The Commodity Investor Q&A
With Matt Badiali

Q: What do you think about buying fertilizer companies right now? I've read that they're cheap. – A.H.

A: The share prices of the big fertilizer companies are down an average 70% from their recent highs. Combine that with the last 12 months of earnings and they do look pretty cheap.

But we're coming off the mother of all commodity bubbles. Take a look:

We're Coming Off a Bubble in Fertilizer Prices

The prices of potassium, nitrogen, and phosphate – the three primary ingredients in fertilizer – tripled on average from 2007 to 2008.

But those numbers have come back down. And Potash Corp – one of the largest fertilizer companies – has seen demand decline over the last year. Company executives expect that trend to continue due to the current economic crisis. Mosaic – another industry biggie – will reduce production for the rest of 2009.

So we can't use recent earnings to see if these companies are cheap. Instead, we'll calculate a price-to-earnings ratio based on the average earnings over the last 10 years. As you can see, they aren't cheap.

Company Market Value (Billions) Price to Earnings* Potash Corp $23.8 45x Mosaic $18.0 37x Agrium $6.3 27x * Based on long-term averages

We still have some room to fall in the ag space. We're coming off a massive spike in fertilizer prices and heading into a major economic decline. That could conspire to send earnings lower and carry the share prices with it.