Microsoft Corp. (MSFT) and Intel Corp. (INTC) suffered from speculators' realization that the sky was not the limit.
Farmers could not bear the weight of ever-increasing costs forever, especially as grain prices fell by nearly half in recent months and credit tightened. And the popularity of the momentum "ag trade" with hedge funds and day traders has led to a decline similar in magnitude and pace to the tech bust.
The other giant fertilizer maker, Potash Corp. of Saskatchewan (POT) - named by Goldman Sachs as one of the top 20 most popular names in hedge-fund portfolios - was down 20.1 percent recently at $102.31, less than half its summer peak. Another peer, Bunge Ltd., fell 19 percent to $51.01, down about 60 percent from its high and a bigger decline than such beaten-down financials as Citigroup Inc.
Seed-and-weedkiller processor Monsanto Co. trimmed some of its losses by late-morning as it again boosted its fiscal-year outlook. The stock was recently down 13 percent to $85.89, putting it 41 percent below its high.
Mosaic said fiscal first-quarter earnings almost quadrupled to $1.18 billion, or $2.65 a share, falling shy of the average of analysts' estimate of $2.94 a share.
The immediate issue was the price of phosphate, a grade of fertilizer that contributed more than half of Mosaic's quarterly revenue of $4.32 billion. In response to an "excess" of phosphate on the market, Mosaic, the leading producer of that fertilizer, reduced its production, and, as a result, its projection for sales volume of phosphate for the year.
Mosaic expects the average price of phosphate to be around $1,020 to $1,080 a tonne, more or less level with $1,013 this quarter, after a string of price increases.
The first signs of pricing trouble came last week, when Citigroup warned that the price of urea, another grade of fertilizer, had fallen sharply. Urea is a chemical compound, whereas potash and phosphate are mineral based. Shares of Agrium Inc. started falling in the wake of that report, and continued their decline Thursday, off 21 percent to $43.35.
"What's happened is that the inventory pipeline got a bit full late in the summer," said Mosaic Chief Financial Officer Larry Stranghoener. "That together with...the overall falloff in commodities prices caused buyers to sit on the sidelines and not make new purchasing commitments."
Stranghoener added that, "to the extent that there could be a significant global economic slowdown, it would fundamentally cause grain and oil-seed prices to drop sharply from where they are, and clearly that would have a negative effect on our business. We don't see that happening; we believe the long-term fundamentals for agricultural economics are excellent. There's still not enough food in the world."
That's an argument that drew top ratings from many Wall Street firms for agricultural stocks and heavy purchasing from hedge funds and day traders. Agriculture stocks were darlings when grain prices doubled and, in some cases, tripled earlier this year. But many of those gains have been given back of late.
On Thursday, Merrill Lynch cut its investment rating on the agricultural chemicals sector because of signs of weakness in phosphate and potash, another major grade of fertilizer. Merrill also warned "a global recession, particularly in Asia, represents a risk to corn prices, as it could lead to reduced demand growth."
One long-term skeptic, Citigroup chief U.S. equity strategist Tobias Levkovich, said the bullish argument on agricultural stocks never held much weight. "One of the arguments is that there's no supply," Levkovich said. "When demand falls off, guess what? There's a little more supply."
For its part, Mosaic insists that price increases for potash, in particular, will continue. For the current quarter, Mosaic projects an average potash price of $560 to $620 a tonne, up from the prior quarter's $488. Still, phosphate and potash are often used on the same crops, and it isn't clear whether they will diverge for long.
The economic slowdown is far from the only worry for agriculture stocks: hedge funds are facing requests from clients for redemptions and are forced to sell their holdings. That's affecting commodity prices and the prices of commodity stocks that hedge funds rode up to their peaks in the summer.
The run-up in fertilizer prices earlier this year also drew scrutiny on Capitol Hill. Sen. Byron Dorgan, a Democrat from North Dakota, asked the Federal Trade Commission to investigate pricing practices in the industry. Dorgan had met with farmers in his state concerned about the increases.
Lastly, with credit historically scarce, farmers may struggle to get the funding for seeds from Monsanto, or fertilizer from Mosaic. Farmer Mac, the country cousin of Fannie Mae and Freddie Mac which helped farmers buy land, is in some distress on the stock market.
Mosaic itself remains optimistic, however.
"I would counsel investors to keep their cool and focus on the outstanding fundamentals of this business," said Stranghoener, the financial chief. "We believe we have a very positive outlook and are going to generate a lot of cash throughout this financial year."