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WIKI ANALYSIS
Mosaic, the world's largest phosphate producer, makes agricultural fertilizer out of potash, and phosphate. Mosaic owns a 13% share of phosphate global production and a 58% share of American production.[1] Similarly, Mosaic owns a 13% of potash global production and a 40% share of North American production.[1] It makes phosphate out of ammonia and sulfur. When sulfur and natural gas are cheap, phosphate is cheap to make, and therefore more profitable to sell. [2] When the price of crops goes up, farmers try to make their land produce more per acre. Thus, a bet on Mosaic is much like short selling ammonia and sulfur futures, and going long on corn , wheat , and soy bean prices.
Mosaic Company competes directly with the Potash Corporation of Saskatchewan (POT) and Agrium (AGU) for control over the Potash and Phosphate sectors of the commercial fertilizer industry. Mosaic is deadlocked with The Potash Corporation in the Potash market, but thoroughly dominates the phosphate market from a production standpoint. [3][4]
Business Overview
The previous fiscal year marked steep declines in Mosaic's net sales and gross margin.[5] These losses were driven primarily by rising prices for fertilizer and decreased demand for fertilizers in the face of higher prices. Poor environmental factors, such as low levels of rainfalls, further disincentive farmers from purchasing fertilizers.[5] Concerns over soil fertility and increasing oil prices, however, are favorable outcomes for Mosaic.
Business Segments
- Phosphates: MOS accounted for about 13% of world phosphate-fertilizer production, and 56% of US production.[5] Phosphates generate a high percentage of the company’s earnings.
- Potash: Mosaic is the second largest producer of potash in the world. It sells potash for fertilizer and industrial applications, holding 38% of North American production and 12% of global production.[5]
Quarterly and Annual Earnings
Q3 FY2011 Summary
Mosaic announced record Q3 earnings of $542.1 million as compared to Q3 earnings of $222.6 million for the third quarter in the previous year.[6] Driving these earnings were an increase in net sales in Q3 FY2011. Net sales increased to $2.2 billion as compared to $1.7 billion in year ago results.[6] Phosphate sales as well as potash sales increased to 2.4 million tons and 1.9 million tons respectively.[6] Their respective selling prices were $543 and $358 per ton.[6] Similarly, gross margin increased to 39% of net sales as compared to 28% of net sales in the third quarter of the previous year.[6] In other words, Mosaic's gross margin was $853.6 million in Q3 FY2011 as compared to $476.5 million in year ago results.[6]
Q1 FY2011 Summary
Mosaic tripled its net earnings for the first quarter of 2011 as compared to first quarter results the previous year[7] Earnings posted at $297.7 million as compared to $100.6 million in year ago results.[7] These earnings were driven by improved gross margin as a percent of net sales. Gross margin for the quarter was 23% as compared to 15% in Q1FY2010.[7] Net sales similarly improved from year ago markers. Mosaic's net sales improved from $1.5 billion in the first quarter of 2010 to $2.2 billion in Q1FY2011.[7]
These earnings are set against the backdrop of higher potash sales volumes and higher prices for phosphate sales; potash sales prices, however, partially offset these gains for the first quarter.[7] Net sales in Phosphates increased by $400 million for the quarter culminating at $1.6 billion.[7] Potash's net sales increased to $621.9 million from $333.3 million in the previous quarter.[7]
FY2010 Annual Earnings
Mosaic posted net earnings of $6.8 billion for FY2010, a decrease from $10.3 billion the previous year.[5] Gross margin similarly decreased from $2.8 billion to $1.7 billion.[5] Operating earnings decreased from $2.4 billion in 2009 to 1.3$ billion in 2010.[5] Overall expenses, whether they are general, administrative, or other operating expenses, increased in 2010 from $365.8 million to $422.5 million.[5]
Trends and Forces
The World Food Crisis Increases Demand for Fertilizer; Temperature and Precipitation Fluctuations Stave Off Customers
Large farming regions within the United States, India, and China are experiencing severe drought conditions that makes growing crops extremely difficult. On one hand, higher demand for food due to lower supply will improve demand to fertilizer. On the other hand, farms will not pay for fertilizer if there is not enough water to grow crops. [8]
Despite drought conditions in California, however, the Midwest is expected to yield a record corn and soybean crop in 2009. Good weather and favorable pollination conditions have driven crop prices down, anticipating record supply surpluses. [9], [10]
Even with supply surpluses, the world food crisis will place some upward pressure on food prices. A 2008 FAO report pegged the number of undernourished people in the world at 963 million, nearly 15 percent of the world's population. [11] Many liberal organizations blame US fertilizer companies for misleading farmers and partially contributing to the world shortage, but at the end of the day, high demand for food will translate into high fertilizer demand absent a severe worldwide drought.
