CF Industries and Natural Gas
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
CF Industries (NYSE: CF), manufacturer and distributer of nitrogen and phosphate fertilizer products, is obviously closely tied to the price of corn. As corn prices rise, farmers plant more acres, and thus, require more fertilizer, benefiting both CF's volumes and prices. However, a clever investor must also be aware of CF's dependence on natural gas in producing fertilizers. The fluctuations in natural gas prices can benefit or hurt CF just as much as fluctuations in corn prices.
Natural gas is the principal raw material and primary fuel source used in CF's ammonia production process, leading CF's nitrogen manufacturing facilities to consume over 250 million MMBtus of natural gas annually. Moreover, natural gas accounted for approximately 45% of CF's total cost of sales for nitrogen fertilizers in 2010. Thus, it is not surprising that CF estimates a $1.00 per MMBtu change in the price of natural gas would increase production costs of ammonia, urea, and UAN by 32%.
With this information, it becomes quite clear that CF investors must pay as much attention to the natural gas market as the grain market. At the moment, CF benefits from low North American natural gas prices (prices in natural gas vary across the world since it is not an easily transported fuel) thanks to the development of new sources of natural gas, namely unconventional shale gas. Many expect the large supply of, and stable demand for, natural gas to keep a lid on prices.
These tailwinds could turn to headwinds if a national energy plan, especially one focused on using natural gas in tractor-trailers and fleet vehicles, comes to fruition. An energy plan targeted at natural gas for vehicles would drive natural gas prices higher, increasing input costs for CF. Furthermore, if ethanol subsidies were lowered in favor of fleet conversion subsidies, CF could get hurt again as corn prices could fall because of lower demand.
For commodity producers, investors cannot simply look at the prices of the commodity produced. Investors must also be cognizant of the input commodity prices. In CF Industries' case, long term natural gas prices and trends must be considered alongside the prices and trends in fertilizers and grains.
I do not have positions in any of the companies mentioned in the post.