Mr. Market Mistakes Good News for Bad

It has been a wild spring for farmers in the U.S. After the USDA predicted farmers would plant one of the biggest crops in a decade, a rainy spring in the Corn Belt delayed plantings by weeks in some areas, leading many to think farmers would eventually give up and sow far less. After a certain point in time, it makes more sense for farmers to leave the fields unsown and collect an insurance payment, rather than plant too late into the season and risk a poor harvest. But according to yesterday's USDA report, farmers eventually managed to get the whole crop planted, the second-biggest since World War II.

The news caused corn prices to crash, on the belief that the massive planting would result in a massive harvest. High crop prices encourage farmers to plant more and use more fertilizer to try to reap higher yields, so fertilizer companies saw their stock prices fall as well. The table below shows some of the carnage, on a day when the broader market did quite well.

Company

Day's Change

Mosaic (NYSE: MOS  )

(0.99%)

CF Industries (NYSE: CF  )

(5.13%)

Intrepid Potash (NYSE: IPI  )

(1.46%)

Terra Nitrogen (NYSE: TNH  )

(3.08%)

CVR Partners (NYSE: UAN  )

(2.98%)

But maybe you can see the flaw in this logic. Yes, corn supplies will probably be higher after the harvest, so it makes sense that corn prices fell. And yes, there tends to be a strong correlation between high crop prices and high fertilizer prices. But high corn prices are only good for fertilizer companies because it means farmers will plant more and buy more fertilizer. The farmers did plant more, so now they need more fertilizer. This is a classic example of getting cause and effect backward.

Additionally, the plantings were heavily delayed, missing the best part of the season. This typically results in a smaller harvest. The global stocks-to-use ratio, a measure of how much supply is available, is close to the lowest it's been in 50 years. One big planting season won't fix that, even if the weather had been good.

Fertilizer demand will remain high for the next couple of years as farmers continue to plant as much as possible and try to eke out higher yields to rebuild supplies. Yesterday's price drop in these companies is nothing to worry about, and just makes for a great buying opportunity.

More Foolishness:

Fool contributor Jacob Roche admits the phrase "nothing to worry about" makes for good famous last words. He owns shares of Terra Nitrogen but holds no position in any of the other stocks mentioned. Check out his Motley Fool CAPS profile or follow his articles using Twitter or RSS.

Read/Post Comments (4) | Recommend This Article (6)

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  • Report this Comment On July 01, 2011, at 12:42 PM, dirtywhiteboyiiz wrote:

    one of the better articles

  • Report this Comment On July 01, 2011, at 2:47 PM, surfgeezer wrote:

    Agree, one of the better articles. Long term demand in global commodities such as food will be increasing. Yes, supply is somewhat elastic, but mother nature has not been helpful globally. I see no reason for that trend to dissipate, except at the margins. Long UAN

  • Report this Comment On July 05, 2011, at 10:28 AM, LT5 wrote:

    I agree that UAN has some potential. But according to their own numbers CVR made just $0.40/ share all of last year and juast $0.20/share last quarter which is a much better start to FY-11 but they can't get to $1.92 on $0.20/quarter. It seems to me that a lot of people are buying and then promoting this stock. Some articles seem to come out twice a month. I have yet to hear anyone suggest waiting till the earning are announced. My fear is if I jump in now and the earnings are even 100% higher than they were last quarter that the stock is going to head right back to where it started at ($16/share) in April...

  • Report this Comment On July 05, 2011, at 11:49 PM, huskerlew wrote:

    If you are more risk adverse, then wait. I personally believe they had to have had a strong quarter and will continue to hold. I can wait it out and am not influenced by a quarter to quarter view.

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