CF Industries: 301 (Part 1)

| About: CF Industries (CF)

The fertilizer space has been nothing if not one of high drama and anxiety over the last few months. "As the World Turns" in the barnyard if you will. The combination of what looks to be a record corn crop (and strong crop harvests, broadly, across the Northern Hemisphere), a delayed planting season in North America (impacting Q3 fertilizer demand), and the dissolution of the Belarusian Potash "de facto cartel" (as characterized by the WSJ) have all led to materially lower fertilizer prices. The result has been weak Q3 earnings relative to 2012's Q3 from all the major fertilizer companies.

The dynamics in fertilizer going into the Fall of 2013 are very different than that of the Fall of 2012. In the Fall of 2012, the market was looking at a drought impacted harvest driving materially higher crop and fertilizer prices, an early Fall planting season motivating late Summer fertilizer demand, and a functioning cartel system in the potash markets. In Fall 2013, fertilizer prices are weaker for all the reasons listed above and laid out in the comparison below:

Fall 2012

Fall 2013

Drought induced weak corn harvest led to record corn prices

USDA projecting a record corn harvest driving corn prices down ~40% from their 2012 highs

Mild Spring led to early Spring plantings, early harvest and in turn early Fall plantings

Wet, cold Spring led to delayed plantings, a delayed harvest, and a delayed Fall planting season

Potash de facto cartels intact

Largest potash de facto cartel (Belarusian Potash Corporation) dismantled and Uralkali single handedly re-pricing the potash markets materially lower

Prices for Potash Corp by Nutrient

(per ton)

Q3 2013

Q2 2013

Q3 2013 % Decline vs.

Q2 2013

Q3 2012

Q3 2013 % Decline vs. Q3 2012



















Typically, avoiding "catching a falling knife" (in this case in terms of fertilizer prices) is all but axiomatic amongst professional investors. We would submit that following this traditional axiom may be one of the biggest mistakes one can make as an investor when it comes to CF Industries (NYSE:CF) specifically and the non-potash fertilizer plays generally. When it comes to the potash plays, there does indeed seem to have been a secular shift and the market arguably has not fully priced in the deteriorated, long-term outlook for Potash pricing.

Summary of what this article will cover and conclusions:

Topic to be Covered (in Part 1)

Summary Conclusions

Look back to the last record corn crop (2009) for guidepost on fertilizer company and fertilizer stock behavior

  • Expect a pick-up in M&A in 2013/2014
  • Crop and fertilizer (especially N&P) price improvements are likely from here

Uncertainties surrounding USDA corn crop estimates

  • Productive corn acreage estimates by the USDA may be too high which would in turn (with all else being equal) bolster corn and fertilizer prices
  • Late harvest causing complications and could further reduce productive acreage and or yields

Outlook for more potash reliant nutrient producers

  • Excessive capacity expansion by North American and Eastern European potash producers is likely to depress potash pricing for the better part of the next decade
  • Canpotex appears increasingly poorly positioned in the context of the steps being taken by Uralkali, which is likely to lead to significant market share losses for Canpotex in 2014 (which would have a significant impact on PotashCorp and Mosaic - less so Agrium)
  • North American potash demand also likely to be particularly weak in 2014 due to ample potash application in 2013 and fewer anticipated acres of corn planting
  • Nutrient producers reliant on potash for a majority of profits are likely to actively pursue non-potash asset acquisitions due to the weak outlook for potash

Clues from 2009 - Record Corn Crops' Past Impact on Fertilizer stocks

One of the greatest drivers of weakness in fertilizer stocks has been the expectation of a record U.S. corn crop. We take our lessons from the last record corn crop year - 2009 - and observe what transpired and what may be extrapolated to now.

