Thursday, April 17, 2008

This Sector is Full of Sh*t





The fertilizer companies have been on a tear for a while now but have recently started going parabolic. This is largely due to the increasing amount of news and attention being paid to the global food crisis. Just today, Reuters reports:

China slapped massive tariffs on fertilizer exports on Thursday in a bid to control rapidly rising domestic agricultural costs and inflation, and above all to ensure it grows enough grain to feed its 1.3 billion people.

Beijing's 100 percent-plus tariffs on some fertilizer exports should temper domestic costs but may drive up prices in world markets that depend on China's supplies, the latest in a series of commodities-related protectionist moves around the world that risk fueling rather than cooling global food costs.

They're exactly right. A number of countries have started imposing export restrictions on certain types of food and now fertilizer. These types of restrictions are often accompanied by price caps, tariffs, and hoarding. Hoarding certainly will lead to short-term price rises. More importantly, to the extent that producers are restricted from selling their food and fertilizer at prevailing world prices they are also less incented and financially able to increase their production.

These agriculture/fertilizer stocks have been some of our best performers (AGU, POT, MOS). The longer-term thesis is still attractive, but the stocks are likely a bit ahead of themselves near-term. These are some of our larger positions given their appreciation. In this situation, we're likely to pare our position very modestly, taking some of the recent gains off the table. We plan to keep a sizable position in this space since the thesis is still attractive, and we would look to add should the stocks pull back.