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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]
Mosaic and other fertilizer producers enjoyed record earnings from 2004-2008 due to escalating world food prices. Farmers bought record amounts of fertilizer at extremely high prices to meet exploding world demand; 2009, however, has seen a sharp decline in food prices. Mosaic and other fertilizer producers have increased fertilizer prices by over 100% to keep margins up; this however, inadvertently has decreased profits as farmers have refused to purchase fertilizer at such high prices.[5] [6] Despite 2009 losses, industry analysts say Mosaic and other fertilizer producers are poised for a rebound as the world demand will increase, farmers will soon need fertilizer to continue their operations, and decreasing amounts of arable land make greater crop yields through fertilizer implementation the most viable option for continued agricultural development worldwide.[7] [8]
Business Overview
The following trends help Mosaic’s bottom line:
- Demand for biofuels, which is almost entirely determined by the price of petroleum and gasoline. People consume more biofuels like Ethanol when gas is expensive. Biofuels are made of crops fertilized by Mosaic's product.
- Demand for meat, especially, in emerging markets'. Calorie per calorie, meat puts a much higher strain on crops than grains. This encourages the use of fertilizer.
- Declining amounts of arable land due to urbanization and drought, combined with increasing populations encourage farmers to use more fertilizer.
Notice that bullish trends for Mosaic have one thing in common: they increase the prices of food by increasing demand. It is important to note that if food prices increase because of a serious collapse in the farming industry (a supply side shock), this hurts Mosaic more than it helps.
The following trends hurt Mosaic’s bottom line:
- Whole Foods-style movement away from processed fertilizer and towards organic food. Phosphates, Mosaic's core product, are frequently decried by natural food enthusiasts.
- U.S. Environmental Legislation against chemical fertilizer
- The strengthening of the U.S. Dollar (USD) against the Brazilian Rea (BRL) and other currencies. Mosaic makes its phosphates in Florida, and sells them in Brazil and other countries.
- Serious damage to the commercial farming industry which consumes Mosaic's product. This could happen through global climate change and/or widespread drought.
- Increasing ammonia and sulfur prices. These are the key ingredients to produce phosphate. Ammonia is made from natural gas
Business Financials
From summer 2004 to summer 2008, the share price of the Mosaic Company (MOS) rose over 1000% due to extremely high fertilizer demand, spurred by lowering crop yields and increasing world demand for food. [9] All 3 of Mosaic’s business segments help farmers grow more crops per acre, and so the company’s financials are 100% exposed to agricultural prices in the way an oil producer would be exposed to oil prices.
Since Summer 2008, the company’s share price has fallen over 50% along with demand for agriculture, and therefore fertilizers. Mosaic made the mistake of buying its industrial inputs (sulfur and ammonia) while they were priced at an all time high, which has pushed the company’s margins into the negative by increasing its Cost of Goods Sold (COGS) . Mosaic’s future profitability relies on its ability to buy ingredients cheaply, process them, and sell them at a mark-up in the form of fertilizer. [2]
Mosaic is dealing differently with this collapse than its competitors from a financial perspective. Its Current Ratio is over 4, which means that it is hoarding its assets in anticipation of better times, much like a squirrel stashing away nuts for the winter. [10] This view is further supported by the company’s sale of its nitrogen fertilizer branch, Saskferco Products ULC (Nitrogen) for $1.6 billion to Yara International. [10] Divesting and focusing on the core business is a sign that Mosaic is taking a conservative approach to the current agricultural market.