Marketing Year









U.S. Corn Production (mm of bushels)









Weighted Avg Corn Price ($ per bushel)









Potash Farm Price

(per ton)









DAP Farm Price

(per ton)









Nitrogen Farm Price (per ton)









Sources: USDA FG Yearbook Table as of 10/28/13 for corn production stats. USDA Fertilizer Use and Price table (published 7/12/13) for fertilizer farm prices. Potassium Chloride 60% potassium used for Potash. Diammonium phosphate (18-46-0) used for DAP. Anhydrous ammonia used for Nitrogen. April '07 and '08 prices used for '06/07 and 07/08 marketing years, respectively. March prices used for all the other years save 2013/2014 where the October prices are used.

A few observations: First, based on the data provided by the USDA and Farm Futures, the 2009/2010 marketing year (which extends from September 09/August 2010) had a record corn harvest and in turn the lowest corn and fertilizer prices the industry experienced since '06/'07. That lines up very similarly with how '13/'14 is developing. Also worth noting is how quickly corn and fertilizer prices snapped back the following year (corn +46% in '10/11 vs. '09/10) and fertilizer prices up anywhere from 18% for potash to 50% for nitrogen (phosphate was up 39%). If the '14/'15 marketing year turns out to be anything like what '10/11 was for fertilizer pricing (relative to the prior year), after we soldier through this year the industry and its investors have a rebound to look forward to. Title of November 5 Weekly Fertilizer Review, "Urea Jumps 10% As Fertilizer Market Looks for Bottom."

Second, despite a corn crop that's forecast to be 700,000 bushels higher than the '09/10 record, corn futures today are still trading at a premium of at least 20% to the '09/10 weighted average price. Further, while Potash and DAP prices are currently virtually on top of the pricing level of March 2010, nitrogen fertilizer prices (a mixed bag depending on type) are as a whole stronger relative to the last record year with ammonia pricing 30% higher, urea 5% lower and UAN 17% lower as of October 28, 2013 vs. March of 2010 (USDA data).

Third, if 2009 is any indication, the global scale fertilizer companies are highly strategic (i.e. acquisitive) during these periods of corn and fertilizer price weakness. These periods (coming off a year of great fertilizer pricing and into one of soft fertilizer pricing) often lead to a spate of M&A activity. Going back to 2009-2010, CF launched an unsolicited bid for Terra in January 2009 which in turn led to an unsolicited bid by Agrium (NYSE:AGU) for CF. After a number of upped, dismissed, and pulled bids by Agrium, Terra and CF, Yara (OTCPK:YARIY) also participated in the action as a white night for Terra before everything came to a resolution with CF acquiring Terra for $4.7 billion in March of 2010 (a remarkable 124% increase in the purchase price vs. CF's initial unsolicited bid 14 months earlier). 2010 was also the year that BHP made a $40 billion hostile offer for Potash Corp (NYSE:POT) (current POT market cap - $27bn).

Sure enough, with the recent announcement of Mosaic's agreement to purchase CF Industries' phosphate business, we might be off to the next round of playing the board game "Risk" in the fertilizer industry. CF's agreement to sell their phosphate business at an estimated 10x first half annualized EBITDA when CF as a whole is only valued at less than 4x EV/TTM EBITDA is not only a coup for CF, it provides an indication of the strategic value of well situated, world scale, non-potash, fertilizer assets. Further, one has to wonder whether the announced CF/Mosaic (NYSE:MOS) transaction only puts CF further into play. Not only did Mosaic agree to purchase CF's phosphate business, Mosaic agreed to an ammonium supply agreement from CF's Donaldsville, LA plant and to build $200mm worth of infrastructure to facilitate smooth transport of that ammonium from Donaldsville to the Florida phosphate production facilities. This is a huge win for CF and for any potential CF suitor that may be concerned about where CF would sell increased supply coming in 2015/2016 from its significant plant expansion in Donaldsville. The supply agreement between CF and Mosaic effectively de-risks the Donaldsville plant expansion. More recent developments and their impact on the increasing likelihood of a potential acquisition of CF will be further discussed later in this article.

