JP Morgan Downgrades Mosaic, Cuts Price Target on Potash Citing Lower Phosphate Prices

Posted on December 9, 2011

According to this Financial Post article, JP Morgan cut its recommendation of Mosaic to Neutral due to lower phosphate prices following capacity additions in the Middle East.

It sounds reasonable, doesn’t it? In my opinion the real reason for the lower price targets and downgrade are at least in part due to the European debt crises and its impact on the EUR/USD exchange rate. Once the Europeans are no longer able to kick the can down the road, someone will have to bear the losses, once this happens the euro will weaken further against the dollar, causing grains prices to fall along with it and in turn fertilizer prices must fall as well in response to the lower incentives of farmers to buy fertilizer with the lower prices they receive for their crops.

Just a couple of days ago I wrote about Mosaics stock price movement as it relates to the EUR/USD exchange rate. In the last 34 trading days correlation between the stock prices of Mosaic, Potash Corp. and the euro are 0.82 and 0.75 respectively.

Mosaic & Potash Stock Correlation to EUR/USD

Source: The Mays Report

These correlations are statistically significant and explain about 67 percent of Mosaic’s stock price movement and 56 percent of the stock movement of Potash Corp. Capacity additions can impact price. However, these companies mostly produce to order as closely as is possible, so alone this is not a strong enough reason for a downgrade.

If the European Central Bank has to lower interest rates to zero as was done in the US this will be extremely bearish for commodity prices. Both companies are likely to stay profitable for the foreseeable futures but their level of profitability will be greatly affected by events in Europe, especially as they lower interest rates towards zero.

Neither the author of this article or any family members own shares in any of the stocks mentioned in this article as of this writing. For a complete disclosure of my policy on ownership of stocks written about or recommended, please see the about page at The Mays Report.