What Led to Mosaic’s Recent Sell-Off?

On September 21, Mosaic (MOS) released a statement that said the company would reduce production in its Potash segment and maintain “planned slower production in its Phosphates” segment. This move was primarily driven by a delay in fertilizer purchases in the North America and Brazil markets. During this slowdown, the company plans to use downtime for maintenance at its Colonsay potash mine.

Selling prices of fertilizers and volumes are two key drivers that impact revenues for fertilizer companies. Despite the positive long-term outlook for the crop nutrient industry in the short term, Mosaic expects prices as well as volumes to come in lower.

The company expects its Phosphates segment to be in the lower range of 2.1–2.4 million tons and DAP prices to be in the upper half of the $435–$455 per ton range. Gross margins, a closely tracked metric for fertilizer companies, is expected to be in the low twenties range. In 2Q15, the Phosphates segment had a gross margin of 21%.

Mosaic also lowered its guidance for its Potash segment to the bottom half of 1.6–2 million tons. Average selling prices were also guided to the bottom half of $260–$280 per ton. Due to these developments, the company stated that “the Potash segment gross margin rate is now expected to be in the high teens, compared to prior guidance of the low- twenty percent range.”

The key takeaway in the lower guidance is the implied weakness in farm economics, which impacts not only Mosaic but also Agrium (AGU), Potash (POT), CF Industries (CF), and the VanEck Vectors Agribusiness ETF (MOO). MOO holds 3.7% of Mosaic as a percentage of its total portfolio.