Today we are selling a core position in Potash Corporation (POT, quote) as we think the outlook for crop prices is challenged, while supply issues may also weigh on utilization levels. We are not changing our tune on the longer term thematic elements of the fertilizer sector, and we believe potash of Saskatchewan is an incredibly well run company.

potash corpWe will revisit the trade from the long side as we hit better technical levels and after we have had a chance to assess the fall harvest, and the next round of contract pricing.

We are looking at a bumper crop season and which has led to heaviness across the grains and seeds space. We layer in caution we got from Deere (DE, quote) last week on farmers feedback on the recent robust growing season and their trepidation about making new purchases of equipment.

We believe acreage application rates will drop in next 12 months. Add this to more supply coming out of AGU and POT in next 12 months and an already uncertain pricing structure within the cartel leaves us cautious in the near term.

Additionally, after weighing the supply/demand factors, looking at potential dropping crop prices, we also note a 19X valuation which is right in the middle of guidance. With a multiple that is fair, we believe it is prudent to take some profits here on a trade we have held since early August 2013, and have made 21% on during that time.

Technically, this is a stock where we should have followed our chart instincts upon seeing the move back from last years’ (July 29, 2013) Uralkali inspired plunge from $38.00 to $28.00, to the key $38.00 level in late June of this year.

At this level not only had the Potash stock recovered from the cartel breakup news but it was back to key support from the previous three years. Until otherwise proven incorrect, old support should clearly be current resistance, and we feel it is. Rather than playing the Potash stock to reach these levels again, we are now deferring to our fundamental assessment of the industry and think therefore the risk/reward of owning the Potash stock here with a target that’s only +8% from here is worth selling after a good run.

We will continue to update you on our view on the sector and Potash as we watch dynamics in crop supplies and prices play out over the next few months.


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