Sometimes it takes quite a bit of time for a relevant theme to mature.  This year we have been bullish on fertilizer stocks such as Intrepid Potash (IPI) and Potash Corp of Saskatchewan (POT).  The trade has been a bit lonely from June through mid-November as a weak economy has dampened demand for fertilizer products.

In January, the ZachStocks Growth Model took a significant position in IPI based on the assumption that the stock would begin to rally back towards its $32 IPO price as demand picked up for agricultural goods.  On March 6, ZachStocks profiled Intrepid Potash, outlining three options which could help IPI better survive the economic uncertainty.  These conservative strategies included shutting down mines, deferring expenditures and reducing operating levels in order to preserve cash during the challenging period. It now appears that the company has survived the worst of the downturn and  is primed to benefit from any increase in agricultural demand.  Intrepid finished the third quarter with $94.9 million in cash and no outstanding debt.  The average price for selling a ton of potash declined to $458 per short ton compared to $623 last year, but this metric is relatively stable compared to the gyrating prices we were seeing last year.  It’s encouraging to see that the company was able to turn a profit even with lower sales prices and adapt to the changing market.

Management has been very careful to match production with customer demand in order to keep inventories at a reasonable level.  Production for the third quarter was actually down 44% which points to a disciplined approach and will likely lead to industry strength.  As demand picks up, IPI can quickly ramp production levels back up to meet rising demand.  And it appears that demand may be picking up:

The third quarter began to show some signs of a moderate recovery in the domestic potash market.  Although the potash market in the United States remains a just-in-time market, our forward warehousing efforts have provided Intrepid the opportunity to participate in sales that we would have otherwise not realized. ~Bob Jornayvaz, CEO

For the last several quarters, farmers have been reluctant to purchase fertilizer due to economic concerns as well as tight liquidity constraints.  Typical funding sources for crop investments were caught up in the financial market dislocation and the capital simply wasn’t available.  But as capital markets have thawed, the demand from farming institutions is beginning to pick up.  The pent up demand from several quarters of weak fertilization could drive significant sales increases. Agriculture stocks have lain relatively dormant for several months.  As the market has favored risk based investments in order to gun for above normal returns, these stable companies have largely been picked over.  However, it appears that we are in the early stages of a broad move back toward stability and away from risky assets.  If this is the case, agriculture stocks could easily regain popularity and see their earnings multiples increase.

The last two days of trading have seen IPI and POT run sharply higher on massive volume.  This most certainly points to institutions building large positions and will likely set off a significant trend.  Intrepid appears to be a better investment due to its smaller market cap and greater flexibility when it comes to adapting to the environment.  POT has a higher debt level and just appears to have more risk.

As IPI trades up close to the $32 level (which was it’s IPO price from early 2008), it could run into resistance and stall out for a week or two.  But I expect that inflationary pressures, rising demand, and low inventory levels will work together to push this stock significantly higher over the next six months.

FD: Author does have a position in IPI in the ZachStocks Growth Model

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