Uncertainties surrounding the 2013/2014 corn crop harvest

If a 40+% decline from the highs for corn prices were not causing enough anxiety for the average farmer, trader, investor and fertilizer producer, the USDA skipping their October 2013 WASDE report due to the partial government shutdown did not help. Going back to the scoreboard, as of the last WASDE report in September, the USDA increased estimated yield harvest for bushels per acre (from the August report), kept the harvested acreage constant, and therefore increased the estimated corn crop size for 2013/2014 by 60mm bushels to 13,843mm from 13,763mm bushels. Not a big increase, but with investors already worrying about what to do with all the anticipated corn any increase was an undesirable increase from the farmer's perspective.

While it would probably be foolhardy to make an all-in bet on the USDA having materially overestimated the size of this year's corn crop, there are a few data points that suggest that the USDA may have been overly generous in their corn crop estimates this time around. First, crop insurance claims in corn acreage were (at last count) running dramatically higher ytd this year than last (this despite a much more significant drought in 2012/2013 vs. 2013/2014). According to the most recent Farm Service Agency ("FSA" a division of the USDA) report in September 2013, the "sum of prevented acres" in 2013 was 3,572k acres vs. 262k acres in 2012 - a 13.6x fold increase over the same time last year.

As of Sept 2013

As of Sept 2012

Year over Year Change

Sum of Planted Corn Acres (FSA)




Sum of Prevented Acres




Sum of Failed Acres




Sum of Planted Corn Acres (USDA WASDE)




Corn Acres Area Harvested (USDA WASDE)




Corn Acres Harvested vs. Planted Yield




The FSA data appears to contradict WASDE data (ironic as the FSA data is supposed to be one of the sources that helps form WASDE data). FSA data highlights less corn acres planted in 2013 than 2012 (a -2.8% decrease in acreage) vs. WASDE which indicates a +0.2% increase. Importantly, WASDE data is principally gathered using "weather analysis and satellite imagery to monitor crop conditions." FSA data on prevented acreage is submitted by farmers filing required reports and claims. If one were to assume that FSA data was correct in terms of an actual 2.8% decline in corn acres planted this year vs. last, keeping all else equal with WASDE forecasts, that would suggest this year's corn crop will come in at 13,452mm bushels vs. 13,843mm bushels - a meaningfully lower crop size. This math would imply a 11.6% ending stock-to use-ratio for corn vs. a 14.6% ending stock to use ratio currently forecast in the September WASDE. That type of discrepancy, if realized, would have a material, positive impact on pricing of corn futures (and in turn, presumably, fertilizer prices).

{Note the WASDE for November was just published today, November 8, with the crop acreage being decreased by 2.2%, but the yield per acre increased by 3.3% increasing the size of the crop by 1%. The market rallied significantly on this news as the "street" expected a harvest number over 14bn bushels (see Bloomberg article entitled "Corn Rebounds from 3-Year Low as Harvest Gain Less than Forecast."}

Second and final on this topic, the crop harvest is running considerably behind last year. As of October 28, 2012, a year ago, 91% of the corn had been harvested from the top 18 corn growing states. As of October 27, 2013, only 59% of the corn crop had been harvested in the top 18 states. Not only is this meaningfully behind the 2012 output, it is lower than the 62% average between 2008-2012 for the top 18 corn growing states (all data according to the USDA October 28, 2013 Crop Harvest Report). The Wall Street Journal published a story this past weekend entitled "Rains Leave Corn Farmers Wet Behind the Ears." The article discusses how significant rains across the Upper Midwest (most notably Wisconsin (a top five corn growing state) and North Dakota (a top 15 state)), create a soggier corn crop in that region. Farmers, unfortunately, cannot get their hands on enough propane to dry out their corn (which compels them to either leave the corn in the field or run the risk of mold or rot). In short, the longer the corn crop is in the ground at this time of year with cold, wetter weather moving in, the greater the risk to the corn harvest.