Because the company’s production is centered in the United States (primarily in Florida), a weakening U.S. Dollar (USD) benefits the company’s bottom line. While the company runs operations in Asia, Australia, and South America, its international presence is centered in Brazil . Thus, whenever the Brazilian Rea (BRL) strengthens against the dollar, Mosaic benefits substantially. [11]
During 2009, international operations saw a loss of 28% as opposed to 40% domestically. The fertilizer industry has responded to the lack of demand by raising fertilizer prices and cutting back production. As of the first quarter 2009, Mosaic has raised its fertilizer prices from 100-200% [2], following the lead of the Potash Corporation of Saskatchewan (POT) . In normal competitive industries, you would not see such price increases due to a lack of demand. If anything you would see price decreases to spur consumption. For example, nearly all of Macy's Inc. (M) clothes went on sale at the first sign of the 2008 recession. This is not so in the Potash and fertilizer industry because POT and MOS form a duopoly (like a monopoly but with 2 players), and have nearly complete pricing power due to their control of the fertilizer supply. They are both under investigation by the SEC for breaching Antitrust Legislation . [2]
Due partly to its strong Brazillian presence, there were publicized rumors that the Brazillian commodity giant Vale S.A. (VALE) would like to buy Mosaic at a $25 billion valuation (about $56.00 per share) [12] Vale denied the buy-out rumors on July 17th, 2009, but has reaffirmed its desire to expand into the commercial fertilizer market. [13]
Firms looking to buy out a major Potash producer would only have two choices: POT or MOS. Of the two, Mosaic is cheaper (lower PE Ratio) and has far less debt. [9][14]
Business Segments
- Phosphates: In 2008, MOS accounted for about 15% of world phosphate-fertilizer production, and 59% of US production. Phosphates generate a high percentage of the company’s earnings. Q3 2009 saw the 9-month average gross margins on phosphates decrease from 33.5% to 25.3%. Despite raising prices 103% from the 9-month period a year earlier, Mosaic’s phosphate sales were less profitable because of higher ammonia and sulfur costs. [5] Mosaic has noticed that customers who would not pay higher prices for phosphate fertilizer were switching over to lower quality substitutes, which include chicken litter and liquid UAN 32. [12]With increasing demand for organic foods (and therefore fertilizer), Mosaic is worried that customers will not switch back to phosphates. [2]
- Potash: As of 2008, Mosaic was the third largest producer of potash in the world. It sells potash for fertilizer and industrial applications. In fiscal 2008, Mosaic made about 14% of the world’s potash and 38% of North America’s supply. Potash has driven Mosaic’s operating income in 2009 more than in 2008 because the cost of mining Potash did not increase. The 9-month gross-margin of Potash increased from 36.7% in 2008 to 52.9% in the first 3 quarters of 2009 due to a price hike of over 160%. [5]
- Offshore and Other: Mosaic used to produce nitrogen fertilizer until selling its interest in Saskferco Products ULC at a $673.4 million gain in fiscal 2009. This was always a relatively small part of the company’s business. [5]
Quarterly and Annual Earnings
Q1 FY2010 Summary
MOS announced Q1 FY2009 earnings of $100.6 million, or $0.23 per diluted share, as compared to net earnings of $1.2 billion, or $2.65 per share, for the Q1 FY2009.[15] Net sales similarly decreased from $2.9 billion in Q1 FY2009 to $1.5 billion in the first quarter of FY 2010 marking a 66% decrease driven by 69% and 66% drops in potash and phosphate sales respectively.[15] Gross margins also fell to 15% of net sales as compared to 38% the previous year, and operating earnings also fell from $1.5 billion to $134.2 million.[15] Driving these losses were a decline in market selling prices for phosphate as well as a decline in potash sales volumes and selling prices.[16]
Trends and Forces
The World Food Crisis and Temperature and Precipitation Fluctuations
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. [17]
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. [18], [19]
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. [20] 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.
Lower Gas Prices, Demand for Biofuels
Ethanol in the U.S. is produced from corn, one of the most fertilizer and nitrogen intensive crops. [21] From 2007-2008, corn prices jumped 125% due to heightened demand for biofuels, food, and livestock feed. [22]
The demand for Ethanol and biofuels peaked in 2008 along with gas prices, only to falter in 2009. People only consume biofuels, it seems, when gas prices are extremely high. For instance, the Midwest has seen a 52% drop in ethanol consumption, with only a 3% drop in gasoline consumption. Ethanol is about 15-20% less efficient than gasoline, and studies have shown it needs to be about 40 cents cheaper per gallon to compete. [23]
When there is less demand for ethanol, there is less demand for corn fertilizers. Lower gas prices hurt the Mosaic Company by decreasing demand for bio-fuel, and therefore Soybeans and Corn.
