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Mosaic, the world's largest phosphate producer, makes agricultural fertilizer out of potash, and phosphate. Mosaic owns a 13% share of phosphate global production and a 58% share of American production.[1] Similarly, Mosaic owns a 13% of potash global production and a 40% share of North American production.[1] It makes phosphate out of ammonia and sulfur. When sulfur and natural gas are cheap, phosphate is cheap to make, and therefore more profitable to sell. [2] When the price of crops goes up, farmers try to make their land produce more per acre. Thus, a bet on Mosaic is much like short selling ammonia and sulfur futures, and going long on corn , wheat , and soy bean prices.

Mosaic Company competes directly with the Potash Corporation of Saskatchewan (POT) and Agrium (AGU) for control over the Potash and Phosphate sectors of the commercial fertilizer industry. Mosaic is deadlocked with The Potash Corporation in the Potash market, but thoroughly dominates the phosphate market from a production standpoint. [3][4]

Mosaic and other fertilizer producers enjoyed record earnings from 2004-2008 due to escalating world food prices. Farmers bought record amounts of fertilizer at extremely high prices to meet exploding world demand; 2009, however, has seen a sharp decline in food prices. Mosaic and other fertilizer producers have increased fertilizer prices by over 100% to keep margins up; this however, inadvertently has decreased profits as farmers have refused to purchase fertilizer at such high prices.[5] [6] Despite 2009 losses, industry analysts say Mosaic and other fertilizer producers are poised for a rebound as the world demand will increase, farmers will soon need fertilizer to continue their operations, and decreasing amounts of arable land make greater crop yields through fertilizer implementation the most viable option for continued agricultural development worldwide.[7] [8]

Contents
1 Business Overview
1.1 Business Financials
1.2 Business Segments
1.3 Quarterly and Annual Earnings
1.3.1 Q1 FY2011 Summary
1.3.2 Q4 FY2010 Summary
1.3.3 Q3 FY2010 Summary
1.3.4 Q2 FY2010 Summary
1.3.5 Q1 FY2010 Summary
2 Trends and Forces
2.1 The World Food Crisis Increases Demand for Fertilizer; Temperature and Precipitation Fluctuations Stave Off Customers
2.2 Lower Gas Prices Decrease Demand for Biofuels
2.3 U.S. Environmental Legislation and Antitrust Legislation Threaten Mosaic with Penalties and Fines
2.4 Reduction in Arable Land, Increasing Populations
3 Competition
4 Footnotes
Business Overview

The following trends help Mosaic’s bottom line:

Demand for biofuels, which is almost entirely determined by the price of petroleum and gasoline. People consume more biofuels like Ethanol when gas is expensive. Biofuels are made of crops fertilized by Mosaic's product.
Demand for meat, especially, in emerging markets'. Calorie per calorie, meat puts a much higher strain on crops than grains. This encourages the use of fertilizer.
Declining amounts of arable land due to urbanization and drought, combined with increasing populations encourage farmers to use more fertilizer.
Notice that bullish trends for Mosaic have one thing in common: they increase the prices of food by increasing demand. It is important to note that if food prices increase because of a serious collapse in the farming industry (a supply side shock), this hurts Mosaic more than it helps.

The following trends hurt Mosaic’s bottom line:

Whole Foods-style movement away from processed fertilizer and towards organic food. Phosphates, Mosaic's core product, are frequently decried by natural food enthusiasts.
U.S. Environmental Legislation against chemical fertilizer
The strengthening of the U.S. Dollar (USD) against the Brazilian Rea (BRL) and other currencies. Mosaic makes its phosphates in Florida, and sells them in Brazil and other countries.
Serious damage to the commercial farming industry which consumes Mosaic's product. This could happen through global climate change and/or widespread drought.
Increasing ammonia and sulfur prices. These are the key ingredients to produce phosphate. Ammonia is made from natural gas
Business Financials
From summer 2004 to summer 2008, the share price of the Mosaic Company (MOS) rose over 1000% due to extremely high fertilizer demand, spurred by lowering crop yields and increasing world demand for food. [9] All 3 of Mosaic’s business segments help farmers grow more crops per acre, and so the company’s financials are 100% exposed to agricultural prices in the way an oil producer would be exposed to oil prices. Demand for fertilizers, however, have declined in 2009, leading to drops in share prices across the industry.[10] Mosaic's share price declined by 85% at the end of 2008, both as a result of the economic downturn and decreased demand for fertilizer, and has yet to recover fully.[11]


