Strong agricultural fundamentals around the globe have sent positive vibes throughout the fertilizer industry. The Mosaic Company (MOS, Financial) has done well as a result. Another thing for the company to be happy about is that it is teaming up with Potash Corporation (POT, Financial) and Agrium (AGU, Financial) to sell fertilizers to China-based Sinofert Holdings.
The way ahead
Mosaic, Potash Corporation and Agrium deal to sell a million tons of potash to China based Sinofret at a very attractive discounted price of about $400 a ton compared to its last contract at $470 per ton. This deal will help to improve the severed relation with China and India which was caused because of the potash glut. More deals with China and India are expected by this summer which should help in increasing the prices of fertilizers with each forthcoming deal. The prolonged deals with India and China had affected phosphate sales too as customers would have had second thoughts but with a stream of deals with these countries the phosphate business too should bounce back.
Another reason that can be the potential cause of boom for fertilizer industry is that the expected population by 2050 should be more than 9 billion. Moreover the cultivable land is under use and so fertilizers will be the most appropriate option to increase production to feed the increased population. This marks a long-term plan for the industry but, on a short-term basis, potash use will expand by 15%-20% in the next few years which should boost Mosaic’s sales in the recent years, too.
A look at the competitors
Potash Corporation is one of the largest potash producers in the world and a strong contender to be benefited by the Sinofret deal. Global shipments of potash and phosphates are expected to hike sustainably over last year which should prosper the company’s future revenue. With international demand still a bit uncertain, the domestic demand will provide an adequate cushion. Optimistic is the only word that I would like to use regarding stock price returns for Potash Corporation.
Agrium, too, will be benefited by recent trends in the agriculture sector, and sales should boost further. Apart from discussing the positive impacts of the booming agriculture sector let’s see what the company’s net income and operating cash-flow say about it.
The operating cash-flow is higher than the net income. The company very well knows how to convert its revenues into profits and cash which can be clearly seen in their last three years performance. This shows that the profits are sustainable, and the company will be able to provide necessary cash cushion for its investors. The company’s double advantage, the bright future prospect of the industry on the whole and its superb financial strength, makes it a good fetch for investors.
Conclusion
Mosaic is a good company to invest in according to me. The volume should be back on track with the contacts that are in the pipeline and with the Sinofert Holdings contract, the company’s affected image in China and India should improve too. The phosphate prices might remain low but the company’s ability to control costs should keep margins in line. Further the company has a very strong balance sheet with decent cash levels which should help the company in buying back its shares and further improving its earnings once the Cargill restrictions lift in May.
