A Rebound in Agriculture?

Seth Goldstein: 2019 has been a rough year for the agriculture sector as flooded U.S. fields have led to the lowest total acres planted in over a decade. Lower acres planted reduced the need for potash. In addition, low palm oil prices further weakened potash demand in Southeast Asia, driving global prices even lower.

Despite near-term challenges, we see better days ahead. For 2020, we expect a full rebound in U.S. acres planted and the recent recovery in palm oil prices to remain in place. Both factors should bode well for potash demand in 2020.

Further, we think potash prices could begin to rebound as soon as next year as recent production cuts should help tighten market conditions.

Lower potash prices have weighed on stocks, creating attractive opportunities for long-term investors. We like Nutrien and Mosaic as our top two stocks to play the potash recovery.

Nutrien is the largest potash producer globally. The company also produces nitrogen and operates the largest farm retail business in the U.S. Our narrow-moat rating is underpinned by the company’s cost-advantaged potash and nitrogen production. With shares trading in 4-star territory, we see considerable upside relative to our $68 per share fair value estimate.

We also like Mosaic, which produces potash and phosphate. Through the build-out of a new mine, Mosaic will become a low-cost producer, strengthening its cost advantage, underpinning our positive moat trend rating. With the stock trading in 4-star territory, we see significant upside relative to our $33 per share fair value estimate.