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January 10, 2022

Mosaic is a provider of phosphate & potash fertilizers and feed ingredients for the global agriculture industry. Simply, they help farmers grow more food so we can eat.

Both phosphate and potash are experiencing tight markets that have pushed prices higher. And it’s not just with greater demand. Mosaic noted the following in their last earnings release:

“Supply disruptions and Chinese government rationing of energy and new export regulations threaten to further limit supplies of phosphates. Beyond 2021, the phosphate supply and demand balance are expected to remain tight as a result of low producer and channel inventories and limited supply additions, while lower than historical grain stocks-to-use ratio points to the need to increase crop production through fertilizer application.”

“[Potash] Inventories around the world remain below historical norms, especially in India and China, both of which will likely seek to establish 2022 contracts sooner than in recent years.”

Inventories

Inventories are relatively light around the world. Check out this chart on grain stocks-to-use ratio (yellow line):

You’ll notice that yellow line hasn’t been this low since the food crisis in 2007-2008.

Here’s how Mosaic management describes the situation today:

“Global agriculture market fundamentals remain attractive. With oil prices above $80 per barrel, increased demand for biofuels and renewable diesel are expected to push grain and oilseed demand higher.

China continues to be a large contributor to global demand for grain and oilseeds, buying record amounts of agricultural products to meet its domestic needs. China is rebuilding its hog herd, shifting to industrialization of its livestock industry, and continuing to use ethanol in fuel. All of this is expected to continue contributing to demand for grain and oilseed imports.”

Now, check out the MOS chart in 2006-2008…

Here’s what caused the 2007-2008 global food crisis:

“After reviewing the evidence, the study suggests the 2007/2008 food crisis was primarily driven by a combination of rising oil prices, a greater demand for biofuels and trade shocks in the food market. Rising oil prices led to increased costs of cereal production, as agriculture is generally an energy intensive enterprise. At the same time, there was increasing demand for cereal foods from wealthy oil-exporting countries. More importantly, higher energy prices increased the demand for biofuels, which became more competitively priced when compared with oil. In particular, this drove up the demand for biofuels derived from maize in the United States.”

History may not exactly repeat, but it rhymes.

Tesla Announcement

But tight markets and China hoarding may not even be the most exciting part of the story.

In October, Tesla announced that it would shift all its standard range vehicles to the Lithium Iron Phosphate (LFP) battery chemistry globally.

The MOS CEO then gave this answer to questions asked by Morgan Stanley and Goldman Sachs regarding China’s phosphate market:

“Now, we also see a long-term decline in production of phosphate fertilizers for agricultural use. That means that the phosphoric acid is starting to find its way into a lot of other industrial products, including these lithium-ion phosphate batteries, and a number of other areas. What we see is a declining production over time, and probably a restriction of availability into the phosphate fertilizer market. That means that over time, we should see a decrease of exports from China [implying higher prices].”

Essentially, we have a derivative EV play developing here.

The Trade

MOS is a cheap stock trading at a forward P/E near 8.

It has a strong balance sheet with a $1Bn buyback in place. In the earnings report, management announced the purchase of more than 956,000 shares at $35.72.

These two trades over the last 8 weeks raised my eyebrows:

• November 12^th: Buy 50,000 MOS March 18^th $50-60 Call Spreads for $0.50 ($37.12)
• December 22^nd: Buy 30,000 MOS March 18^th $50-60 Call Spreads for $0.48 ($38.74)

The $36 level in MOS seems to be an interesting pivot level going back 12 years.

It’s been resistance for the last 5 years. Notice, the prices being paid by the company and where our buyer came in to buy those Call Spreads.

The set-up (oil higher, supply shocks, China hoarding) makes the situation not unlike the food crisis we saw more than a decade ago. Add in the EV angle and you can see how it could gain momentum.

MOS has earnings in mid-February. I suspect this story needs time to develop and believe that the buyer of that Call Spread will roll out if he misses the timing.

I like the MOS June 17^th $42 Calls for $3.40. The Target Stock Price is $55.

This is What Happened After the Trade...