With the economy pulling back, commodities are usually first on the chopping block. As the basic elements of society, any concerns that economic growth is contracting leads the market to believe that demand for commodities - copper, iron ore and oil - will decline. As a result, commodity prices retreat quickly, which in turn causes the market to sell shares in the companies that make or sell the underlying commodities.

Investopedia Markets: Explore the best one-stop source for financial news, quotes, and insights.

Fundamentally Strong
No commodities have been spared; not even fertilizer. Ironically, fertilizers prices continue to remain strong and have not pulled back as much as other commodities. However, prices of agricultural commodities, like corn and wheat, have slipped a little, and investors use those commodity prices to extrapolate future fertilizer demand. Lower grain prices suggests that farmer profits will decline; lower farming profits suggests that farmers will buy less fertilizer in order to reduce expenses. That's the scenario that occurred in 2008, and indeed sent fertilizer prices spiraling downward, and taking the valuations of the company's that make fertilizer along for the ride.

There's no question that another recession will depress shares further. But fertilizer helps increase food production, the most essential need for society. The long-term demand for food continues to remain robust, thus the long-term outlook for fertilizer remains strong.

Price Vs. Value
Fertilizer shares have been getting hammered in the past month, and valuations are beginning to look interesting again. Prices are still off from 2008 and 2009 lows, but investors should keep a close watch on this industry, as it offers the greatest potential going forward. Nitrogen producer CF Industries (NYSE:CF) was trading for as high as $192 a few months ago, and shares have since pulled back to $120 trading at 8.5 times current earnings. Phosphate and potash giant Mosaic (NYSE:MOS) has pulled back from nearly $90 to $46 today. Shares fell over 3% after the company announced earnings as high sulfur costs hurt margins. Mosaic has a pristine balance sheet with over $3 billion in net cash against a market cap of $21 billion.

For those investors who want a basket bet, Market Vectors Agribusiness ETF (NYSE:MOO) has holdings in all of the major fertilizer stocks; along with interests in other high quality names like farm equipment giant Deere (NYSE:DE) and seed company Monsanto (NYSE:MON). MOO offers greater diversity which helps on the downside, but that also means if a name like CF or Mosaic begin to climb higher again, MOO will likely under perform.

In any regard, the long-term outlook for agriculture and fertilizer remains as strong as ever. There are always going to be pullbacks when the economy stutters, or investors get nervous. However, as long as investors buy in at the right price, the upside value will take care of itself. (For additional reading, also see Water: The Ultimate Commodity.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: Direxion Daily S&P Biotech Bull 3X

    Learn more about the Direxion Daily S&P Biotech Bull 3x exchange-traded fund, a new triple-leveraged ETF tracking biotechnology equities.
  2. Mutual Funds & ETFs

    ETF Analysis: First Trust Health Care AlphaDEX

    Learn more about the First Trust Health Care AlphaDEX exchange-traded fund, an indexed fund that uses an advanced stock selection methodology.
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI Emerging Mkts

    Learn more about the PowerShares FTSE RAFI Emerging Markets ETF, a fundamentally weighted fund that tracks emerging market equities.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Cali AMT-Free Muni Bond

    Learn more about the iShares California AMT-Free Municipal Bond exchange-traded fund, a popular tax-advantaged ETF that dominates its category.
  5. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Dividend

    Learn more about the SDPR S&P Emerging Markets Dividend Fund, a yield-focused exchange-traded fund tracking global emerging economies.
  6. Mutual Funds & ETFs

    ETF Analysis: First Trust Dow Jones Global Sel Div

    Find out about the First Trust Dow Jones Global Select Dividend Index Fund, and learn detailed information about characteristics and suitability of the fund.
  7. Mutual Funds & ETFs

    ETF Analysis: U.S 12 Month Natural Gas

    Learn about the United States 12 Month Natural Gas Fund, an exchange-traded fund that invests in 12-month futures contracts for natural gas.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares Floating Rate Bond

    Explore detailed analysis and information of the iShares Floating Rate Bond ETF, and learn how to use this ETF as a defense against rising interest rates.
  9. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Short S&P500

    Find out information about the ProShares UltraPro Short S&P 500 exchange-traded fund, and learn detailed analysis of its characteristics and suitability.
  10. Mutual Funds & ETFs

    ETF Analysis: SPDR Barclays Investment Grd Fl Rt

    Learn more about the SPDR Barclays Investment Grade Floating Rate Fund, which tracks an index of highly rated floating debt securities.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Lion economies

    A nickname given to Africa's growing economies.
RELATED FAQS
  1. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  6. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!