CF Industries and Agrium: Why You Should Buy Nitrogen Fertilizer Stocks

Includes: AGU, CF
by: Chris Damas

There was one word glaringly missing from US President Obama’s stirring speech on American energy independence yesterday. You’d think it had four letters.


He said OIL thirty-three times. Said GAS several times. WIND half a dozen times. But as far as Obama was concerned, CORN isn’t part of the US energy future. This, is in spite of the fact almost 10% of US motor fuel is now CORN ETHANOL.


Because CORN ETHANOL is hated by many food activists and environmentalists.

Note we are talking about field corn going into fuel ethanol plants, which is otherwise used primarily by the industry to make all sorts of corn derivatives, or used for animal feed. It’s not the yummy sweet corn we get at the end of August.

Obama wants to steer clear of the messy idea that US ethanol policy is driving up food prices, both domestically and globally, causing inflation and world hunger. But as long as the current energy policies towards corn ethanol stay in place, there will be a massive wealth transference continued from BIG OIL to BIG AG.

That’s why investors should be buying stocks such as CF Industries Holdings (NYSE:CF) and Agrium Inc. (NYSE:AGU), two major beneficiaries of the increased demand for American corn.

Let’s look at some numbers on annual motor gasoline and fuel ethanol in the United States (courtesy of American Fuels). For this analysis, I am going to omit discussion of diesel and biodiesel, as they are a small component of consumer fuel.

Motor gasoline including fuel ethanol consumed (as required increasingly by law):

2010 138.5 billion gallons

2006 141.4 billion gallons

2002 135.6 billion gallons

Fuel ethanol used:

2010 12.8 billion gallons

2006 5.6 billion gallons

2002 2.2 billion gallons

Motor gasoline LESS fuel ethanol

2010 125.7 billion gallons

2006 136.2 billion gallons

2002 133.5 billion gallons

As you can see, fuel ethanol usage is going up, but the petroleum “oily” part of gasoline is declining.


Two laws were signed by former President George W. Bush; the first in 2005, and the second at the end of 2007. They increase the average amount of “renewable fuel” that must be put into motor gasoline. These were called the Renewable Fuel Standards I and II.

Under RFS II, the amount of renewable fuel in motor fuels had to be 12.95 billion gallons in 2010.

This year it’s 13.95 billion gallons, but that includes 1.35 billion gallons of "advanced" fuels such as biodiesel and cellulosic ethanol, so the net amount mandated for corn ethanol will be 13.20 billion gallons.

In RFS II, the corn ethanol mandate in RFS II keeps climbing, but more slowly, and peaks at 15.0 billion gallons in 2016.

In Canada, the Conservative government instituted a similar standard, requiring 5% ethanol in gasoline fuel.

Consequently, there is an active grain-based fuel ethanol industry in Canada satisfying domestic requirements, taking wheat and corn production in the provinces of Alberta, Manitoba, Ontario, Saskatchewan and Quebec.

The amount of CORN that is required to produce 14 billion gallons of corn ethanol is approximately 5 billion bushels.

This number should be compared to 6.5 billion bushels, the estimated amount of field corn in storage in the USA as of March 1st. The estimate was released Thursday by the United States Department of Agriculture.

The storage number was even lower than the lowly number expected, and corn futures spiked up the 30 cent limit to $6.93/bushel for May delivery.

click to enlarge

According to the USDA, the amount of corn used for fuel ethanol in the US was 3.7 billion bushels in 2008/2009, 4.6 billion bushels in 2009/2010 and is estimated to reach 4.95 billion bushels this year. Due to the RFS II, the estimate isn't likely to be reduced, but will go up.

To give you an idea of how much fuel ethanol (almost exclusively derived from corn) is important to US fuel consumption, the Energy Information Administration now includes it in their weekly petroleum balance sheet report.

For the week ending March 25, 2011, the US was producing 903,000 barrels/day of fuel ethanol. That’s 38 million gallons per day and would produce 13.8 billion gallons in a year, almost at the new RFS II level.

