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The Fertilizer Commodity Bubble: Potash (POT) at Trader’s Narrative

Yes, this is about #2. At least the chemical equivalent. So let’s get the jokes out of the way first…

Whenever one stock grows enough to represent an inordinately large percentage of the index it belongs to, you know there is some major dislocation going on. And it is about to be corrected.

Right now that would be Potash (POT) the fertilizer company from Saskatchewan, Canada. Potash is now the 2nd largest company on the Toronto Stock Exchange, at $60 billion capitalization. The largest is RIM (RIMM), which along with Potash has been the engine that has propelled the Canadian indexes higher in 2007 and so far in 2008, almost unassailable.

From the bottom of the bear market in early 2003 to recent times, Potash stock has given the lucky few to have ridden it loyally higher, a “20 bagger”:

potash pot long term chart may 2008

The problem is that right now it is priced for utter perfection. And if the world is one thing, it is imperfect. For one, there is no reasonable logic to its valuation. We have more than ample reserves of yet to be mined. In fact, according to the International Fertilizer Association (who should know) at the current rate of use, we have enough proven reserves to last us another 300 years.

And strangely enough, inflation adjusted potash prices have continuously and consistently fallen over time. It is only in 2007 that we’ve seen an exception to this with KCI (potassium chloride) prices tripling. This is a response to a similar rise in the price of sulfur and natural gas (raw materials) for potash.

To bring back some perspective to this, consider a research note from Merrill Lynch saying that if we add the capitalization of the 3 large fertilizer companies: Potash, Mosaic (MOS) and Agrium (AGU) we have a value larger than the sum of the value of all potash ever mined and sold in modern history!

During the tech bubble of 2000 many Canadians remember how the TSX index was pulled higher by Nortel (NT) to levels it wouldn’t have attained by its own accord. But Potash’s (POT) meteoric rise makes Nortel’s look pathetic in comparison.

If you were lucky enough (or smart enough) to buy Nortel at the 1998 October bottom - around $75/share - and repeat the miracle of perfect timing again to sell at the top: August 2000 at around $830/share, you would only be boasting a 10 to 11 “bagger”.

nortel networks nt tech bubble rise

If you have been fortunate enough to be long Potash, the good times may be over. Time again to look for what most are ignoring.

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5 Responses to “The Fertilizer Commodity Bubble: Potash (POT)”  

  1. 1 Harold Postchy

    I’m sure your hedgie colts will love for this full of absurd personal observations. If you hade done your homework you’d know that Potash is not Ethanol, PV/Solar cell to flood the market and ever become oversupply commodities; it’s a precious source that like crude oil & N. Gas with limited reserves in the globe. Where did you dig out these nonsense lies? You call yourself an analyst? Off course we all know you’ll be handsomely rewarded to be an scum with an unlimited resources. You’ll be exposed soon, might as well close your site. After you cash in your reward of your lies, look for a real job this time.

  2. 2 Babak

    what exactly did I “lie” about? could you be a bit more vague? thanks

  3. 3 Ryan P.

    I thought this is a personal observation page owned by the writer. What is wrong with “absurd” observation anyway? We all do it time and time. Also, be specific of your claim of lies with reliable sources, numbers, projections, etc. Otherwise, your observation on Babak’s “absurd” observation is absurd.

  4. 4 George

    Why is potash based fertilizer - which due to limited supply and long ramp ups to bring more production online has tripled in price - in the same league as “commodities”?

    Commodities can go up and down when people speculate on them or when there’s fluctuating supply/production due to natural or economic conditions. In the case of potash and oil there’s high demand and non-renewable limited supply - people need fertilzer even more than they need oil and until there’s a huge reduction in the human population (inevitable I think: hopefully a non-catastophic version, instead of Easter Island style) demand will be constant and growing.

    Of course everyone could go vegan and quit giving perfectly good food to vast numbers of cows but that’ll take a while. Right now Potash Corp. has 75% of the world’s excess capacity in fertilizer and is set to make a lot of money of all the people who are eating.. Folks are investing in **the company’s ability to make money** here not the price of the commodity.

    They will make money and lots of it I just wish there were fewer people buying shares in companies these days. Every middle class joe or jane with a computer thinks they have the right to do it. To my mind the equity markets should be limited to people or funds with over 10million in net worth and put/calll contracts should be limited. Give a bundh of unwashed people the ability to make naked puts and you are going to get lots of people trying to “move the sentiment” of the market and create feelingsof fear and greed amongst investors. The decision makers who manage larger funds or who are wealthy are more rational and we wouldn’t have had this silly run up if they were by rights and privilege allowed to rule the system.

    Individual trading by the unwealthy should be made illegal.

  5. 5 Howardr

    Looks like Harold has been more than correct; the bubble has indeed burst. If only I had read this, and other forecasts about POT that I previously missed, a few months ago.

    So, Harold, what do you see next on the horizon, either bursting or booming?

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