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FMC Provides Ag Fertilizer?

Posted on: October 16, 2008 - Email Article - Printable Version

Darrell Reid

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I’ve been dying to ask the investors who have sold FMC Corp. [FMC: 45.96, 0.00 (0.00%)] in recent weeks a few questions. Since when did FMC Corp. mine phosphate rock to supply to farmers? When did FMC Corp. negotiate international potash prices or supply nitrogen fertilizer to farmers? Never! You wouldn’t know that by last week’s ridiculous sell-off. Merrill Lynch analyst Don Carson downgraded the agricultural commodity sector to “neutral” from “buy” foreseeing difficulties for many companies to perform in a “post-peak environment.” Big name Ag players such as Potash Corp. [POT: 82.62, 0.00 (0.00%)], CF Industries [CF: 56.60, 0.00 (0.00%)], Mosaic Inc. [MOS: 37.67, 0.00 (0.00%)], and Agrium Inc. [AGU: 37.40, 0.00 (0.00%)], and Intrepid Potash [IPI: 21.69, 0.00 (0.00%)] all fell over 20% in response to the overly bearish report. FMC Corp. unjustly suffered the same fate as they were caught in the broad Ag commodity sell-off. I guess this is the result of the VIX, often referred to as the “fear index”, reaching all-time highs.

So what exactly happened?

Merrill Lynch is worried the credit crisis will shift towards farmers who often use loans to purchase equipment and other operational costs. At first glance, this is a logical argument considering there is a clear slowdown in the industrial production of emerging nations. This is most noticeably depicted through the Baltic Dry Index, commonly referred to as an indicator of economic growth, which declined 52% in September. Farmers will face a slowdown in profit growth rates, but their ability to finance operations through debt has not changed materially. Ag chemical companies are more concerned with the appetites of emerging nations more so than rapid rise of their skylines.

Ag chemical companies have recently gone through a golden age of evolving tastes as nations accumulating wealth have switched to more protein-enriched diets. This increased demand for meat has put pressure on farmers to produce corn, a staple of the feedstock. Demand for these crops are coming off all-time highs but are still in line with 3 year averages. Farmers are extremely profitable and they will have no problem funding operational costs going into the next harvest season. Farmer Mac[AGM: 4.04, 0.00 (0.00%)], the agricultural lending institution that provides loans to farmers backed by the U.S.D.A, currently holds $5.2 million in 90-day loan delinquencies currently representing just 0.21% of their total loan portfolio. To make the assumption that the same egregious practices that caused the housing bubble were replicated in the agricultural sector is erroneous and neglegent. Global consumption of corn has grown by an average of just over 4% the past 10 years. The domestic farmer today is more capable than ever to pay down the debt accumulated to purchase land, fertilizer, and equipment. Panic has spread to this sector and grossly mis-priced companies such as FMC Corp.

What does this have to do with FMC?

FMC Corp. operates in the same end markets as the fertilizer companies above, but their role in aiding farmers optimize crop yield is slightly different. FMC provides insecticides, herbicides, and pesticides to protect crops from succumbing to natural forces that would typically eat away at crop yields. Farmers cannot decide to stop buying pesticide and herbicide just because corn is not fetching a record price. The absence of FMC’s products would actually cause supply to go down. They must maintain their crop yields as arable land sinks to a historical low. FMC’s products are absolutely necessary in insuring crops last through the season.

The fact that FMC’s share price has collapsed almost 50% in the past month is completely unjustified. Market panic has completely consumed investors. FMC Corp. reported earnings of $1.29 per diluted share, representing a 35% increase from the same period last year. FMC Corp. is a fundamentally sound company currently trading at a paltry 8.57x earnings and 2.01x book value. Agricultural chemicals insider Terry Crews, CFO of seed and herbicide supplier Monsanto [MON: 74.38, 0.00 (0.00%)], sees “price increases for its seed and traits in the U.S to be above its targeted 16%-18% range next year, with volume growth in the low single-digits.” Why has FMC Corp. lost half its value in a month? The selling of fundamentally sound companies seems to be the trend right now, but as murmurs of capitulation begin to arise and people look for a bottom in the market, FMC Corp. will not be trading at such a discount for long. Look for companies such as Monsanto, Terra Industries [TRA: 17.74, 0.00 (0.00%)], and Ecolab [ECL: 35.15, 0.00 (0.00%)] to lead the rebound.

-Darrell Reid

Disclosure: The author and the mutual fund the author manages are long FMC, while the mutual fund the author manages has interest in the performance of POT and ECL.

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