Is a fallow sector ripe for upside?
07/11/17

Traders apparently think money grows on trees.

Or at least, through trees, and shrubs, and other leafy things, as bullish options activity has blossomed in the agriculture sector.

Grain prices have been on a tear recently as corn and wheat futures break out to new 52-week highs. Soybeans also stunned bears with a violent surge from multiyear lows. It looks like the Fourth of July wasn’t the only cause for fireworks last week.

Options traders positioned for the move to continue yesterday, amassing over 4,500 August 17 calls in Potash Corp. of Saskatchewan (NYSE: POT). They initially paid $0.40, then shelled out $0.55 and $0.65 as the beaten-down fertilizer company ploughed higher.

Calls fix the price where a security can be purchased, so they can shoot up in value when a stock rallies. Monday’s contracts, for instance, will break even around $17.50 and double if POT climbs about 4 percent to $18. Traders will harvest a 200 percent gain at $18.50 and a 300 percent profit at $19. But if the shares close under $17, they’ll lose everything. POT ended the session up 5.27 percent to $17.17.

The moves in grain futures surprised some bean counters staring at full silos around the world. Blame it on the rain, quipped others as near-drought conditions spread across North America and parts of Europe.1

Potash (POT) YTD-year chart

Source: OptionsHouse by E*TRADE

Traders fondly remember huge swings in the fertilizer space in years gone by. First, the global-growth boom hurtled stocks like POT five, 10-, and 20-fold higher. Then, the financial crisis and world-wide deflation slashed their prices like a sickle mowing down ripe wheat. More recently, the group simply went nowhere.

But, longer-term observers see potential for a turn. They saw tractor maker Deere (NYSE: DE) call a bottom in farm equipment over the winter and knock the cover off the ball with its earnings report in May.2 They read the United Nation’s bullish price report in early June, and heard about rice shortages in Thailand later in the month.3 Floods in China threatening grain barges?4 Yep, saw that too.

Traders turned to Mosaic (NYSE: MOS), another provider of phosphates and potash, later in yesterday’s session. They first purchased a block of 2,800 September 25 calls for $0.90, followed by a slug of 2,653 August 26s for $0.37. MOS advanced 5.31 percent to $23.80.

Bottom line: Fertilizer companies have been idling in the shade since early 2016, but yesterday traders looked for the group to come to life.

 

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1. Bloomberg: Soy Contract Up Most Ever as Wheat Rallies on Acreage Misses. 6/30/17. ABC News (Australia): Unprecedented grains price jump as farmers in Australia and US battle dry conditions. 7/4/17. Agrimoney: Grain prices rise at quickest in 3 years - despite 'abundant' supplies. 7/6/17. Billings Gazette: Wheat prices jump on Montana drought news. 7/10/17.

2. CNBC: Agriculture market is 'nearing bottom,' Deere says. 2/17/17. Reuters: Deere raises 2017 forecast on strong farm equipment demand. 5/19/17.

3. RTTNews: Global Food Prices Rise For First Time In 3 Months: FAO. 6/8/17. Wall Street Journal: Rice Prices on the Rise as Inventory Shrinks. 6/28/17.

4. Reuters: Too much rain: China's floods roil hydropower, corn supplies. 7/5/17.