Fertilize Your Portfolio With These Stocks
Kirk is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Fertilizer producers have taken it on the chin recently to the point that many investors are forgetting that people continue to eat. With strengthening food demand in emerging markets coupled with continuing supply constraints due to arable land and water issues, fertilizer companies are a great long term story.
The Fertilizer Market
According to the International Fertilizer Industry Association, key factors that impacted fertilizer companies in the 2012/13 growing season were changes in subsidies in India that significantly reduced demand for K (potassium) and P (phosphorus) based nutrients. Also, China also held back on orders due to inventory build from prior years.
The 2012/13 growing period was also negatively impacted by severe weather issues. In North America the most severe drought in decades ended crop seasons early driving corn output down 17% and in South America the La Niña effect contributed to the soybean crop falling 15%. Overall global grain production was down by 4.5% according to a study by the USDA. As a result fertilizer use trailed off as well. Only N (nitrogen) based fertilizers showed positive demand growth.
The end result of a poor 2012/13 crop season globally where production fell short of consumption in much of the world is severely decreased foodstuffs. These levels need to be replenished quickly. Fertilizer companies impacted by the past year should benefit from anticipated aggressive plantings in the 2013/14 season.
Companies Set to Benefit
Among companies with bright long-term outlooks due to both the expected demand rebound and longer term trends is a smaller company that I mentioned about a year and a half ago called Intrepid Potash (NYSE: IPI). Intrepid has had a wild ride and sits a few dollars per share below where I left it.
In Intrepid's favor is that it is the United States' only pure play potash producer. Its location of assets in Utah and New Mexico give it a transportation advantage to many of its end users which strengthen its margins. Intrepid also has a good mix of industrial and agricultural customers which affords the company safety through diversification. The company provides 9.2% of all potash in the United States.
Beyond Potash, the company is one of two producers of the emerging product sulfate of potash magnesia which is used for the growing vegetable and fruit markets. Their balance sheet is strong with the addition of a new low interest debt offering of $150 million which was their first debt to speak of. As outlined in its investor presentation, Intrepid is using the funding to expand production and reserve lines in anticipation of growing demand.
Operating at the opposite end of the size spectrum from Intrepid is Potash Corporation (NYSE: POT) which is the largest producer of potash in the world. After a disappointing 2012 in which orders from India and China lagged, the company is projecting an imminent rebound in demand. Judging from two recent contracts, one from China and one from India, Potash's projections of exceeding last year's potash output by 4 to 6 million tons seem likely to occur.
In their presentation at the BMO Metals and Mining Conference the company discussed that lower demand years were generally followed by higher demand years. Whether that rebound year is this year or next is of little consequence longer term. Ultimately the longer term upward trend for fertilizer demand and prices has the most impact for investors.
With their position as de facto leader of the Canadian fertilizer cartel Canpotex and their foreign subsidiaries, Potash is well positioned to capitalize on global fertilizer demand growth. Potash is diversified beyond potash and is a significant producer of nitrogen and phosphates as well. For a little icing on the cake, Potash pays a nice dividend of about 2.8%.
Another member of the Canpotex cartel with strong fundamentals and geographic reach is Mosaic (NYSE: MOS). With assets and markets in South America, the company is poised to benefit from the development of Brazil and other South American nations. Mosaic also has existing relationships with China and India in Asia which will allow it to grow there as more people demand higher protein food.
Mosaic is strong in both potash and phosphate which gives it reach into the rotational nature of agriculture. The company is also developing a specialty fertilizer called MicroEssentials which incorporates patented technology for efficient delivery of crop nutrition via one granule. MicroEssentials, branded as a next generation fertilizer, potential is substantial as more nations seek greater efficiency in their agricultural complexes.
The Bottom Line
Investors with long-term outlooks who consider the demographic and agriculture trends will be well served to own one or more of these wonderful companies. Currently, each company's share price is well off of recent highs and may indicate a good entry price.
kirkydu-- Kirk Spano is the owner of Bluemound Asset Management, LLC and publisher of the American Resource Boom Letter. Clients of Bluemound hold stock positions in Potash Corp. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!