Mosaic Co (MOS), Agrium Inc. (USA) (AGU): More Headwinds For Fertilizer Stocks

Each year, the population of Earth grows by 75 million people. It will grow by 2 billion by 2050. All those people need to be fed somehow. In the meantime, the quantity of land available for agriculture diminishes every year. Land turns into desert or just wears out due to bad farming practices. You could imagine these two facts must be super-bullish for agricultural stocks. If you have less land and at the same time need to feed more people, you need more fertilizers and better crops, right? Not so easy.

Hurt by lower prices

The recent quarterly report by Mosaic Co (NYSE:MOS) has shown that there are significant headwinds to profitability in the industry. The operating income was down 7.5% from a year ago. Record Potash Corp./Saskatchewan (USA) (NYSE:POT) and phosphate sales were offset by lower prices. This fact should worry shareholders of other agricultural stocks such as Agrium Inc. (USA) (NYSE:AGU) and Potash Corp./Saskatchewan (USA) (NYSE:POT).

Lower prices were a result of a combination of factors. India continued to show low demand levels, as problems with agricultural subsidies continued to pressure farmers in the region. A weak rupee contributed too, as it has made imported fertilizers harder to afford. Mosaic Co (NYSE:MOS) has stated it thinks that India will ultimately rebound, as the nation is growing by 18 million people each year. At the same time, the company does not provide an exact time frame when it would happen.

Excess supply

Another contributor to the pressure on prices was the growth of supply. Additional phosphate supply came from China & Saudi Arabia, while extra potash supply came from Russia and Canada. Mosaic Co (NYSE:MOS) states that production volumes historically increase before prices, and expects pricing to rebound somewhere in the future. It is important to notice that in the near-term prices would likely remain under pressure.

Here’s another drop of paint to the picture of excess supply. Stocks of potash at Canadian mines owned by Mosaic Co (NYSE:MOS), Potash Corp./Saskatchewan (USA) (NYSE:POT) and Agrium Inc. (USA) (NYSE:AGU) were collectively 20% larger in May than the five-year average. In response to that, Potash Corp./Saskatchewan (USA) (NYSE:POT) declared that it was going to temporarily shut down its six Canadian potash mines for summer maintenance. Mosaic Co (NYSE:MOS) moves in the same direction and plans to run its Canadian mines at less than 75% of capacity this quarter.

Valuation

Agricultural stocks have been underperformers this year. Mosaic Co (NYSE:MOS) is down 4%, Agrium Inc. (USA) (NYSE:AGU) is down 9% and Potash Corp./Saskatchewan (USA) (NYSE:POT) is down 3%. I believe the long-term picture is bullish for fertilizer producers, but is it the right time to pull the trigger?