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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: E_K_S who wrote (69882)	3/3/2022 1:05:09 PM
From: Elroy	Respond to of 78821

I don't have an exit strategy for UAN. I'm hopeful that with the reduced debt interest payment, and tariffs on Russian UAN imports (not that that matters much now) and lack of new nitrogen fertilizer plant construction in the US and increased inflation of food relative to natural gas, well, UAN may be able to pay quite large distributions for the foreseeable future. Like you know, years and years. We know fertilizer is cyclical... I don't know that. The cyclical industries I know about (mainly memory chips) go through a period of undersupply = high prices = massive capacity expansion = over supply = low prices = wait for demand to catch up to existing supply and .... repeat. My understanding is no fertilizer maker is going to build any new fertilizer plants in the US for various reasons. So.....how you going to get the big supply bump that should cause the reduced prices and the fertilizer cyclicality? Demand (for food) doesn't seem like it will go down, so in order for fertilizers to be cyclcal we've gotta have a big increase in fertilizer supply. From where? I also understand it takes 4-5 years to build a new fertilizer plant. So....until the big US (or foreign) fertilizer companies start announcing new fertilizer plant builds, I won't sell UAN. I will happily collect the distribution checks. My hunch is before any big companies build a new fertilizer plant they will try to buy UAN. If some fertilizer company announces massive fertilizer plant expansion project, then we've got a few years to create a UAN "exit strategy", all the while collecting the distributions until the new plant capacity hits the market and (theoretically) pushes fertilizer prices lower. If the spot price of corn falls below $5, I might consider selling UAN. It's $7.60 and climbing now. markets.businessinsider.com Most farmers have already made their annual commitments late last year. I don't think that's how it works. In Nov-Dec farmers purchase their fertilizer for delivery in Q1 and much of Q2 in the following year. In June/Jul/Aug the fertilizer supply chain buys fertilizer about 1-2 months forward to refill the tanks they sold in the just completed planting season - no one is applying fertilizer at this time, customers are just restocking. In Sep/Oct farmers order the ammonia that they plan to apply in Q4 pre-winter., then repeat, Nov and Dec famers purchase their fertilizer for delivery in Q1 and much of Q2 in the following year. So Aug is the low price of the year (only restocking) and April/Maty is the high price of the year (planting season). What I mean to say in regard to your comment that farmers have already made their commitments for the year, for the Apr/May 2022 planting season you are correct, these sales have been ordered already. For the 2022 July/Aug restocking, zero has been ordered already, zero, and if you look at the CME NOLA UAN futures page you will see that Aug 2022 rocketed up $150 yesterday to $555/ton. cmegroup.com If Aug 2022 stays above $500/ton for UAN fertilizer, UAN the MLP is going to make so much free cash it's not even funny. It's EASILY $40 per year in distributions. Aug is the WEAK sales period. If Aug is above $500/ton imagine what's going to happen to high season spring planting in 2023? The thing is with corn $7.60, the farmers don't care about the price of fertilizer, they want it at any cost, because it makes corn yield increase and they are highly profitable, despite the high price of fertilizer. ---- As for your comments on valuation, look at the UAN 12 year chart. It was $250 in 2011 and had much lower production volumes than today, and the price of the fertilizers that UAN sells then was lower than they are today. There's an argument right there that based on past history UAN should be $300.....today. Look at LXU, another small domestic fertilizer maker. Sales for both companies in Q4 2021 were ~$190m with EBITDA ~$90m. Both have ~$525m 6.2% debt so the balance sheets are almost the same. Both sell UAN and ammonia. LXU has a market cap of $1.7b, UAN has a market cap of $1.2b. To be equally priced UAN should be $170 per unit. Don't kid yourself, UAN remains deeply undervalued. Nothing is going on in the world right now that indicates fertilizer prices are going to decline meaningfully over the next 12 to 24 months. UAN will easily pay out $30-$40 per year once the debt paydown charges are finished (they will finish this Q). Where else in the investment world can you get a 30% yield on a necessary agricultural company? I guess my exit strategy is to make an exit strategy when exiting has some rationale. I have a hard time finding any stocks that appear (to me, at least) superior to UAN. So....why sell this growing cash cow and ..... buy IBM? I do do relative investing, so if I'm going to sell UAN there has to be some better place to put the money. I don't know of any.