Tuesday, June 23, 2009

Potash - Fertilizer Or More Baloney? Part Deux

One of the greatest Wall Street Ponzi schemes this cycle were fertilizer producers and agricultural commodities. Everyone on Wall Street was pumping these stocks like there was no tomorrow. Everyone. We had a prior critical post on Potash by the same title when exuberance was coursing through the financial system. Since then the stock has imploded yet is now up substantially off of that implosion low. Now it's time for a follow up or part two post.

Buy fertilizer stocks and pump up the commodities associated with their production and voila! You have the makings of completely artificial and unsustainable earnings. Couple that with the momentum and quantitative "factors" clowns running most hedge funds and you've got yourself enough fuel to ram these stocks to the heavens regardless of reality. Unfortunately, the slide for Potash, as an example, was a brutal one. It has fallen from about $250 to $45. The Fed's liquidity rampage lifted the price to back over $100 again. But, this is purely Wall Street gamesmanship and not the least reflective of fundamentals.

If you bought Potash anywhere near peak earnings, don't worry. You might have an opportunity to make your money back some time around 2050. That's not a joke. While commodities were making these moon shots, I wrote on here that they were discounting fundamentals for decades to come. I believe it was up to thirty years of cash flow discounting that we wrote of. Frankly, any Wall Streeter who recommended these stocks in the last few years doesn't deserve a job managing other people's money. Ironically, the market will probably make that very decision as the finance industry implodes.

Early this year I actually saw a CNBC commentator remark that fertilizer was the new gold. Ah, the kiss of buffooneryism touches another supposed asset class.

So let's talk about something that is a lost art in the world of quantitative factors, hedge funds, Frankenstein finance and general Wall Street blabbering. It's called fundamental analysis. You remember fundamentals? It's what would have scared anyone into a bunker looking at discounted cash flows on Potash or any untold number of commodity stocks this past cycle. It's what would have kept Ben Graham miles away from these Ponzi schemes. It's what the world is witnessing now. But you never once heard any of this in the press. And you don't hear it now as Wall Street plows back into these same schemes.

Ironically, a return to fundamentals will soon be driving the market for fertilizer. I grew up on a farm so I'm a bona fide hick from the sticks. We really aren't quite as dull-witted as many in the media would make us out to be. But for those seeking validation, I do admit to watching Hee Haw while growing up. But, I was forced to watch it because my grandparents made me. Ugh!

I still keep in touch with a few farmers. Farmers that run pretty sophisticated operations. You know, they add and subtract in between watching Hee Haw. They also use GPS mapping systems to calculate fertilizer loads, rainfall, crop yields, etc. and use the agriculture futures market to hedge their yields & lock in production profits. Well, at least they used to before Wall Street started scheming in these markets. Many farmers now won't touch the futures market for the very use it was intended for because Wall Street's commodities "takeover" distorts the ability of the market to be used for business purposes.

Anyway, do you know what they told me a few months ago? Between the genetically modified seed companies which have cornered the seed market (anti-competitive monopolistic business practices) and the outrageously high prices for fertilizers, the profits derived from farming are just about nonexistent. And depending on the debt load of farmers, profits have turned into substantially upside down losses. Couple that with restricted credit and falling land prices and we are likely headed for a major uptick in agriculture-related bankruptcies and losses. (So much for Jim Rogers's repeated remarks about how much he still likes agriculture commodities. Has Rogers actually been right on anything after writing that book? Hot on China, hot on the collapse of the dollar, hot on agriculture commodities, hot on inflation and on and on and on. All wrong. Can I get a job that pays me millions? Where countless people repeatedly line up to hear what I have to say even though I am continually wrong? I can be as wrong as anyone. I promise.)

Some might say this environment will also provide fuel for increasing agricultural prices to relieve possible shortfalls in production or upside down market pricing structures. But, this argument fails to take into account the reality of boom and bust cycles so prevalent in commodities. Take out the financial manipulation of commodities by Wall Street and what are the chances hundreds of millions of people around the globe now either unemployed or living on subsistent wages are going to absorb higher food prices? In other words, to spur substantial product demand at substantial higher levels? The greater reality is that we now see the potential macro environment developing for a future famines as millions struggle for their very existence. Additionally, because of the economic dynamics highlighted above, we now see a potential for a drop in food production caused by the banksters. Or, as a farmer taught me as a child, you can't bleed a turnip. A timelessly prescient economic maxim lost by the never-ending pump on Wall Street.

We are now in a period that is going to test the economic maxim of income inelasticity of demand for basic foodstuffs. In the real world, there is no demand when there is no money. Instead there is malnutrition and starvation. Something I think could become epidemic in emerging markets. The pricing models of fertilizer and genetically modified seed providers have to adjust much further. Or, as I see it, even collapse. Whether that is today or a month from now or a year from now, it's basic math. And, that will lead to further erosion of profit margins in the agricultural commodities business.

So, is fertilizer really the new gold? A fool and his money.........
posted by TimingLogic at 7:23 AM