High food prices, and moderate drought conditions will improve demand for the The Mosaic Company's products. Severe drought conditions will disrupt demand for Mosaic's fertilizer because it is pointless to fertilize dead fields. Low food prices, and great weather will decrease demand for Mosaic's fertilizers.
Higher Gas Prices Increase Demand for Biofuels
Ethanol in the U.S. is produced from corn, one of the most fertilizer and nitrogen intensive crops. [12] The demand for Ethanol and biofuels increase with rising gas prices. People only consume biofuels, it seems, when gas prices are extremely high. When there is greater demand for ethanol, there is greater demand for corn fertilizers. Higher gas prices benefit the Mosaic Company by increasing demand for bio-fuel, and therefore Soybeans and Corn.
Reduction in Arable Land, Increasing Populations
The amount of arable land worldwide is dwindling. The population boom has cut the amount of arable land per person in half over the past 50 years.[12] As population and personal incomes in developing regions of the world increase, the worldwide demand for food also has increased. Worldwide population has grown 12% in the past ten years, while farm acreage has grown only 2%.[13]
Brazil, China, and India are three of the five most populous countries and are trying to meet the growing demand for food, fuel, and feed for livestock. Brazil, China, and India each have just 7%, 15%, and 49% of arable farmland, respectively,[14] and with their respective populations on the rise, these countries need to make the most of the arable land they have. In addition, weather factors such as temperature, rain, floods, droughts, and hurricanes destroy arable land for a particular crop season and render land unusable for a few seasons.
Reduction in arable land should increase the demand for yield-increasing fertilizers in the long run and benefit Mosaic. In the short run, however, violent destruction of arable land through natural disasters could disrupt Mosaic's contracts and damage the company's profitability.
Competition
Mosaic has few competitors since the fertilizer industry has significant barriers to entry and Economies of scale. It would cost from $1.6-$2.5B for a new company to enter the industry. A company would need five to seven years of development time to build mines and factories, build rail and gas lines, and purchase rail cars and storage before it could even begin making a profit from Potash or Phosphates. [3] [15]
Mosaic primarily competes with the Potash Corporation of Saskatchewan (POT), and to a lesser extent with the Nitrogen giant Agrium (AGU). Nitrogen based fertilizers are not a significant part of Mosaic's business model.
Footnotes
- ↑ 1.0 1.1 | MOS 2009 Annual Report
- ↑ Mosaic Company 2009 Form 10-Q Second Quarter
- ↑ 3.0 3.1 Potash Corp. 2008 Annual Report, "Company Overview: Potash," p. 2
- ↑ The Mosaic Company 2008 Annual Report, "Company Overview: Mosaic," p. 2
- ↑ 5.0 5.1 5.2 5.3 5.4 5.5 5.6 5.7 | Mosaic's 2010 Financial Highlights
- ↑ 6.0 6.1 6.2 6.3 6.4 6.5 | Mosaic Announces Third Quarter Results
- ↑ 7.0 7.1 7.2 7.3 7.4 7.5 7.6 The Mosaic Company Reports Threefold Increase in First Quarter Fiscal 2011 Net Earnings
- ↑ | Map of International Drought, Global Researcher
- ↑ | UNL's Drought Monitor
- ↑ | Good corn pollination in the 2009 season so far
- ↑ [http://www.un.org/apps/news/story.asp?NewsID=30256&Cr=Food+crisis&Cr1 | UN News Centre]
- ↑ 12.0 12.1
- ↑ Delta Farm Press, "World population trends favor farmers," December 5, 2007
- ↑ | C.I.A. World Factbook: Brazil, China, India
- ↑ Mosaic 2007 Annual Report, pg. 2
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