(Updates stock price movements, adds analyst comment, background)
By Euan Rocha and Matt Daily
NEW YORK, Oct 2 (Reuters) - Shares of North American fertilizer companies plunged on Thursday, leading Wall Street lower after Merrill Lynch chopped its ratings on the sector in the wake of Mosaic Co’s (MOS.N) disappointing quarterly earnings.
The sell-off in fertilizer stocks dragged other companies in the agricultural sector lower. Seed company Monsanto’s (MON.N) shares fell more than 20 percent early in the day, but pared a bit of their losses after Monsanto raised its 2008 earnings-per-share forecast.
The agricultural sector sell-off comes amid worries that the credit crisis that has swept through financial markets could hamper farmers’ ability to get cash for next year’s planting season.
Investors fear that farmers will pull back on spending as grain prices have fallen from historic levels, but the cost of major farm inputs like fertilizers, seeds, farm equipment and fuels remain at relatively high levels.
“There are issues over tighter credit in both the U.S. and Brazil that could force farmers to cut back on spending and reduce fertilizer usage,” said Goldman analyst Edlain Rodriguez in a note to clients.
Shares in Mosaic tumbled almost 40 percent late on Thursday on the New York Stock Exchange while peers CF Industries (CF.N) shed 37 percent; Intrepid Potash (IPI.N) dropped 14 percent and Terra Industries TRA.N tumbled 24 percent.
Canada’s Potash Corp (POT.TO) fell 24 percent in late afternoon trading on the Toronto Stock Exchange, while Agrium’s (AGU.TO) shares dropped 24 percent, despite the company announcing a share buyback late Wednesday.
Farm-equipment makers were also hit following the Merrill note, with Deere & Co’s (DE.N) shares down 15 percent and Agco Corp’s (AG.N) shares down more than 12 percent, while those of CNH Global NV CNH.N were down almost 11 percent.
Shares of Monsanto Co (MON.N), fell almost 20 percent. The herbicide and biotech seed producer announces fourth-quarter results next Wednesday.
Merrill Lynch cut shares of companies in the North American fertilizer sector to “underperform” from “buy,” citing an uncertain near-term earnings outlook. It downgraded ratings on Mosaic, Intrepid Potash, Agrium, Potash Corp, CF Industries and Terra Industries.
Earlier Thursday, Russian fertilizer maker Uralkali (URKA.MM) shares dropped 13.7 percent to 128.65 rubles, German K+S AG SDFG.DE fell 12.1 percent to 40.20 euros and Swiss Syngenta SYNN.VX dropped 9.5 percent to 206.10 Swiss francs.
North American fertilizer stocks began their declines late Wednesday after Mosaic announced fiscal first-quarter results that fell short of Wall Street’s expectations. The crop nutrient producer also warned it plans to sharply reduce phosphate production over the next several months due to high inventory levels.
“With phosphate prices falling, nitrogen prices peaking and potash prices rising less than expected, there is considerable uncertainty surrounding the near-term earnings outlook as underscored by Mosaic’s earnings miss and downward guidance,” said Merrill’s Don Carson in a note to clients.
Potash, nitrogen and phosphate are all key ingredients in crop nutrients that are used by farmers across the globe.
Shares of fertilizer companies had surged in the first half of 2008 as grain prices soared. However, since mid-June the sector’s valuations tumbled due to a sell-off in commodities and a pullback in grain prices.
“I think it’s just a lot of panic in the market right now and the market is very, very skittish, and any hint of even a possibility of bad news seems to generate a huge overreaction,” said Agrium’s Chief Financial Officer Bruce Waterman in an interview with Reuters.
Potash Corp, Mosaic, Agrium and Monsanto all reiterated that demand fundamentals in the agricultural sector remained strong. Executives for the companies insist that the recent sell-off is just an overreaction.
However investors and some analysts continue to be skeptical of a rebound.
Goldman’s Rodriguez, who cut his rating on Mosaic to “neutral” from “buy,” noted that the decline in corn prices has led to a growing anxiety that farmers globally will reduce fertilizer usage.
“Concerns about a global recession, particularly in Asia, represents a risk to corn prices, as it could lead to reduced demand growth,” said Merrill’s Carson.
Merrill lowered its rating on Monsanto Co to “neutral” from “buy,” given the uncertainty about future growth from its glyphosate business, which is expected to account for over 40 percent of the herbicide maker’s earnings before interest and taxes in fiscal 2009.
“While the stocks remain inexpensive, they appear to be driven more by price and earnings momentum than by valuation,” said Carson. (Additional reporting by Roberta Rampton; Editing by Brian Moss and Brad Dorfman)