Outlook for the more potash reliant nutrient manufacturers

Potash producers are arguably looking at a very challenging decade ahead of them. Massive and continued over-expansion by virtually every major potash producer has left the market awash in potash capacity. See following table:

(Sorted by Planned Potash Production Capacity)


Original Potash Production Capacity

Planned Potash Production Capacity

Incremental Capacity

Capital Cost of Capacity Expansion

Anticipated Completion Date













OAO Uralkali


















BHP Billiton

















Late 2014












Table Sources: Gathered from company press releases, financial reports, websites and news articles. Many of these projects have been subject to change. Some have become considerably more expensive than originally anticipated (e.g. as for K+S and Agrium). Some have been ratcheted back from their originally anticipated size (e.g. MOS - which has suspended for now some potash expansion projects) and timing (e.g. BHP Billiton). Some have been pulled like the $6bn Argentinean project planned by Vale. Note: This is not a comprehensive list. There are other major producers (like ICL, Qinghai Salt Lake, Intrepid Potash, SQM and others) that have not been sufficiently researched to be able to add to the above table). FTIA estimates that the other aforementioned producers not listed in the table above have approximately 5mm of potash production capacity in the aggregate.

Some quick math before diving into specifics. Based on Potash Corp's estimates, current global potash capacity is approximately 65mm tons. Referring to the prior table and inclusive of other market participants not included in the table (see disclaimer above), FTIA estimates that global potash production capacity will exceed 85+mm tons by 2020 (absent cancellations of any projects already underway). 2013 assumed global potash demand is estimated to come in at approximately 53.5mm tons (see Potash Corp or Mosaic Q3 earnings call transcripts) with 2014 demand jumping to 56.5mm tons. Jim Prokopanko (Mosaic CEO) estimated on his Q3 earnings call that the long-term growth rate for potash is 3%. Extrapolating from 56.5mm tons in 2014 at a 3% growth rate to 2020 one arrives at 67.5mm tons of demand in 2020. Based on FTIA estimates noted above, that suggests that demand will be < 80% of global capacity in 2020. That is less than the industry's current capacity utilization (suggested by Potash Corp) of approximately 82% in 2013.

Potash Corp is near complete on a decade long $7+ billion capital expansion program that's put Potash Corp in the position to be able to produce up to 17mm tons of potash per year. The anticipated production in 2013 will be 8.2 million tons according to Potash Corp's Q3 earnings release. Agrium CEO Mike Wilson recently stated at their October 8, 2013 analyst day "I am a little more cautious than some of our competitors on potash . . . the price will fall until someone shuts in production. . . {or} until we get towards 60 million tonnes {of global demand}." The irony of those statements should not be lost on investors as Agrium's single biggest investment initiative (almost 3x its next closest top investment initiative) is a $1.75 billion expansion of its potash production capacity ($1.75 billion represents 50% of the "Top Investment Initiatives" highlighted on p. 126 of Agrium's October 8, 2013 investor day presentation). Mosaic is amidst completing a major Potash expansion. The problem for those three (Potash Corp, Mosaic, and Agrium) is that they: a) require significant export growth to justify their incremental potash investments (if anything, for reasons to be discussed, foreign market demand for North American potash appears increasingly challenged); b) require an increase of capacity in-line with one another or risk a haircut to their share of Canpotex sales (% of Canpotex entitlement is based, largely, on allocation runs); and c) face North American potash demand that may be relatively weak in 2014. In effect, it appears that Potash Corp, Mosaic, and Agrium have all gone on a capacity building binge to claim a bigger share of a smaller pie. And to add insult to injury, it is not clear that any of the three's slices of pie will increase that much once all the capacity expansions are complete.

The challenges for Canpotex's export sales are four fold: poor Indian demand, a serious risk of loss of market share in China, exploding supply coming out of not only its members, but the now divorced Uralkali and Belaruskali as well as others like Eurochem (and by the end of the decade BHP Billiton) and finally dramatically lower pricing being pushed onto the world market by Uralkali. In terms of Indian demand, a weak Indian economy, a devalued rupee and subsidies being applied only to much less expensive urea imports (largely coming from China) makes Potash prohibitively expensive for the average Indian farmer. This has led to Indian Potash imports dropping approximately 4 million tons (~70%) in three years. See following charts from Agrium's October Investor Day.

Inevitably at some point, India will need much greater volumes of potash, but the Eastern Europeans are more favorably positioned for that business. In terms of loss of market share in China, the same as in India, Uralkali is positioned to take away significant exports to China from Canpotex (see following table).


