China early Thursday then moved to put huge tariffs on fertilizer exports, in an effort to curb inflation and keep enough of the product in-country to guarantee its own crops.
Led by the biggest North American producer, Potash, the stocks were lower today, after moving sharply higher yesterday.
"You have all the makings of a wonderful speculative target for options traders," said Rebecca Darst, equity options analyst at Interactive Brokers.
"People taking both sides of these bets are saying these companies are in prime position to capture global growth and other people are saying this price is way too high. It's just a fascinating story."
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I spoke to Darst Thursday afternoon after her morning appearance on CNBC's "Squawk Box." (To watch the interview, click video above.)
She was watching options on Potash, Mosaic and Agrium.
"We didn't see a big move in implied volatility in Potash yesterday. It came today. There was an 18 percent rise in implied volatility just intraday. What this tells us is that the options market is pricing in 22 percent more, either to the upside or downside to Potash shares, than already has been charted in the stock."
"What we see is a real traders market emerging in the April 200 calls, with traders taking both sides on whether the company can pull off a close above $200 by this Friday," she said, adding there is "pretty frisky" trading in the May 220 calls.
"This is a very speculative market. These are expensive shares. The market's not ready to call a top," Darst said.
RBC analyst Fai Lee must agree with that. Lee, based in Vancouver, let us know he doesn't speak to the press but he did issue a report today. And in that report, he continues to ratchet up his price target on Potash: to $300 per share from $250.
Lee wrote that he increased his target and raised earnings estimates "largely to reflect an upward revision to our potash price assumptions. We have increased our 2008 and 2009 realized potash price assumptions (net of freight) from $340/tonne and $395/tonne, respectively, to $400/tonne and $600/tonne."
He said his 2009 price forecast is based on the assumption that spot potash prices stabilize at about $700 ton and no further increases occur in China and India. He called this assumption conservative.
He said he increased first-quarter earnings estimates for Potash to $1.64 from $1.32 per share and expects management to guide 2008 higher. Potash reports earnings April 24. Lee also said his price target reflects a 2009 P/E of 16, plus $55 per share of value for future expansion projects.
The group has had its naysayers as it's moved higher and higher, yet it continues to bubble along with surging ag commodities. Potash was trading at $58.87 a year ago and has traded as high as $199.89.
David Kotok, chief investment officer of Cumberland Advisers, says he likes agricultural ETFs, and one he owns -- Market Vectors Global Agribusiness ETF -- has positions in Potash, Mosaic and Agrium.
"By definition, just by position in that ETF, we have already overweighted the sector against the broad index. I would probably say in ag, we are three times market weight," said Kotok, a CNBC contributor.
"Obviously, it's been a good play for us. Do I think it has more to go long term? Absolutely. As long as the U.S. continues its stupid ethanol policy, it has many miles to go," Kotok added.
Goldman Sachs issued a recent note that covered fertilizer and seed companies, like DuPont and Monsanto. The note was about a discussion it had with several Midwestern farmers. (Goldman last week put a target of $225 on Potash from $180.)
Interestingly, Goldman analysts quoted one farmer on their call as saying if ag prices dropped, he could skimp on fertilizer but not seed. He apparently said based on the mineral levels on his central Illinois farm, without noticing any negative yield effects, he could cut back on phosphate and potash applications for a few years. All soil is different, but interesting nonetheless.
The farmer did say he would not cut back on seed, which Goldman called his single most important purchase.
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