These losses are also explained, in part, by the fact that Mosaic made the mistake of buying its industrial inputs (sulfur and ammonia) while they were priced at an all time high, which has pushed the company’s margins into the negative by increasing its Cost of Goods Sold (COGS) . Mosaic’s future profitability relies on its ability to buy ingredients cheaply, process them, and sell them at a mark-up in the form of fertilizer. [12]

Mosaic is dealing differently with this collapse than its competitors from a financial perspective. Its Current Ratio is over 4, which means that it is hoarding its assets in anticipation of better times. [13] This view is further supported by the company’s sale of its nitrogen fertilizer branch, Saskferco Products ULC (Nitrogen) for $1.6 billion to Yara International. [13] Divesting and focusing on the core business is a sign that Mosaic is taking a conservative approach to the current agricultural market.

Because the company’s production is centered in the United States (primarily in Florida), a weakening U.S. Dollar (USD) benefits the company’s bottom line. While the company runs operations in Asia, Australia, and South America, its international presence is centered in Brazil . Thus, whenever the Brazilian Rea (BRL) strengthens against the dollar, Mosaic benefits substantially. [14]

During 2009, international operations saw a loss of 28% as opposed to 40% domestically. The fertilizer industry has responded to the lack of demand by raising fertilizer prices and cutting back production. As of the first quarter 2009, Mosaic has raised its fertilizer prices from 100-200% [15], following the lead of the Potash Corporation of Saskatchewan (POT) . In normal competitive industries, you would not see such price increases due to a lack of demand. If anything you would see price decreases to spur consumption. For example, nearly all of Macy's Inc. (M) clothes went on sale at the first sign of the 2008 recession. This is not so in the Potash and fertilizer industry because POT and MOS form a duopoly (like a monopoly but with 2 players), and have nearly complete pricing power due to their control of the fertilizer supply. They are both under investigation by the SEC for breaching Antitrust Legislation . [12]

Due partly to its strong Brazillian presence, there were publicized rumors that the Brazillian commodity giant Vale S.A. (VALE) would like to buy Mosaic at a $25 billion valuation (about $56.00 per share) [16] Vale denied the buy-out rumors on July 17th, 2009, but has reaffirmed its desire to expand into the commercial fertilizer market. [17]

Firms looking to buy out a major Potash producer would only have two choices: POT or MOS. Of the two, Mosaic is cheaper (lower PE Ratio) and has far less debt. [9][18]

Business Segments
Phosphates: In 2008, MOS accounted for about 18% of world phosphate-fertilizer production, and 58% of US production.[11] Phosphates generate a high percentage of the company’s earnings. Despite raising prices 103% in FY 2009 as compared to FY 2008, Mosaic’s phosphate sales were less profitable because of higher ammonia and sulfur costs. [5] Mosaic has noticed that customers who would not pay higher prices for phosphate fertilizer were switching over to lower quality substitutes, which include chicken litter and liquid UAN 32. [16]With increasing demand for organic foods (and therefore fertilize Mosaic is worried that customers will not switch back to phosphates. r),[12]
Potash: As of 2009, Mosaic was the third largest producer of potash in the world. It sells potash for fertilizer and industrial applications. In fiscal 2008, Mosaic made about 13% of the world’s potash and 40% of North America’s supply.[11] Potash has driven Mosaic’s operating income in 2009 more than in 2008 because the cost of mining Potash did not increase. The 9-month gross-margin of Potash increased from 36.7% in 2008 to 52.9% in the first 3 quarters of 2009 due to a price hike of over 160%. [5]
Offshore and Other: Mosaic used to produce nitrogen fertilizer until selling its interest in Saskferco Products ULC at a $673.4 million gain in fiscal 2009. This was always a relatively small part of the company’s business. [5]
Quarterly and Annual Earnings
Q1 FY2011 Summary
Mosaic tripled its net earnings for the first quarter of 2011 as compared to first quarter results the previous year[19] Earnings posted at $297.7 million as compared to $100.6 million in year ago results.[19] These earnings were driven by improved gross margin as a percent of net sales. Gross margin for the quarter was 23% as compared to 15% in Q1FY2010.[19] Net sales similarly improved from year ago markers. Mosaic's net sales improved from $1.5 billion in the first quarter of 2010 to $2.2 billion in Q1FY2011.[19]

These earnings are set against the backdrop of higher potash sales volumes and higher prices for phosphate sales; potash sales prices, however, partially offset these gains for the first quarter.[19] Net sales in Phosphates increased by $400 million for the quarter culminating at $1.6 billion.[19] Potash's net sales increased to $621.9 million from $333.3 million in the previous quarter.[19]