Corp Q3




Q3 2013



Q4 2013





Wholesale Potash price per ton

$307 $257 $221

Estimated Potash Cost

$62 $100+

Sources: Potash Corp Q3 10Q for POT average price per ton. WSJ entitled "Uralkali to Cut Potash Price 12.5% for Compound Fertilizer Makers" dated September 20, 2013 for Uralkali price per ton. Estimated cost per ton from Bloomberg article entitled "Potash's $20 Billion Market Transformed by Uralkali" dated August 1, 2013.

China is an even bigger, consistent importer of potash (6-7mm tons annually since 2011 - see prior Agrium supplied chart) than India. Chendong Investment Corp, a unit of sovereign wealth fund China Investment Corp ("CIC"), recently swapped bonds it owned in OAO Uralkali for a 12.5% stake in the Company (see Bloomberg article). It would be fair to assume that CIC's interests are as much about securing cheaply priced Potash as they are about seeking high returns out of its Uralkali investment. In fact, it may be fair to assume that CIC is open to accepting modest returns on its Uralkali shares so long as Uralkali provides abundant potash supplies at favorable prices to Chinese farmers. Finally, Uralkali reported a 12% jump in year-to-year potash production in Q3 (2.7mm tons) for a total of 7.2mm tons YTD. The company has indicated that it plans to increase potash production to 10.5mm tons in 2013 (implying a Q4 run rate of 3.3mm tons and an annualized run rate of 13.2mm tons per year). Uralkali produced 9.12mm tons in 2012 so if Q4's forecast run rate is maintained in 2014, Uralkali will be adding 4mm tons (a 45% increase over 2012's level) of potash to the global markets (that takes care of India if India comes back to the record 2010/2011 high demand or it takes care of about 2/3 of Chinese annual demand). Further, there is Eurochem that has, as Chris Damas highlights (see Seeking Alpha article), sunk $2bn (ultimate cost will be $3+billion) into adding another 5mm tons of potash capacity onto the global markets. The advantages that the North American potash producers enjoy in terms of proximity to the end user are more analogously applied to the Eastern European producers and Asia than they are to Canpotex and Asia.

In short, for all of the reasons listed in the prior paragraph, we would submit that Canpotex will be suffering global market share losses to its Eastern European competitors that will impact both realized prices and export volumes. Further, we believe that North American potash producers will face a particularly challenging 2014 in terms of North American demand. The thinking is as follows. 2013 is forecast (as discussed earlier) to deliver the largest North American corn crop on record. The reason for such a large crop was tremendous prices enjoyed by corn producers through August of 2013 that led to high Spring 2013 plantings of corn acreage and tremendous usage of fertilizer (record usage of nitrogen fertilizer in terms of volumes and very high usage of both potash and phosphates). Fertilizer investors need to recall that Potash and phosphate fertilizers are banked by the soil, not nitrogen fertilizer. As highlighted in my first Seeking Alpha article on CF, demand for Nitrogen fertilizer is relatively inelastic whereas demand for Potash and Phosphates can vary greatly from year-to-year. As the 2013-2014 marketing year is lining up to have weaker economics for farmers based on materially reduced corn futures prices and as farmers are coming off having heavily fertilized with potash and phosphates in 2012/2013, why would not North American farmers reduce potash usage this upcoming year vs. last? Another factor impacting North American potash demand is the expectation (as highlighted by CF Industries on its Q3 earnings call) that there will be a 5% reduction in the number of acres of corn planted in 2014. Further, whereas the Canpotex structure provides for a certain amount of pricing discipline when facing foreign markets, Potash Corp, Mosaic, and Agrium are not constrained by Canpotex decorum when it comes to addressing the North American market. Is there the chance with all three facing the risk of materially reduced contributions from export sales that they lose some discipline in the North American market? We believe there is a likelihood - maybe even a high probability.

