2 Developments Every Fertilizer Stock Investor Should Closely Watch
Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Barclays has just upgraded the rating for three fertilizer stocks to Overweight. Reason: high corn prices as a result of drought should encourage farmers to grow more and apply more nutrients. Before you start thinking, this article won’t tell you a thing about what the three stocks are, or what to make of the ratings.
Instead, it will tell you about two major developments that are affecting or will affect fertilizer companies in the next few months, and which everyone who invests in fertilizer stocks should keep an eye on.
It’s not the drought I am talking about
To begin with, neither of the two really has anything to do with the drought in the U.S. That’s because how the heat wave has damaged crops and pushed up prices to record highs is not news anymore. With yields questionable, the U.S. is certainly not the only market fertilizer players are banking on for the rest of the year.
Hopes are pinned on Latin America instead, which is just stepping into its peak planting season; and like the U.S., is targeting record crop plantations this year. The excitement among farmers in the region isn’t surprising. One, the last season was marred by drought, so the urgency to grow more this time is pertinent. Two, prices of the two most important crops, corn and soybean, are hitting all-time highs – a sure-fire incentive for farmers to plant more.
Agrium (NYSE: AGU) expects its offshore sales to pick up during fall backed by a strong planting season in Brazil. Nitrogen king CF Industries (NYSE: CF) is banking on the U.S. fall season for ammonia sales, but it expects the Latin American market to drive sales of phosphates. Though not a fertilizer company, seed giant Monsanto (NYSE: MON) could be one of the biggest beneficiaries of the Latin American spring season as Brazil is its most important market after the U.S. and Europe. The company is expecting good part of growth to come from the region in the next two quarters.
Robust buying from Brazil was also one of the key factors that drove PotashCorp’s (NYSE: POT) second-quarter profits to record high. The company also feels deficiency of potassium in soil should boost demand for potash from the region. Peer Mosaic (NYSE: MOS) is a little more excited, expecting shipments to Brazil to be at record levels this year as demand for both potash and phosphates remain firm.
Clearly, how plantings go in South America will be closely watched by all these companies, and is likely to play an important role in shaping their revenue for the rest of the year. Shares of CF and Agrium are anyway toppling their own 52-week highs week-after-week, and if good news keeps pouring in from Brazil, the momentum could stay.
In fact, for PotashCorp, Mosaic and Agrium -- the three companies that are members of legal cartel Canpotex that controls all potash exports out of Saskatchewan -- Latin America is acting as a savior when other markets are going slow. The region accounted for 35% of Canpotex’s total shipments during the second quarter. But these companies have another market under close watch, which brings me to the second development you should not miss.
From India, with love
If I tell you that 20% of Mosaic's potash is marketed to India, you’ll probably get a sense of how important the market is. India imports 100% of the nutrient. Sadly, its potash consumption has slumped by more than 20% this year as high fertilizer prices coupled with rupee depreciation hit hard on farmers’ pockets. A cut back in government subsidies exacerbated the situation.
Canpotex is yet to receive a contract from India this year. The only big contract the cartel landed was in March with Sinofert, China's biggest integrated agriculture company. Shipments under it were completed in this past quarter, which helped push up sales volumes for members.
With contracts drying up, PotashCorp is shutting down one of its mines for four weeks beginning mid-next month. It (and others) had already cut back production earlier in the year. Naturally, a contract from India will be a blessing in disguise for all the three companies. Uralkali, the world's largest potash producer, is expecting one sometime in September. So are PotashCorp and Mosaic.
Factors like depleting potash level in soil, need to boost yield in prevailing dry conditions, and fairly stable (though still high from last year) potash prices suggest India might soon feel the need to buy potash. But if you think a contract from India means only good news, there could be a caveat -- it might not be a high-priced contract. Keep an eye on any news from India on the potash front. Also, another contract from China might be on its way as it faces an important September application season. Any contract will be critical for the cartel.
The Foolish takeaway
The fertilizer industry might sound boring, but it actually keeps me glued because of all that goes on. Seems like this industry never sleeps. Nor should an investor, because any piece of news from any part of the world – good or bad – could affect fertilizer stocks directly. And given the industry’s solid resilience, you sure wouldn’t want to miss the fun. I’ll try and keep you updated on all that’s relevant. Just keep following this space closely.
Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool owns shares of CF Industries Holdings. Motley Fool newsletter services recommend PotashCorp. 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. If you have questions about this post or the Fool’s blog network, click here for information.