Q4 FY2010 Summary
Mosaic posted net earnings of $396.1 million for the fourth quarter of 2010 as compared to net income of $146.9 million for the fourth quarter of 2009.[20] These increases were driven by increased net sales in the fourth quarter. Net sales for the quarter increased from $1.6 billion in year-ago results to $1.9 billion, a 17% increase.[20] Gross margin similarly jumped in Q4, culminating at 37% of net sales as compared to 13% of net sales last year.[20]

Operating earnings were $547.6 million compared to $421.3 million last year.[20] All business metrics were driven by improved conditions for Mosaic's three business segments. Phosphate sales prices increased over the course of the quarter to bring its gross margin to $306.6 million as compared to a loss of $31.9 million the previous year.[20] Net sales for Potash were approximately double that of year ago results, reaching $696.5 million.[20]

Q3 FY2010 Summary
Mosaic posted net earnings of $222.6 million for Q3 FY2010 as compared to net earnings of $58.8 million the previous quarter.[21] Phosphate sales volumes increased by 52% as compared to year-ago earnings, totaling at 2.5 million tonnes.[21] Potash sales volumes similarly increased from 2009 levels to 1.9 million tonnes.[21]

Driving these gains was a 26% increase in net sales for the quarter posting at $1.7 billion as compared to the previous year.[21] Gross margin also increased from 2009 to 28% of net sales as compared to 10%.[21] Gross margin for Q3 FY2010 was $1.7 billion as compared to $1.4 billion in Q3 FY2009 2009.[21] Increased were attributed to higher demand for both potash and phosphate.[21]

Q2 FY2010 Summary
Mosaic posted net earnings of $107.8 million for the second quarter of fiscal year 2010, a decrease from net earnings of $959.8 million the same quarter in fiscal year 2009.[22] These earnings were driven primarily by a renewed demand for phosphate with increases in both sales volumes and sales prices, with sales volumes increasing 15% to 3.3. million tons.[22] Potash sales similarly increased, rising 30% compared to the previous quarter. Net sales culminated at $1.7 billion for the quarter, a $1.3 billion, or 43%, drop from $3.0 billion the previous year.[22]

Though tailing behind year comparisons, Mosaic's financials reflected growth from the previous quarter. Gross margin for Q2 FY 2010 was 18% of net sales, or $307.0 million, as compared with 26% and $773.7 million the previous year.[22] Operating earnings for the quarter were at $200.1 million compared with $682.0 million the previous year.[22] These postings were driven by continued low demand and prices for potash and phosphate compared with last year's figures.[22]


Q1 FY2010 Summary
MOS announced Q1 FY2009 earnings of $100.6 million, or $0.23 per diluted share, as compared to net earnings of $1.2 billion, or $2.65 per share, for the Q1 FY2009.[23] Net sales similarly decreased from $2.9 billion in Q1 FY2009 to $1.5 billion in the first quarter of FY 2010 marking a 66% decrease driven by 69% and 66% drops in potash and phosphate sales respectively.[23] Gross margins also fell to 15% of net sales as compared to 38% the previous year, and operating earnings also fell from $1.5 billion to $134.2 million.[23] Driving these losses were a decline in market selling prices for phosphate as well as a decline in potash sales volumes and selling prices.[24]

Trends and Forces

The World Food Crisis Increases Demand for Fertilizer; Temperature and Precipitation Fluctuations Stave Off Customers
Large farming regions within the United States, India, and China are experiencing severe drought conditions that makes growing crops extremely difficult. On one hand, higher demand for food due to lower supply will improve demand to fertilizer. On the other hand, farms will not pay for fertilizer if there is not enough water to grow crops. [25]

Despite drought conditions in California, however, the Midwest is expected to yield a record corn and soybean crop in 2009. Good weather and favorable pollination conditions have driven crop prices down, anticipating record supply surpluses. [26], [27]

Even with supply surpluses, the world food crisis will place some upward pressure on food prices. A 2008 FAO report pegged the number of undernourished people in the world at 963 million, nearly 15 percent of the world's population. [28] Many liberal organizations blame US fertilizer companies for misleading farmers and partially contributing to the world shortage, but at the end of the day, high demand for food will translate into high fertilizer demand absent a severe worldwide drought.

High food prices, and moderate drought conditions will improve demand for the The Mosaic Company's products. Severe drought conditions will disrupt demand for Mosaic's fertilizer because it is pointless to fertilize dead fields. Low food prices, and great weather will decrease demand for Mosaic's fertilizers.

