Mosaic Has Room To Run On The Back Of Wheat Prices
Oct. 19, 2020 9:45 AM ET|15 comments | About: The Mosaic Company (MOS)
Andrew Hecht
Andrew Hecht
Hecht Commodity Report
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Summary
Bullish signs in agriculture.
Wheat rises to a six-year high.
Soybeans and corn rally.
Fertilizer demand will increase with prices.
Mosaic is a leader in the fertilizer and a takeover candidate at its current valuation.
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I am bullish on the agricultural sector for the coming years. In my most recent Seeking Alpha piece on the USDA’s October 9 World Agricultural Supply and Demand Estimates report, I highlighted the recent gains in the commodities that feed the world.
Each year is a new adventure for crop production, as Mother Nature’s weather is the primary factor for yields. The mid-August derecho in the US grain belt caused prices to rise. The weather event was a reminder of the fickle nature of supplies. The last significant drought came eight years ago, which sent corn and soybean prices to record highs. Since then, bumper crops have consistently satisfied the global demand.
Meanwhile, the demand side of the fundamental equation is always increasing because of demographics. Each quarter, the world adds approximately twenty million mouths to feed. According to the US Census Bureau, since 2020, the world population grew from around six billion to 7.689 billion as of October 13, an increase of over 28%. Each year the world requires more food. In 2020, demand for grains, oilseeds, and other agricultural products was higher than in 2019. In 2021, it will be higher than in 2020. The bottom line is that crop production needs to keep pace with the rising population.
The efficient production of crops depends on nutrients in the soil. The Mosaic Corporation (MOS) produces concentrated phosphate and potash crop nutrients in North America and internationally. If we are entering a bull market in the agricultural sector, the ever-increasing demand for fertilizers is likely to increase. MOS shares are trading at a bargain-basement price below the $20 level. MOS could be the perfect stock for exposure to the agricultural sector over the coming years.
Bullish signs in agriculture
The last time agricultural commodity prices rose to highs was in 2011 and 2012. In 2012, dry conditions caused supply shortages that pushed corn and soybean prices to record highs and wheat to the second-highest level in history. In 2011, sugar, coffee, cocoa, and cotton rose to multi-year or all-time highs. While the weather is always the primary factor for the commodities that feed, clothe, and power the world (via biofuels), the central bank liquidity and government stimulus that followed the 2008 global financial crisis created a landscape for prices to rise.
In 2020, the amount of liquidity and stimulus has been even higher because of the global pandemic. The US Treasury borrowed a record $530 billion from June through September 2008. In May 2020, the Treasury borrowed $3 trillion, and more borrowing is on the horizon. The increasing money supply weighs on the purchasing power of all fiat currencies, including the US dollar. The dollar is the world’s reserve currency and the benchmark pricing mechanism for agricultural commodities. A falling dollar is a bullish factor for agricultural products.
Source: CQG
The weekly chart highlights the bearish trend in the dollar index since March. The index measures the value of the US currency against the other leading foreign exchange instruments.
Wheat rises to a six-year high
CBOT soft red winter wheat futures are a benchmark for the price of the grain produced across the world. Many producers use the CBOT futures market as a pricing mechanism because it is the most liquid market for the primary ingredient in bread. The wheat price has made higher lows and higher highs since reaching a low of $3.5950 per bushel in 2016. The low in 2020 came in June at $4.6825.
Source: CQG
The monthly chart shows that CBOT wheat futures rose to a high of $6.3075 per bushel on October 16. The most recent peak was the highest level for the grain since December 2014. Wheat had not eclipsed the $6 level since 2015 before this month.
Soybeans and corn rally
In 2012, soybean and corn futures rose to record highs at $17.9475 and $8.4375 per bushel, respectively. Over the past months, the oilseed and coarse grain futures have been moving higher. In October, both broke out above technical resistance levels.
Source: CQG
The monthly chart of CBOT soybean futures shows that the oilseed rose to a high of $10.7975 per bushel this month, which was the highest level since January 2017 when they peaked at only one-quarter of a penny higher at $10.80.
In a sign of increasing demand for soybeans, the crush spread has moved higher since June.
Source: CQG
The weekly chart of the processing spread for crushing raw soybeans into soybean meal and soybean oil show the increase from a low of 54.25 cents in June to 121.50 cents per bushel at the end of last week. Meal and oil are consumer products, so the increase in the crush spread as soybeans rally provides fundamental support as the demand for the products is rising.
Source: CQG
Meanwhile, corn rose to a new high for 2020 at $4.09 per bushel last week and was trading above the $4 level on October 16. The last time nearby corn futures traded above $4.09 was in August 2019.
The rallies in the grain and oilseed markets have come during the 2020 harvest season in the northern hemisphere. The US is the leading producer and exporter of corn and soybeans. Russia and the US are leading wheat exporters. Dry conditions have caused the explosive move in the wheat futures market. While there are ample supplies, the rally reflects concerns that 2021 could be a different story.
Fertilizer demand will increase with prices
Rising grain and oilseed prices and the potential for bullish price action in other agricultural commodities will encourage producers to increase their output over the 2020/2021 crop year in the Southern Hemisphere and 2021 in the Northern Hemisphere. Increased production will cause fertilizer requirements to grow.
The agricultural commodities that feed, clothe, and even power the world each year can deplete soil nutrients. Fertilizers replace those nutrients. They provide the nitrogen, phosphorous, and potassium that help crops grow faster and bigger, increasing farmers' yields.
The higher the prices of grains rise, the more demand for fertilizers will grow over the coming months.
Mosaic is a leader in the fertilizer market and a takeover candidate at its current valuation
The Mosaic Company and its subsidiaries produce and market concentrated phosphate and potash crop nutrients in North America and worldwide. MOS’s headquarters is in Tampa, Florida, and was incorporated in 2004. At $19.14 per share on Friday, October 16, MOS had a market cap of $7.256 billion. The company trades an average of over 4.5 million shares each day and pays shareholders a $0.20 or 1.04% dividend.
Source: Barchart