Mosaic Co. (NYSE: MOS) is reported to be in talks with Mexico’s Grupo Fertinal SA de CV about acquiring the Mexican fertilizer maker. The deal could be worth as much as $1 billion. Agriculture stocks including Potash Corp. (NYSE: POT), Syngenta AG (NYSE: SYT), Monsanto Corp. (NYSE: MON) and Intrepid Potash, Inc. (NYSE: IPI) are all down dramatically from the commodity boom of 2008, and the fertilizer sector appears to be searching for a new bottom. This means mergers or buyouts could be in the works for the ag stocks and fertilizer sector.
Valuations in agricultural chemical stocks have dropped, and the sick euro and sales slowdown in Europe don’t point to a rise in share prices. One thing that is possible, though is adding value by consolidating, and that is almost surely Mosaic’s aim here.
Grupo Fertinal’s phosphate resources are the prize for Mosaic, which makes about 10% of the global supply of potash fertilizer and controls 13% of the global supply of phosphate fertilizer. The acquisition would give Mosaic an entry into the Mexican market, and a new supply of phosphate.
Mosaic reported more than $2 billion in cash and equivalents at the end of its third fiscal quarter in February. According to The Wall Street Journal, company executives believe that global demand for agricultural products over the long term was not harmed by the recent recession. Mosaic also predicts that demand for fertilizer will increase as farmers are called upon to grow more food for more people. Increased demand for biofuels such as corn-based ethanol also contributes to the prediction for more fertilizer.
One analyst estimates that global potash consumption in 2010 will be 48-50 million tons, and that another 5-7 million tons of demand is needed before potash prices rise.
Potash prices are rising in Europe and that is leading Mosaic and Potash Corp. to boost output as demand for the fertilizer grows. The whole industry is banking on breaking through to the pent-up demand from farmers who did not buy as much fertilizer in 2009 because low grain prices led the farmers to hope that potash prices would fall. They did for a while, but seem to be recovering a little now.
Consolidation in the fertilizer business could also come from an unlikely source — BHP Billiton plc (NYSE: BHP). Billiton owns potash deposits in western Canada and may choose either to develop those or to buy other producers, like, for example, Grupo Fertinal. As we pointed out, even the threat that Billiton could buy keeps valuations up, and Grupo Fertinal has no doubt noticed that as well.
Mosaic shares are trading down less than 1% this morning, while the Market Vectors Agribusiness ETF (NYSE: MOO) is up more than 1%.
