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Last quarter, Mosaic's (NYSE: MOS ) earnings jumped, and its shares got dumped -- largely because of an overstuffed phosphate pipeline. Oversupply is still the issue, but investors were better prepared for today's news -- thanks in part to a warning that came out last month.
Average phosphate prices peaked at more than $1,000 per metric ton for the second fiscal quarter, but sales volume of the fertilizer fell almost in half. Prices reversed course late in the quarter, and judging by the price collapse in raw-material inputs such as sulphur and ammonia, they have a lot of room to fall.
On its conference call, management described the current market dynamics as a game of chicken. Whereas farmers in the likes of Brazil appear to be struggling with access to credit (bad news for equipment suppliers such as AGCO (NYSE: AG ) ), U.S. farmers are flush, content to sit back and wait for lower fertilizer prices.
Unfortunately, the more that phosphate producers such as Mosaic, Agrium (NYSE: AGU ) , and PotashCorp (NYSE: POT ) take production offline -- Mosaic says that more than half the world's capacity has already been idled -- the longer it takes to get the supply chain humming along again. This situation extends beyond the suppliers to rail operators such as Burlington Northern Santa Fe (NYSE: BNI ) , whose chemical car loads fell dramatically in the final weeks of 2008. The fertilizer pipeline is stuffed today, but in a few months' time, it could be too late to get fertilizer to everyone desiring it.
That's what commodity cycles do -- they sow their own seeds of recovery and decline. Mosaic has no illusions about the nasty quarter to come -- the company expects to experience an operating cash outflow. But come springtime, we might see a bit more spring in the fertilizer maker's step.