Making Money in the impending world famine. $MOS, $DBA $MOO
Thesis: It is the time for Agro-business and fertilizer to go stratospheric. MOS could possibly go to a price over $150 a share in the next quarter, and agro business ETFs are also poised to make major gains over the summer and beyond.
What is MOS does MOS do?
- The Mosaic Co. engages in the production and marketing of concentrated phosphate and potash crop nutrients. The company operates its businesses through its wholly and majority owned subsidiaries. It operates through the following segments: Phosphates, Potash, and Mosaic Fertilizantes. The Phosphates segment owns and operates mines and production facilities in North America which produces concentrated phosphate crop nutrients and phosphate-based animal feed ingredients, and concentrated crop nutrients. The Potash segment owns and operates potash mines and production facilities in North America which produce potash-based crop nutrients, animal feed ingredients, and industrial products. The Mosaic Fertilizantes segment produces and sells phosphate and potash-based crop nutrients, and animal feed ingredients, in Brazil. The company was founded on October 22, 2004, and is headquartered in Plymouth, MN
- Lets just look at the chart : https://imgur.com/a/Nedhvlj
- In 2008, commodity prices for potash and oil spiked causing MOS to spike as well. Potash as you might have gotten from the intro is an important ingredient for fertilizer.
Fertilizer is a somewhat specialized commodity, with certain countries better at producing potash fertilizer than others. This breakdown (from https://feeco.com/a-look-at-world-potash-production-for-2020/) shows the breakdown of the top producers
- Canada, 14 million metric tons - Russia, 7.6 million metric tons - Belarus, 7.3 million metric tons - China, 5 million metric tons - Germany, 3 million metric tons - Israel, 2 million metric tons - Jordan, 1.5 million metric tons - Chile, 900 thousand metric tons - Spain, 470 thousand metric tons
- As you can see, Russia and Belarus produce almost 15 million metric tonnes of potash for fertilizer. They are both under sanctions and as a result potash prices are rising. It is almost up 100% in the last month or so: https://imgur.com/a/LwljXtk
- Moreover, China has halted exports of potash to ensure adequate domestic supply: https://www.wisfarmer.com/story/news/2021/09/28/china-halts-phosphate-exports-fertilizer-prices-expected-soar/5907300001/
- Possible Catalysts:
- The end of the quarter means that ETFs can rebalance. I’ve been following the price action on MOS for a couple of weeks, and there is definite shorting going on. The shorting has increased by 20% in the last couple of week, its only about 5% of outstanding shares. This is not a short squeeze play at all, but most likely that funds are shorting before adding at lower CB at end of quarter.
- Increasing Gas prices: gas goes up, fertilizer goes up.
This brings me to the second part of this DD. MOS is my conviction fertilizer play, but it is a part of the larger macro-economic story that is at play here. All the news and confluence of events relates to food commodity prices going up, and I am going to detail some of these below:
- Ammonia prices: Ammonia is directly derived from natural gas, and as natural gas prices have one up, so has the price of ammonia. Here take a look at this chart for ammonia, urea and synthetic prices: https://imgur.com/a/abLTpid . This should be even higher when the march print comes out.
- Herbicides: You know what farmers need a lot of along with fertilizer? Weed control. Glyphosate, also known by it’s brand name of “Roundup”, is the most commonly used herbicide. Glyphosate is essentially a modified fertilizer molecule that contains both phosphorus and ammonia. Because both this components are more expensive, the prices have also increased dramatically in the last 3 months, and there is a massive supply shortage. As a knock-on effect, prices and supplies of other herbicides are also being squeezed. Bayer, the owner of Roundup, was sounding the alarm in December 21 about impending shortages. Here is an article that goes in depth – https://www.producer.com/news/glyphosate-hiccup-triggers-domino-effect/
- Diesel: To compound issues, diesel prices are at an all time high. Guess what goes into tractors, combines, trucks etc? Diesel. This is pretty straight forward. But let me give some nuance here too – refineries require natural gas to produce hydrogen that is then used to remove sulphur in the production of diesel. The gas price spike has led to a cutting of production of diesel as it is now cost prohibitive. Javier Blas, the commodities correspondent for Bloomberg, has a really nice article on it – https://www.bloomberg.com/opinion/articles/2022-03-14/ukraine-war-the-oil-price-rally-is-bad-the-diesel-crisis-is-far-worse?sref=5dj0X2VO
- Chip shortage: Yeah, its affecting this industry and its machinery too. Here is a quote from this article (https://www.agriculture.com/news/business/farmers-seek-relief-from-soaring-fuel-prices-supply-shortages) that highlights this issue:
- “Jim Boyer, an Emmet County farmer, had a similar, personal anecdote. He’s awaiting a $40 emissions-related sensor for his tractor, and he’s not sure if it will arrive anytime soon. ‘I cannot drive that tractor — a quarter-million-dollar piece of equipment — because I cannot get that sensor,’ he said.”
- Labor: US agriculture is extremely dependent on migratory labor from mexico and other latin american countries to support the activities during the growing season from March to late fall. Given the labor crunch in other industries, and the vaccine mandates at the border, this seems to be putting a lot of pressure on farmers forcing them to scale out of certain crops all together (https://www.wpr.org/wisconsin-farms-are-feeling-squeeze-tight-labor-market):
- With producers on edge about hiring for this year, Strader said many farms started recruiting earlier than usual and developed a contingency plan for how to make it through the season without employees. That could mean discontinuing certain markets or scaling back the variety of produce that they’re growing
- Propane: You know what propane is used for in agriculture? Drying grain after harvest. The US now has only 35 days of supply of propane. https://twitter.com/chigrl/status/1505636194482282499
So all these macro-trends seem to indicate one thing to me. We might be at the begining of a world famine and that the price of agrocommodities is going to rise and so is the the stock performance of agro-business related equities. There are two tickers that are on my radar for this, specifically DBA and MOO.
- DBA tracks an index of 10 agricultural commodity futures contracts. It selects contracts based on the shape of the futures curve to minimize contango.
- Top holdings: https://imgur.com/a/6H8cgzm
- I like this because it gives you exposure to more commodities than just Wheat, which seems to be a recent favorite of the WSB crowd.
- There was a recent thread by /u/manpozi that highlighted
- DBA is far below ATHs from the late 2000s (topped at 43.5 circa 2008
- Next major catalyst is march 31 with the new USDA monthly WASDE report providing annual estimates of most major agriculture products (Monthly report is easily accessible here: https://www.usda.gov/oce/commodity/wasde)
- Major institutional flow. Just this week, nearly 40k jan23 options and ~8k july call spreads have been bought along with 4k july puts that have been sold
- MOO tracks a market-cap-weighted index of companies that generate revenues from the agribusiness sector.
- Top holdings: https://imgur.com/a/F5FYZlL
- option volume was 17X normal on Friday with 3,431 contracts. Call volume was 86% and put volume was 14%.
- I like all the companies in the top 10 given what I have laid out. TLDR: The world is going to have food supply crunch based on a number of factors. Fertilizer is a big concern, but there are macro trends to be concerned with. Playing Agrobusiness related tickers will provides a great opportunity
Positions: I have been playing MOS in and out for last couple of weeks. Current Positions: MOS 3x 69c, 3x 71c for 4/1, and 4x100c for 6/17 + 250 shares. DBA 4x23c for 7/15, MOO 4x 115c 8/19. I will be looking to add more positions for MOO and DBA in the upcoming week.
Submitted March 26, 2022 at 09:01PM by podcaste
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