8/26/2015
By Charles Payne, CEO & Principal Analyst

Much has been made of the plunge in commodities prices around the world led by the freefall in crude oil. While there are obviously pluses to these kind of moves in the building blocks of economies, there’s a point when these declines represent anything but opportunity.

These times they represent lower demand, lower risk-taking and less confidence.

Under those economic conditions otherwise known as deflation the value of all assets begins to decline. The domino effect can be harsh and swift and at some point, create the kind of gravitational force that’s hard to reverse.

This is known as a deflationary death spiral and some see this as the biggest issues for the global economy- is America immune?

Individual Food Commodity Prices

The Food and Agricultural Organization of the United Nations monitors global food prices and its index is currently near a six year low. Drivers of food prices are like any other commodity or product beginning with supply and demand.

Supply is driven in-put cost, labor and energy.

(In addition, supply of agricultural products are affected by severe weather changes. The six year plunge would counter the notion that severe weather has changed dramatically in recent years. I suspect it’s the proliferation of media outlets and political agenda that’s really spreading. Be that as it may, save for an African drought that sent cereal prices higher this year, weather hasn’t been an issue.)

Demand may be waning from the global economic slowdown.

It would seem obvious cheap food could be the key to the prosperity of the planet, but when it’s cheap because of slowing demand, it’s symptomatic of an economy that needs a booster shot. The irony is the world’s useable land shrinks each day as the population increases. There was a time when top scientists saw this combination as the death knell for the world and used it to promote population control.

Nobody believes that these days as technology has made farming more effective.

Still, the foundation of growing food is seed, soil and nutrients and that means potash and phosphates are critical. Only rich nations that take food for granted could see the organic food movement take flight as it makes it easier for the spread of disease and sends prices higher. (It’s very dangerous when these rich nations try to force poor nations to act the same. The anti-GMO movement, if truly successful, could potentially lead to starvation and will certainly increase the reliance on foreign generosity rather than domestic developments within poor nations.)

There has to be a happy place where demand puts a slight uptick into commodities from crude oil to food prices. It might sound counterintuitive, but the fact of the matter is when food prices and crude oil get to downside levels they are symptomatic of major problems not solutions.

Potash Corp (POT)

Net sales soared in the most recent quarter driven by massive improvement in potash gross margin of 49.2 from 36.5 a year earlier. Phosphate came in at high end of management guidance on average selling price $450 ton, but down from $465 a year earlier. Still, volume and capacity were strong. I think the stock has hit a low, but not sure when we would add- would like to see DAP monthly pricing climb through $475 as a buy signal.

Technically, the stock has broken all support points and doesn’t have any real help until $20.00.

The Mosaic Company (MOS)

Saw strong pricing power in potash and phosphate, but a huge decline in nitrogen.

• Potash $273 from $263
• Nitrogen $334 from $393
• Phosphates $553 from $509

Technically, the stock needs to close above $53.50.

-Charles Payne, CEO & Principal Analyst

Charles Payne
Wall Street Strategies

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