Has Fertilizer Flatlined?

So far in 2010, we've seen Greece wobble and Goldman Sachs executives get grilled, but nothing's managed to derail this remarkable rally. At least one sector has been left out of the market's year-to-date rise, though. That's the fertilizer group, which numbers one member fewer now that CF Industries (NYSE: CF) has sealed the deal with Terra Industries.

At year's end, my decision was to avoid the group, and I haven't been given a reason to regret that call so far. While the early 2010 snap-back was stronger than I expected, with Agrium (NYSE: AGU) using the word "surge" to describe farmer buying patterns, the follow-through potential over the next few quarters remains somewhat unclear.

On PotashCorp's (NYSE: POT) earnings call yesterday, management commented that "some observers have not fully appreciated that a recovery is under way." The suggestion was that investors have gotten too hung up on sagging corn prices, as the correlation with fertilizer demand is not one-to-one. Well, on that front, China just made its biggest purchase of U.S. corn in many years, as prices there are soaring. Bunge (NYSE: BG) expects China to become a net importer of corn in the future, and that prospect seems to have given a lift to domestic corn prices.

Goldman Sachs (speak of the devil!) recently argued that farmers may dial back on fertilizer applications in the face of subdued profitability. Perhaps high corn prices will come to the rescue. Oops, I'm not supposed to focus on that. Let's just move along to the company guidance.

For the full year, PotashCorp sees global shipments of 50 tons of its namesake fertilizer, which represents a 50% boost from last year. The company's own potash sales should range from 7.4 million to 8 million metric tons, which is a slight positive tweak of January's projection. That should help the company earn somewhere about $5 per share.

On this projected earnings basis, the stock doesn't look particularly cheap, but as management noted, this is a recovery year, and PotashCorp is setting up for stronger future results. Given the oligopoly market structure of potash, a premium of some sort is probably warranted when it comes to PotashCorp, Mosaic (NYSE: MOS), and the rest of the potash clique, but I'd prefer to wait for a fatter pitch.