World's Breadbasket Creates Record Earnings for the Fertilizers

Includes: AGU, MOS, TRA
by: Zacks Investment Research

Global Food Demand is On the Rise

Global demand for food continues to increase as the emerging market countries change diet and are eating more beef. The beef demand has increased grain demand, which is needed in order to feed the cattle. Agriculture commodity prices have skyrocketed in 2008 as demand has soared.

Behind the farming scene is a little known industry called the fertilizers, which supply the building blocks to farmers around the world who use fertilizers to increase crop size and health.

As prices rise for wheat, soybeans, or corn, farmers are eager to plant more crops in order to cash in on the price increases. Farmers then invest in more fertilizer to increase their crop size.

Fertilizers See Earnings Soar in the Last Six Months

Many of the major fertilizer companies have recently reported quarterly earnings and they have been fantastic.

Terra Industries, Inc. (TRA), which produces nitrogen fertilizers, saw revenues nearly triple to a record $202.2 million from $69.4 million.

The Mosaic Company (NYSE:MOS), a producer of phosphates and potash fertilizers, quadrupled profits when it reported fourth quarter earnings on July 28 to $862.5 million from $202.6 million.

The story was more of the same at Agrium, Inc. (NYSE:AGU), the nitrogen and potash fertilizer and agricultural products manufacturer. Agrium doubled its earnings in the second quarter to a record of $636 million from $229 million a year ago.

Companies Foresee a Bright Future

Across the board, the fertilizer group is saying that the rest of 2008 looks strong for the industry.

Terra Industries said it anticipates strong demand for the remainder of 2008 as customers fill their storage capacity in anticipation of a robust spring 2009 planting and application season. In the nitrogen market, tight global supply/demand balance continues to put upward pressure on pricing.

Global demand for food continues to grow and with it grows fertilizer demand. Mosaic said that fertilizer growth is projected to grow at double the rate of the last 10 years. The company was bullish in its fourth quarter earnings report, saying that the fundamental driver of its business, the need for more food, continues unabated.

Agrium continued the chorus in its second quarter earnings statement. It saw continued strong demand for its products as corn, wheat and soybean prices remain at two to three times historic levels. AGU believes these levels should support crop input demand and continued fertilizer strength.

What Dangers Lurk Beneath the Surface?

Because the fertilizer industry is so dependent on the amount of planting and application by farmers, prices of corn, soybeans and wheat remain at the forefront of forecasting future fertilizer demand.

As Agrium remarked, global crop production will likely remain high as long as prices of corn, soybeans and wheat remain above historical norms. Obviously, a whole scale crash in commodity prices would have a negative impact on the fertilizer industry.

Higher production of fertilizers, especially potash, could also have a negative effect by driving down potash prices, which have been soaring in 2008.

According to Agrium, North American potash inventories have tightened significantly over the past couple of months. The Fertilizer Institute reported levels at the end of June that were 30% lower than the same time in 2007. Inventories are also 41% less than the 5-year average.

However, it's difficult for the fertilizer industry to increase production given the significant start-up costs and time delay in bringing a new potash mine on-line.

Consensus Estimates Are Rising

Consensus estimates have been rising in the last 30 days on both Mosaic and Terra Industries.

Estimates rose on MOS for both the first quarter 2009 and the full year 2009. For the first quarter, estimates rose to $2.92 from $2.80. For the full year, estimates gained 68 cents to $13.62 from $12.94. 90 days ago analysts were calling for $11.99.

For TRA, third quarter estimates gained 5 cents to $1.14 from $1.09 per share. For the full year, estimates rose to $4.67 from $4.59 per share.

MOS, TRA and AGU are Zacks #1 Rank (Strong Buy) stocks. All three are classified in Fertilizers. This group contains 8 companies, including several other Zacks #1 Rank stocks: CF Industries Holdings, Inc. (NYSE:CF), Potash of Saskatchewan (NYSE:POT) and Intrepid Potash, Inc. (NYSE:IPI). Intrepid Potash is scheduled to report earnings on Aug 14.

It also includes two Zacks #3 Rank (Hold) stocks: China Agritech (OTCPK:CAGC) and Yara International (OTCPK:YARIY).

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