Global fundamentals weaken
In its press release, Mosaic (MOS) cited weakness in global fundamentals as the reason for lowering its guidance for its Potash and Phosphates segments. The recent global weakness is primarily driven by weakness in farm economics and, to a lesser extent, the slowdown in China that has rattled the majority of the commodities and equity markets.
Reasons for the weakness
Mosaic stated that market sentiments were impacted by political and economic uncertainty, lower crop prices, and currency volatility for softening demand. In our 2Q15 earnings series Why Mosaic Can Be More Competitive in the Fertilizer Industry, we looked at concerns Mosaic was facing in Brazil and North America.
In 2Q15, Mosaic’s management stated that in Brazil, farmers have been facing issues due to a weakness in the credit environment and a weaker Brazilian currency compared to the US dollar. North America experienced wet conditions, which is negative and led to farmers to delay their fertilizer purchases. A stronger dollar compared to the respective currency further makes it expensive for farmers to purchase fertilizers, thus hurting the companies.
Since the fertilizer business is impacted by all these industry fundamentals, other fertilizer companies will also take a hit as a result of these weakness. That explains why Potash (POT) has recently taken a beating. Agrium (AGU) and CF Industries (CF) were also impacted. The VanEck Vectors Agribusiness ETF (MOO), which holds 8.7% of Mosaic and Potash combined as a percentage of its total portfolio, also saw downward movement.
In the next part of this series, we’ll wrap things up by looking at how valuation multiples have been affected.