Lower Gas Prices Decrease Demand for Biofuels
Ethanol in the U.S. is produced from corn, one of the most fertilizer and nitrogen intensive crops. [29] From 2007-2008, corn prices jumped 125% due to heightened demand for biofuels, food, and livestock feed. [30]

The demand for Ethanol and biofuels peaked in 2008 along with gas prices, only to falter in 2009. People only consume biofuels, it seems, when gas prices are extremely high. For instance, the Midwest has seen a 52% drop in ethanol consumption, with only a 3% drop in gasoline consumption. Ethanol is about 15-20% less efficient than gasoline, and studies have shown it needs to be about 40 cents cheaper per gallon to compete. [31]

When there is less demand for ethanol, there is less demand for corn fertilizers. Lower gas prices hurt the Mosaic Company by decreasing demand for bio-fuel, and therefore Soybeans and Corn.

U.S. Environmental Legislation and Antitrust Legislation Threaten Mosaic with Penalties and Fines
The Mosaic Company is currently under investigation by the Environmental Protection Agency and the Department of Justice for its role in unlawful pollution in Florida, and the destruction of native bird populations. [32] There is fierce debate as to whether commercial fertilizers cause health harms in humans and animals, especially phosphates (the key ingredient in Round Up). Also, there are worries of radioactive toxicity associated with Mosaic's Floridian phosphate mining operations. [33]

Additionally, both the Mosaic Company (MOS) and the Potash Corporation of Saskatchewan (POT) have displayed textbook price gouging behavior (raising prices over 100% when demand falls), and are under investigation by the US Federal Government for breaching Antitrust Legislation.[5] This is a serious concern because such actions could be construed as exacerbating humanitarian hunger problems.

The government could severely penalize Mosaic for its breaches of environmental law, or even break it up if it were to be judged a harmful monopoly.

Reduction in Arable Land, Increasing Populations
The amount of arable land worldwide is dwindling. The population boom has cut the amount of arable land per person in half over the past 50 years.[29] As population and personal incomes in developing regions of the world increase, the worldwide demand for food also has increased. Worldwide population has grown 12% in the past ten years, while farm acreage has grown only 2%.[34]

Brazil, China, and India are three of the five most populous countries and are trying to meet the growing demand for food, fuel, and feed for livestock. Brazil, China, and India each have just 7%, 15%, and 49% of arable farmland, respectively,[35] and with their respective populations on the rise, these countries need to make the most of the arable land they have. In addition, weather factors such as temperature, rain, floods, droughts, and hurricanes destroy arable land for a particular crop season and render land unusable for a few seasons.

Reduction in arable land should increase the demand for yield-increasing fertilizers in the long run and benefit Mosaic. In the short run, however, violent destruction of arable land through natural disasters could disrupt Mosaic's contracts and damage the company's profitability.

Competition

Mosaic has few competitors since the fertilizer industry has significant barriers to entry and Economies of scale. It would cost from $1.6-$2.5B for a new company to enter the industry. A company would need five to seven years of development time to build mines and factories, build rail and gas lines, and purchase rail cars and storage before it could even begin making a profit from Potash or Phosphates. [3] [36]

Mosaic primarily competes with the Potash Corporation of Saskatchewan (POT), and to a lesser extent with the Nitrogen giant Agrium (AGU). Nitrogen based fertilizers are not a significant part of Mosaic's business model.

The following graph shows the year by year production of the major agricultural fertilizer companies. As you can see, Mosaic dominates the phosphate market, and competes with Potash Corporation of Saskatchewan (POT) somewhat evenly in the potash market on a production basis. The Potash Corporation of Saskatchewan (POT) is able to gain higher margins on its Potash production due to its higher fertilizer content and superior distribution networks, and has therefore been a more profitable company overall.



Leading Fertilizer Producers 2008 Financial Comparison
Company Revenue Net Income Profit Margin Operating Margin
Potash Corporation of Saskatchewan (POT)[37] $9.4 B $3.5 B 37.00% 49.07%
Mosaic Company[38] $9.8 B $2.1 B 21.232% 28.60%
Agrium (AGU)[39] $10.3 B $1.3 B 12.87% 19.34%

Leading Fertilizer Producers' Annual Nutrient Capacity (million tonnes)
Company Phosphate Potash Nitrogen
Potash Corporation of Saskatchewan (POT) [40] 2.4 13.2 3.5
Mosaic Company (MOS)[41] 9.4 10.4 0.5
Agrium (AGU)[42] 1.0 2.1 5.0
 
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