This all feeds back to the attractiveness of non-potash assets. Right now, Potash Corp and Mosaic have an over reliance on what's been historically high margin Potash (see following table). Despite poor stock market performance by both companies, their forward valuations (based on traditional multiples) have materially increased as their profitability declines faster than their share prices.

% of Sales from Potash YTD 2013

% of Gross Margin

from Potash

YTD 2013

P/2013 Est Earn's as of Dec 31,


P/2013 Est Earn's as of Nov 1,


Delta in

Curr P/E Multiple

Stock Price as of Dec 31,2012

Stock Price as of Nov 1, 2013





































Source: Each company's Q3 earnings release or 10-Q. 2013 10-k used for Mosaic because nine month results for Mosaic are unavailable due to a change in their fiscal year.

The market presumably has not taken these stocks down further because a) they believe that the Belarusian Potash Corp will be re-constituted with things going back to "normal" and b) they still have faded but potent memories of the remarkable run that POT and MOS enjoyed back in 2007-2008 on the back of $900 potash (POT increased fivefold over that period and hit $77 per share while Mosaic increased 7.5x and hit $153 per share). This author believes that a play on the Humpty Dumpty analogy is appropriate. Humpty Dumpty (defined, in this case, as the cozy world of potash pricing by the two, de facto global cartels) was effectively nudged off the top of the hill in 2009 when stratospheric potash prices induced plans for massive investment in potash capacity by all the aforesaid players. Humpty Dumpty crashed into a wall at the bottom of the hill this July when Uralkali busted the Belarusian Potash Corporation marketing agreement and stated a goal to dramatically reduce price of its product and make it up on volume. Canpotex, arguably, was in many ways just as much of an instigator of the Belarusian Potash Corp dissolution as Belaruskali or Uralkali as Canpotex's continued capacity additions and market share gains were putting pressure on all the players. Agrium highlighted a chart at its October 8, 2013 investor day exhibiting how Canpotex's percentage share generally increased as the tonnage of global seaborne potash trade increased (see below). Undoubtedly Uralkali had noticed the same thing and had had enough. Uralkali's primary goal may very well be to derail any further investment in potash production capacity by its global competitors.

Regardless of the instigators or the rationale for Uralkali's actions, the oversupply situation in potash is so acute (and the animosity between Belaruskali and Uralkali so vitriolic) that Humpty Dumpty is unlikely to be reconstituted, bringing things back to the way they were*, regardless of the efforts of the all the king's horses and men. It would stand to reason that as major potash producers come to that conclusion, that a number of the major potash producers will be looking to add attractively priced and situated non-potash assets to overcome the long term challenges in potash. Mosaic's move on CF's phosphate business (and decision to continue with the Ma'aden phosphate investment) appears to be the first clear evidence that a major potash player has embraced the new reality and weakened outlook for potash pricing. Further strategic moves on CF outright (by PotashCorp or Mosaic) or Yara International (-11% YTD) and/or others like Rentech Nitrogen (NYSE:RNF) (-45% ytd) and possibly CVR Partners (NYSE:UAN) (-30% YTD) are logical next steps. North American nitrogen fertilizer assets, because of their access to bountiful, inexpensive natural gas, should prove of particular interest.

* Will there ultimately be some agreement by Uralkali to take potash prices back to higher levels again? At some point, in all likelihood yes. But it is our belief that Uralkali will not do so until a) it has materially improved its market share with key Asian buyers (which would logically come at the expense of Canpotex exports and Belaruskali) and b) it has compelled a significant amount of planned potash capacity expansions (that are already in process) to be abandoned.

CF: 301 (Part 2) will be forthcoming. Topics that will be covered in Part 2:

- Outlook for more nitrogen reliant nutrient producers

- Importance of recent management changes at CF as well as activist investor interest in the Company

- Summary analysis and speculation on progress of CF's share repurchase program

- CF as an investment vs. its large cap peers

Disclosure: I am long CF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Information gathered from sources believed to be accurate, but the accuracy of the information cannot be guaranteed. Investors should not rely upon the above analysis when making their own investment decision. Investors should do their own work to determine the appropriate investment decision. Past performance is not a guarantee of future results.