The bubble has burst for fertilizer and agricultural chemical stocks, with former stock-market star Mosaic Co. off by a third in Thursday trading and others hard on its heels as excess supply and reduced demand slow the pattern of price increases on farm chemicals.
The blowback has also hit firms such as farm-equipment giant Deere & Co., off 9.3 percent at $42.
Mosaic, one of the two largest fertilizer makers by sales, was off 31.4 percent to $46.33 midday - and has lost two-thirds of its value since mid-June.
Thursday's decline came despite the company's report late Wednesday of robust fiscal first-quarter earnings growth as it also warned that prices of phosphate, a particular grade of fertilizer, were leveling off. That sent hedge funds and Wall Street brokers fleeing from the sector, where consistent price increases had resulted in great expectations.
The action in fertilizer stocks in particular is comparable to the technology bust of 2000 to 2001, when profitable companies like Microsoft Corp. (MSFT) and Intel Corp. (INTC) suffered from speculators' realization that the sky was not the limit.
Farmers could not bear the weight of ever-increasing costs forever, especially as grain prices fell by nearly half in recent months and credit tightened. And the popularity of the momentum "ag trade" with hedge funds and day traders has led to a decline similar in magnitude and pace to the tech bust.
The other giant fertilizer maker, Potash Corp. of Saskatchewan (POT) - named by Goldman Sachs as one of the top 20 most popular names in hedge-fund portfolios - was down 20.1 percent recently at $102.31, less than half its summer peak. Another peer, Bunge Ltd., fell 19 percent to $51.01, down about 60 percent from its high and a bigger decline than such beaten-down financials as Citigroup Inc.
Seed-and-weedkiller processor Monsanto Co. trimmed some of its losses by late-morning as it again boosted its fiscal-year outlook. The stock was recently down 13 percent to $85.89, putting it 41 percent below its high.
Mosaic said fiscal first-quarter earnings almost quadrupled to $1.18 billion, or $2.65 a share, falling shy of the average of analysts' estimate of $2.94 a share.
The immediate issue was the price of phosphate, a grade of fertilizer that contributed more than half of Mosaic's quarterly revenue of $4.32 billion. In response to an "excess" of phosphate on the market, Mosaic, the leading producer of that fertilizer, reduced its production, and, as a result, its projection for sales volume of phosphate for the year.
Mosaic expects the average price of phosphate to be around $1,020 to $1,080 a tonne, more or less level with $1,013 this quarter, after a string of price increases.
The first signs of pricing trouble came last week, when Citigroup warned that the price of urea, another grade of fertilizer, had fallen sharply. Urea is a chemical compound, whereas potash and phosphate are mineral based. Shares of Agrium Inc. started falling in the wake of that report, and continued their decline Thursday, off 21 percent to $43.35.
"What's happened is that the inventory pipeline got a bit full late in the summer," said Mosaic Chief Financial Officer Larry Stranghoener. "That together with...the overall falloff in commodities prices caused buyers to sit on the sidelines and not make new purchasing commitments."
Stranghoener added that, "to the extent that there could be a significant global economic slowdown, it would fundamentally cause grain and oil-seed prices to drop sharply from where they are, and clearly that would have a negative effect on our business. We don't see that happening; we believe the long-term fundamentals for agricultural economics are excellent. There's still not enough food in the world."
That's an argument that drew top ratings from many Wall Street firms for agricultural stocks and heavy purchasing from hedge funds and day traders. Agriculture stocks were darlings when grain prices doubled and, in some cases, tripled earlier this year. But many of those gains have been given back of late.
On Thursday, Merrill Lynch cut its investment rating on the agricultural chemicals sector because of signs of weakness in phosphate and potash, another major grade of fertilizer. Merrill also warned "a global recession, particularly in Asia, represents a risk to corn prices, as it could lead to reduced demand growth."
One long-term skeptic, Citigroup chief U.S. equity strategist Tobias Levkovich, said the bullish argument on agricultural stocks never held much weight. "One of the arguments is that there's no supply," Levkovich said. "When demand falls off, guess what? There's a little more supply."
For its part, Mosaic insists that price increases for potash, in particular, will continue. For the current quarter, Mosaic projects an average potash price of $560 to $620 a tonne, up from the prior quarter's $488. Still, phosphate and potash are often used on the same crops, and it isn't clear whether they will diverge for long.
The economic slowdown is far from the only worry for agriculture stocks: hedge funds are facing requests from clients for redemptions and are forced to sell their holdings. That's affecting commodity prices and the prices of commodity stocks that hedge funds rode up to their peaks in the summer.
The run-up in fertilizer prices earlier this year also drew scrutiny on Capitol Hill. Sen. Byron Dorgan, a Democrat from North Dakota, asked the Federal Trade Commission to investigate pricing practices in the industry. Dorgan had met with farmers in his state concerned about the increases.
Lastly, with credit historically scarce, farmers may struggle to get the funding for seeds from Monsanto, or fertilizer from Mosaic. Farmer Mac, the country cousin of Fannie Mae and Freddie Mac which helped farmers buy land, is in some distress on the stock market.
Mosaic itself remains optimistic, however.
"I would counsel investors to keep their cool and focus on the outstanding fundamentals of this business," said Stranghoener, the financial chief. "We believe we have a very positive outlook and are going to generate a lot of cash throughout this financial year."