The amount of fuel ethanol in storage was 20.1 million barrels versus 152.1 million barrels of total motor gasoline components. (1 barrel = 42 US gallons).

What is more startling is that the US Environmental Protection Agency (EPA) allowed (but did not require) a higher percentage of fuel ethanol to be added to gasoline for consumer usage, raising the current maximum ethanol percentage of 10% (E-10) to 15% (E-15) for vehicles built in model year 2001 and later. They had raised the percentage for cars built in 2007 and later last October, but now were extending it to many more vehicles, pressured by corn ethanol lobby groups such as the Renewable Fuels Association (RFA).

The underlying reason for this is that the 10% level was inconsistent with the rising RFS II required amount of biofuels. At 10%, there was no way gasoline blenders could use enough corn ethanol to satisfy both the EPA and the federal statute signed by Bush.

Of course, the major oil companies are angry for several reasons. Firstly, they see the amount of petroleum going into fuel declining. Secondly, they have to buy ethanol even though it has only two thirds the energy content of petroleum gasoline, which allows them to use crude oil.

Thirdly, they have to put in place expensive dispensing systems to handle E-15 and avoid misfueling by consumers.

Finally, the auto companies are mad because their vehicles may not be able to handle the higher blend of ethanol without malfunctioning and the lower energy value of ethanol will make more stringent CAFE mileage requirements harder to meet with combustion engines.

So the oil companies (and several other groups including cattle farmers and grocery chains) are suing the EPA for both E-15 in newer cars (2007 and later), and there is a second lawsuit over the EPA extending E-15 to older cars.

In itself, E-15 will probably not add greatly to corn ethanol demand in a big way because it is optional. What would increase demand for corn ethanol would more likely come from either higher crude oil and motor gasoline prices or causing blenders to find E-15 more profitable to blend.

Alternatively, there is always the possibility of an "RFS III" being devised for political reasons, with higher quotas for corn ethanol use.

Finally, the failure to commercialize cellulosic ethanol from other sources of biomass might require corn ethanol to make up a growing portion of the total renewable fuels requirement, which tops out at 36 billion gallons in 2022.

At current corn and fuel pricing, corn ethanol is hardly profitable to produce, although there are subsidies in place to make it more attractive to fuel blenders.

But it doesn’t matter, under the RFS II and the most recent changes to legal fuel specifications, the EPA says it must be used, and in increasingly large amounts.

Ironically, the use of corn in ethanol plants is really a “stripping process” where the starch is removed to produce alcohol, leaving the bulk of the protein, fibre and oil for use as a feed product called DGS (Distillers Grains with Solubles). Therefore, the supposed impact of corn ethanol on human food prices is debatable.

But one thing is for sure. More fuel ethanol means more need for corn and all the inputs farmers require to produce it.

In the case of Nitrogen fertilizer, it takes on average about 150 lbs equivalent of elemental nitrogen per acre of corn planted to produce the average yield of, for the sake of simplicity, 150 bushels of corn yielded (the actual average corn yield was 152.8 per acre in 2010). That means every additional billion bushels demanded requires 500,000 short tons of elemental N.

Depending on the nitrogen fertilizer used, the amount of fertilizer needed would be anywhere from 610,000 tons of ammonia, to 1.7 million tons of liquid UAN-30. I don’t see any US government, including Republicans and Democrats, removing the tacit stimulus corn ethanol provides to the massive US agricultural sector.

Therefore, buy companies that serve the needs of corn farmers. CF Industries and Agrium Inc are two of the biggest suppliers of nitrogen fertilizers and other farm inputs to the corn belt. Both stocks are good value relative to my estimates for their 2011 cash flows. And both are breaking out of a down or sideways pattern.

Note: These stocks are volatile and for high risk tolerant investors, or should be held within a diversified portfolio. Consult your financial advisor and we assume no liability for losses.

And smile the next time President Obama talks about biofuels, oil and self-sufficiency.

Disclosure: I am long CF.

Additional disclosure: This information was disseminated to clients and subscribers of the BCMI Report and the BCMI Flash anywhere from 12 to 48 hours prior to appearing on Seeking Alpha.