By G C Mays
When CF Industries (CF) reported its fourth quarter and full year earnings the company noted that its forward pricing program aided Q4 sales as they had sold much of the Q4 volume in earlier periods when prices were higher. This allowed the company to realize increases in the average selling prices of urea and UAN of 9% and 15% percent, respectively. However, in the fourth quarter prices slumped to levels that the company found too unappealing to book any significant new Q1 business.
This caused customer advances or unearned revenue to sag to $257.2 million, its lowest level since December 2009 when its balance tumbled to $159.5 million. The company's decision to limit forward pricing increased the company's exposure to spot prices in the first quarter of 2012. In line with other industry leaders like Agrium (AGU) and Potash Corp (POT), CF Industries also noted that nitrogen and phosphate dealers were reluctant to take inventory positions.
UAN fertilizer, which is a urea and ammonium nitrate solution in water, generates the bulk of nitrogen segment revenues in any given quarter. In Q1 of 2011 it represented 54% of segment revenues.
Source: The Mays Report
Using gulf index prices as a proxy, average daily UAN prices were about $268 per ton during Q1. This is less than the $354 per ton average realized price of the fourth quarter and the $277 per ton price achieved in the first quarter of 2011.
UREA pricing surged during the quarter, rising roughly 11.5% between January and March, according to producer price data and more sharply if you look at gulf coast prices, which closed at an average daily price of $447 per ton during the first quarter.
Ammonia prices in the gulf began the quarter around $503 a ton. By the last week of March pricing had fallen to roughly $400 per ton.
The phosphate segment, which comprised about 18% of sales in 2011, also saw a decline in prices with swap and producer price data confirming one another. Gulf coast prices show a price decline of about 4.5% with an average daily closing price of $455 ($502 in Tampa), while producer prices received showed an average price decline of 5.2%.
Whether the company did better by using less forward selling looks like a mixed bag. Limiting forward selling of UREA in December was an excellent decision. November prices, at about $450 a ton, were roughly the same as the average for Q1. Ammonia was a mixed bag as it always is, this time reducing the company's input costs while also reducing potential revenues. The company may have done better selling forward UAN and phosphate as those prices continued to fall slightly during Q1.
In Q1 of 2011 the company earned $3.91 per share on revenue of $1.17 billion. Let's take a look back at 2011 revenues and earnings per share by quarter.
(Click to enlarge)Source: The Mays Report
Selling forward is an inexact science and its impossible to create certainty in an uncertain world. In my view the above mixed bag result represents a decent job by the company in the market environment that existed at the end of the fourth quarter and throughout Q1. However, this scenario also illustrates that forward pricing programs can work for and against you. We will have to wait for the results on May 3rd to learn of any real impact on revenues.