U.S. Environmental Legislation and Antitrust Legislation
The Mosaic Company is currently under investigation by the Environmental Protection Agency and the Department of Justice for its role in unlawful pollution in Florida, and the destruction of native bird populations. [2] There is fierce debate as to whether commercial fertilizers cause health harms in humans and animals, especially phosphates (the key ingredient in Round Up). Also, there are worries of radioactive toxicity associated with Mosaic's Floridian phosphate mining operations. [24]
Additionally, both the Mosaic Company (MOS) and the Potash Corporation of Saskatchewan (POT) have displayed textbook price gouging behavior (raising prices over 100% when demand falls), and are under investigation by the US Federal Government for breaching Antitrust Legislation.[5] This is a serious concern because such actions could be construed as exacerbating humanitarian hunger problems.
The government could severely penalize Mosaic for its breaches of environmental law, or even break it up if it were to be judged a harmful monopoly.
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.[21] 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%.[25]
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,[26] 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] [27]
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.
The following graph shows the year by year production of the major agricultural fertilizer companies. As you can see, Mosaic dominates the phosphate market, and competes with Potash Corporation of Saskatchewan (POT) somewhat evenly in the potash market on a production basis. The Potash Corporation of Saskatchewan (POT) is able to gain higher margins on its Potash production due to its higher fertilizer content and superior distribution networks, and has therefore been a more profitable company overall.
| Leading Fertilizer Producers 2008 Financial Comparison | ||||
|---|---|---|---|---|
| Company | Revenue | Net Income | Profit Margin | Operating Margin |
| Potash Corporation of Saskatchewan (POT)[28] | $9.4 B | $3.5 B | 37.00% | 49.07% |
| Mosaic Company[29] | $9.8 B | $2.1 B | 21.232% | 28.60% |
| Agrium (AGU)[30] | $10.3 B | $1.3 B | 12.87% | 19.34% |
| Leading Fertilizer Producers' Annual Nutrient Capacity (million tonnes) | ||||
|---|---|---|---|---|
| Company | Phosphate | Potash | Nitrogen | |
| Potash Corporation of Saskatchewan (POT) [31] | 2.4 | 13.2 | 3.5 | |
| Mosaic Company (MOS)[32] | 9.4 | 10.4 | 0.5 | |
| Agrium (AGU)[33] | 1.0 | 2.1 | 5.0 | |
Footnotes
- ↑ 1.0 1.1 | MOS 2009 Annual Report
- ↑ 2.0 2.1 2.2 2.3 2.4 2.5 | MOS 10Q, p.2
- ↑ 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 Mosaic |Yahoo Finance Consolidated Financial Statements
- ↑ | PotashCorp's profit drops 80 per cent as farmers balk at high fertilizer prices
- ↑ Mosaic shares rise after RBC starts coverage
- ↑ Agricultural Stocks And Precious Metals Miners Next Hot Stock Sectors
- ↑ 9.0 9.1 | Google Finance Data on Mosaic Company
- ↑ 10.0 10.1 Motley Fool Analysis on Stock Valuation
- ↑ Mosaic Company Website
- ↑ 12.0 12.1 |MOS Acquisition Rumors, Reuters
- ↑ |MOS Acquisition Rumors, Bloomberg
- ↑ | Google Finance Financials on Potash Company
- ↑ 15.0 15.1 15.2 Mosaic Reports Fiscal Year 2010 First Quarter Results
- ↑ CEO Message: First Quarter 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]
- ↑ 21.0 21.1
- ↑ | www.wikinvest.com: Corn Prices
- ↑ [http://news.yahoo.com/s/ap/20090714/ap_on_re_ca/us_farm_scene_e85_outlook | Yahoo News: Massive Ethanol Decrease in 2009]
- ↑ Our Phosphate Risk, Website
- ↑ 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
- ↑ 2008 POT 10K
- ↑ 2008 MOS 10K
- ↑ 2008 Agrium 10K
- ↑ 2008 POT 10K
- ↑ 2008 MOS 10K
- ↑ [Agrium (AGU)|Agrium]]<ref>[http://www.agrium.com/uploads/Agrium_Fact_Sheet.pdf September 2008 Agrium Fact Sheet]</li></ol></ref>
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