With the planet’s population surging past 7.5 billion, you might expect steady demand for crops and also for the fertilizer that’s essential for crop yield. Farming isn’t that easy. The mid-decade crash in grain prices threw the big agriculture stocks off the bull market’s back. And even as farm icons like Deere (DE) have regained favor in the past two years, investors kept a wary distance from fertilizer sellers CF Industries Holdings (CF), the Mosaic Co. (MOS), and Nutrien (NTR)—concerned that new producers would weigh down pricing.
A plant-food glut hasn’t happened, and now looks unlikely. And Wall Street has started warming to the industry. All three fertilizer leaders got a lift in early August, after good second-quarter earnings. Yet the stocks still have a ways to go, says Charlie Neivert, the Cowen & Co. chemicals analyst who was ahead of the crowd when he turned bullish on fertilizer in early March. “The new supply, which was coming on fairly rapidly, is slowing its advance,” says Neivert. “And demand, which constantly increases, is catching up.” He sees 25% upside for the shares of Nutrien—the Saskatoon, Saskatchewan-based Canadian giant formed in the recent merger of PotashCorp and Agrium—and almost as much headroom for CF and Mosaic.
As shown in the chart toward the end of this story, prices of crops such as corn have been fairly stable, even amid the Trump administration’s trade war, while prices have been rising for fertilizers containing the three main plant nutrients: nitrogen, phosphorus, and potassium. “The fundamentals of the industry are improving,” says Nutrien CEO Chuck Magro, whose company is the industry’s largest. “By the 2020-21 year, the supply-demand fundamentals could even be tight.“
Fertilizer companies will do quite well, even if their products’ prices don’t reach the crazy levels seen in 2008—when some fertilizers spiked above $1,000 a metric ton. Those prices were a culmination of the 20th century’s agricultural revolution, which taught farmers to ditch manure and drive their crop yields by applying chemical fertilizers.
In the first half of this decade, business boomed for farmers in North and South America. Corn passed $8 a bushel in 2012, up fourfold from the level just a few years earlier. Corn is the hungriest crop for fertilizer, especially nitrogen. London-based economist Pedro Vergel Eleuterio studied the fertilizer industry in 2015 for his Ph.D. thesis and found that the strongest drivers of fertilizer shares are crop prices.
Farmers tend to budget their spending in proportion to their anticipated revenue per acre, says Cowen analyst Neivert, and through the 2014-15 season, farms in North America and Brazil reaped high prices on record corn acreage. The resulting profits were reinvested in new machinery from Deere, CNH Industrial (CNHI), and Agco (AGCO), and farmers were happy to buy fancy seeds and fertilizers. Then, crop prices tanked.
As corn fell back toward $3 a bushel in 2015, plantings retreated and so did the shares of the leading nitrogen producer, CF Industries. Soybeans, another big crop, fell from $15 a bushel to $9. By 2016, the stock of the Deerfield, Ill.-based company had slid from near $70 to $22. Last year, farmers found profit in corn and soy again, allowing CF’s revenue to grow for the first time in several years. Sales in 2017 rose 12%, to $4.1 billion. The recovery continued this year. Farmers ordered a record amount of nitrogen-based fertilizer from CF, lifting its second-quarter revenue 16% over the prior-year period’s, to $1.3 billion. June quarter earnings jumped to $150 million from $3 million, and to 63 cents a share from a penny.
CF stock moved up 12% on these Aug. 1 results, to $49, as analysts lifted their estimates for 2018 earnings to $1.25 a share, according to the FactSet consensus, and $1.90 for 2019. What got pulses racing was CEO Tony Will’s forecast of tightening nitrogen supplies. While North American producers are enjoying low natural-gas prices from the shale boom, rivals in Europe have idled nitrogen plants in the face of a 50% rise in their gas costs. Exports from China fell 74%, meanwhile, as its producers encountered higher coal prices and tougher environmental rules.
With demand rising by 2% a year, those capacity constraints point to higher prices for the nitrogen fertilizers ammonia and urea. “Over the next several years, demand growth should outpace net global capacity additions,” CF’s Will told analysts on the earnings call.
Global supplies of potassium-rich potash are also growing at a slower pace than demand. That’s good news for Nutrien, the world’s largest producer. It’s also the third-largest nitrogen producer. June-quarter sales rose to $8.1 billion, 11% over last year’s pre-merger numbers at Agrium and PotashCorp combined. Merger synergies helped widen profits on continuing operations to $740 million, or $1.17 a share. Those results sent the Canadian company’s shares up 6%, to near $57; now, they’ve eased to $56. On raised guidance from Nutrien, analysts have boosted their earnings forecasts to some $2.60 a share for 2018 and $3.20 for 2019.
Industry watchers had worried about a new potash mine planned by Russia’s Eurochem, but that project is proving more challenging than expected. Nutrien chief Magro says the new capacity will be absorbed by growing demand. “Fundamentals have improved for farmers,” Magro tells Barron’s. “Right now, we see a strong, healthy crop. That’s good for the farmer and good for our business.”
Incumbents such as Nutrien can enjoy increasing returns on rising fertilizer prices, notes Cowen analyst Neivert, as they run their plants at higher utilization rates and reduce their marginal costs.
Potash is also a key product for Mosaic, the Plymouth, Minn., company that is a dominant producer of phosphates. Prices for the phosphate fertilizers known as DAP and MAP have climbed, as China has closed many mom-and-pop producers for environmental reasons and Mosaic has idled a large plant in Florida. “That’s one advantage of being the largest in the market,” CEO Joc O’Rourke says. “You have the ability to move the market and play a role in balancing supply.”
Mosaic’s June-quarter sales of $2.2 billion were 25% higher than the prior-year period’s. Although operating earnings doubled, the latest period’s net income came in below last year’s, because of tax differences and currency effects on the company’s large operations in Brazil. In 2017, Mosaic bought the fertilizer business of that country’s mining giant, Vale, hitching onto Brazil’s booming agriculture sector.
Much of the world’s demand growth for food is in the BRIC countries—Brazil, Russia, India, and China—says O’Rourke. Of those, Brazil is the most attractive for doing business. In the coming year, it’s expected to pass the U.S. in soybean production, and soybean farmers are big customers for Mosaic’s potash and phosphate nutrients. Like all of his ag industry peers, O’Rourke says he isn’t happy about the impact of the U.S.-China trade war on American farmers. But Mosaic is hedged against that problem because U.S. farmers’ losses are Brazilian farmers’ gains.
Mosaic shares moved up on the company’s June-quarter results, to a recent $29.50, as analysts raised their earnings estimates to $1.65 a share for 2018 and $2 for 2019.
Analyst Neivert notes that he’d been negative on the fertilizer companies for years, because of falling grain prices or unbalanced supply and demand. All of these negatives have now turned positive, and he expects the good times to last.
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