Tuesday's Pair Trade: Fertilizer Providers

BMO Capital Markets released another set of ratings this morning that creates a potential pair trade. First, it upgraded Mosaic

to an Outperform Rating while issuing a $72 price target. The report stated that trading was turning toward potash fertilizer providers as potash fundamentals had bottomed. While it was stated that fertilizer stocks could be pressured by corn futures, global phosphate sentiment and prices give a bullish case for potash. Later on, the report mentioned that at the end of May Mosaic will be able to negotiate with Cargill shareholders to repurchase shares. Much of the recent run-up has been linked to this expected buyback, so if it doesn't occur, this could present a potential downside to BMO's bullish thesis on the equity. On the downside of the pair, BMO downgraded Agrium

to a Market Perform Rating while issuing a $120 price target. The case for the downgrade centered around some strong headwinds that nitrogen producers are facing in the form of rising gas prices and weakening urea/ammonia sentiment. Despite the expectation for a strong first-half of 2013, the stock was highlighted as pushing towards an overvalued price. The recommendation was to take some profits off the table on nitrogen fertilizer companies like Agrium and rotate into potash companies such as Mosaic. This presents an opportunity to play the volatility of that rotation, and go short Agrium and long Mosaic to simply play the volatility here, and is the second pair trade that BMO ratings have set up in two days. Following the reports, Agrium has traded down 3.01 percent to 103.98, while Mosaic has risen 0.75 percent to $61.98.