The next USDA WASDE and Crop Production reports will be released on August 10, my birthday, and I am expecting a present of some sort. I hope they announce the Midwest crop damage is not as bad as what seems apparent, because I believe extreme prices can only hurt the fertilizer industry. Just look at what happened in 2008 and 2009.
The crop insurance adjusters are looking at the strips they have to leave behind to guesstimate final yield. Crop insurance recoveries will determine what is left in the pockets of wiped out corn farmers (bean soybean farmers will have their drought comeuppance in August). No insurance - no fertilizer purchases for next year.
I hear most farmers in Iowa will be covered for their corn yield shortfalls, guaranteeing buying power in the fall for fertilizer application for the 2012/2013. But I am concerned the land - the base, the rock - of farmer productivity, is being harmed by the Great Drought of 2012. If soil moisture levels do not recover, land values will fall, and will eat into farmer equity, It's a volatile situation.
Agriculture Secretary Tom Vilsack announced more disaster zones in the Midwest. But the Farm Bill negotiations are held up in the House. So it isn't a slam dunk that farmers will be bailed out by the government. The ones that are really hurting are the livestock producers, with high feed prices and scorched pastures.
We think it's easy for impulsive traders and investors to get excited and forget about how commodity markets tend to buy on rumor and sell on news. We sold fertilizer stocks last Tuesday, and it turned out to be a good move. Fertilizer equities tanked on Monday, helped by more Spanish and Greek debt fears, and we now have time to pick our targets for the next move, which I am sharing with you.
We sold CF Industries (CF) at $204. It hit $192 today and we bought it back at $192 and change. It was at $193.73 in after hours trading. We sold Terra Nitrogen (TNH) at $225 (bought at $185). It closed at $212.49 but we'd like it to go lower. They have a major turnaround planned for the fall, which will eat into remaining distributions for the year. Both CF and TNH will announce Q2 earnings on August 7.
Analysts expect CF to earn $8.70-$8.85 ($567-$577 million) for Q2, versus $6.87 last year (on more shares outstanding) on revenues of $1.95 billion versus $1.80 billion last year.
My feeling is CF will have great nitrogen segment results, but phosphate results will be pressured by higher input costs and lower international sales. Their JV in Trinidad could report less equity earnings, due to natural gas curtailments. The JV in the U.K., however, did well in Q2, based on partner Yara International's Q2 results announced July 18. Our 2012/six month target for the stock is $220.
I think Rentech Nitrogen will announce over a $1 distribution for Q2 and I like the units at $28 where it closed today. We have a target of $35.75 on the units, based on an 8% yield for 2012. They announce their Q2 on August 10. CVR announces their Q2 earnings on August 1 and I think they might announce a 60 cent distribution, better than the last two quarters. It closed at $24. I think upside on the units is limited as their fall plant turnaround and UAN expansion will limit paying much distribution in Q4.
What about Terra Nitrogen L.P.?
I wrote President and CEO Steve Wilson of CF Industries, TNH's General Partner, a few months ago, when TNH took a major $100 swan song dive from almost $300 down to below $200. I encouraged him to provide cash available for distribution guidance for unit holders as do TNH's two peers. No response, but keep an eye on this quarter's release in case they surprise us. I expect TNH to announce a better than expected cash distribution for Q2, probably over $4.50 per unit.
But guidance, if they make it available, would be for lower distributions for the back half of the year, as they plan to spend $60-80 million on their plant maintenance turnaround in the fall. The General Partner would pay half of that expense of course, so the damage to distributions would then be $1.62-$2.16.
PotashCorp (POT) announces their Q2 tomorrow. The average analyst estimate is for $1.02 with a range of 90 cents to $1.12 supplied by 25 analysts.
PotashCorp plans to restart its Geismar, LA ammonia plant (capacity 525,000 st/year formerly provided by their Trinidadian plant). We'll hear more about the status of the Geismar restart and the condition of the fertilizer business (if you can screen out CEO Bill Doyle's perennial bullish sales pitch.
PotashCorp plans to institute shareholder friendly moves such as increased dividends and share buybacks, once their potash mine and plant capacity increases stop cutting into cash flow.
We've been arguing for two years they should do this, so it is gratifying to see them respond. However, I still am reluctant to recommend the stock, which closed at $44.49 U.S.
The reason is a simple truth. Their buyers have less money with which to buy high-priced USD denominated fertilizers.
The Mosaic Company bit the bullet finally on the high cost of their purchased ammonia which is eating into finished phosphate margins, and announced on the recent Q4 earnings call, a plan to build a 1 million ton U.S. plant rather than continue to buy ammonia from Yara's Tringen plant in Trinidad.
The high ammonia prices at Tampa ($695/mt for July), are largely due to ongoing supply problems from Trinidad, but Gulf ammonia prices are volatile, and were trading at less than $400 as recently as February.
Note that the high Tampa ammonia price that rewards nitrogen producers also hurts Florida phosphate producers such as Mosaic Company, PotashCorp, and CF Industries, in order of vulnerability.
In spite of these looming dangers that most investors seem unaware of, ammonia sold in the heart of the Corn Belt is relatively impervious to the import competition cited above, at least from the Gulf, if not Canada. A major beneficiary of the Belle Plaine turnaround should have been Rentech Nitrogen, based in East Dubuque, Illinois, which sells ammonia, UAN and urea into the northern, central and eastern Corn Belt.
Rentech Nitrogen should report an excellent Q2 and at the Q1 call guided $2.86 in cash distributions for the entire year. Given 53 cents has already been paid, we can expect at least $2.33 for the remaining three quarters, and this could be raised at the Q2 call which should occur sometime in early August. The yield at current prices with just three quarters of distribution is an attractive tax-deferred 8.3%