Stepping into Fertilizer Stocks

Looking to get caught up on the fertilizer space? Look no further.

| More on:
The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

The markets often get it wrong when they push the price of quality companies lower due to short-term events in the marketplace.  This very phenomenon may be happening in the fertilizer industry as a weak pricing environment and negative news have sent shares lower this year.  The market’s reaction to news often creates brief opportunity for investors seeking value, but is it time to step in or time to be patient and let the markets take their course?

Short-term concerns

One of the biggest stories to hit the fertilizer market was the announcement by Russian-based Uralkali that it will end its cooperation with its Belarusian partner Belaruskali through which both companies exported potash via Belarusian Potash Company.  Uralkali will instead direct all exports through its own Uralkali Trading and abandon limits on potash production which could send potash prices reeling.

This news put pressure on the entire fertilizer industry, but the selling in purer potash players was certainly more severe.  The reaction was not entirely unwarranted as potash prices could be negatively impacted by the increased production from Uralkali which is already the world’s number one producer by output and controls a global market share of approximately 20%.

Long-term prospects

We live in a world of growing populations, changing appetites, and potentially shrinking arable lands.  According to the United Nations World Population Prospects 2012 Revision, the population is estimated to currently be just under 7.2 billion and increase by nearly 1.0 billion over the next twelve years reaching 8.1 billion and grow another 1.5 billion reaching 9.6 billion by 2050.  That is a lot more hungry mouths to feed over just the next 12 years.  According to the Food and Agriculture Organization of the United Nations, agricultural production will need to increase by 70% globally and by 100% in developing countries to meet the demand for the estimated 2050 population.

The diets of developing countries around the world are changing with the onset of rising incomes and continued urbanization.  Typically the result is increased meat consumption and lower consumption of cereal.  However, the increased meat consumption will drive the demand for feed cereal higher and the requirements for grazing land will be greater.

The argument over arable land takes both sides and would be difficult to solve here.  However, it is known that much of the higher quality arable land is in use and the remaining land suitable for crops is not in areas where the population is growing the fastest.   As farmers attempt to grow crops on less fertile land near population growth, the use of fertilizers will increase in order to maintain desirable yields.  In addition, crop land will have to compete with grazing land as demand for meat products worldwide continues to increase.

How to play it

Canada is home to another one of the world’s largest producers of potash and when combined with capacity for producing phosphate and nitrogen, Potash Corporation of Saskatchewan Inc. (TSX: POT), is the largest fertilizer company in the world.  The stock of Potash Corp. was crushed on the day of the Uralkali announcement falling 16% that day and even further the following day.  The stock has recovered slightly from lows, but is still trading at prices not seen since 2010.

Another large player in the fertilizer space is Agrium Inc.  (TSX: AGU).  Shares of Agrium were not as impacted by the Uralkali announcement, but have been weak since mid-February.  Agrium offers the investor a more diversified way to play the fertilizer markets.  The company distributes products similar to Potash Corp., but also has a retail unit that distributes seed, crop protections and nutrients directly to the grower.  In addition its technology unit offers controlled-release fertilizers to golf courses, lawn care providers, nurseries, horticulturists and other specialty agricultural customers.

For a more speculative play, an investor might take a look at MBAC Fertilizer Corp.  (TSX: MBC).  MBAC has had a tough go of it during 2013 as it watched its shares fall by over 66%.  The shares are now off the lows, but still remain depressed.

The company has four phosphate projects and one potash project all of which are located in Brazil.  However, the company has yet to produce any material revenues and only last month saw its first production of Single Super Phosphate powder from its Itafos Arraias SSP Project.  However, the location of the projects in the agriculturally focused Brazil may make MBAC an interesting long-term investment prospect.

Final thoughts

Due to the potential impact of the Uralkali decision, it may be a little early to touch a more pure play such as Potash Corp.  While the stock price tumbled hard on the news, if the predicted price drops follow, shares of Potash Corp. will most likely find lower ground.

The long-term prospects for the Brazilian properties of MBAC may present a significant value at current levels, but the lack of revenues from this company in a time of pricing uncertainty might make this too risky for more conservative investors.  The recent production is a positive sign, but patience with MBAC would seem prudent.

That leaves us with the more diversified Agrium.  The retail sales drive revenue at this company and Agrium reported that sales from this unit increased by 7% over the second quarter of 2012.  The much smaller technology unit saw an increase of 16% while the wholesale revenue from the distribution of nutrients fell by 9%.  The retail and technology units should provide a cushion for the wholesale unit which may see further pricing pressure making Agrium the more conservative pick.

Stepping lightly around fertilizer stocks until the markets sort out the recent announcement by Uralkali may allow patient investors to take advantage short-term concerns and reap the rewards of the long-term prospects.

Another resource that we are rich in

Potash is currently out of favour, but its long-term prospects are solid.  Another out of favour Canadian resource is uranium – the key ingredient for nuclear power.  Uranium has the potential to be the energy source of the next 100 years.

That is why the Motley Fool has prepared a Special FREE Report that will clue you into two of the best uranium companies in Canada. It’s called “Fuel Your Portfolio With This Energetic Commodity,” and you can receive a copy at no charge by simply clicking here now!

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.

Follow us on Twitter and Facebook for the latest in Foolish investing.

Fool contributor Alex Gray does not own shares in any of the companies mentioned at this time.  The Motley Fool does not own shares in any of the companies mentioned at this time.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

Profit dial turned up to maximum
Tech Stocks

$1,000 Invested in Constellation Software Stock Would Be Worth This Much Today

Constellation Software (TSX:CSU) is trading above $2,000 today. Why this stock is so expensive, and is it worth buying?

Read more »

Dividend Stocks

Passive Income: 3 Top Canadian Stocks to Buy for Monthly Dividends

Companies such as Pembina Pipeline and Killam Apartment REIT pay investors monthly dividends, making them top bets for income-seeking investors.

Read more »

Shopping card with boxes labelled REITs, ETFs, Bonds, Stocks
Stocks for Beginners

TFSA Investors: Top TSX Stocks to Buy With $6,000

Here are two safe, dividend-paying TSX stocks for your long-term portfolio.

Read more »

Gold medal
Investing

3 Growth Stocks That Could Be Huge Winners in the Next Decade and Beyond

Are you looking for growth stocks that could be huge winners in the next decade? Here are three top picks!

Read more »

Retirees sip their morning coffee outside.
Investing

Retirees: How to Make Over $95/Week in Passive Income TAX FREE!

Canadian retirees who are hungry for passive income should look to snag stocks like Sienna Senior Living Inc. (TSX:SIA) in…

Read more »

Man holding magnifying glass over a document
Investing

Where to Invest $500 in the TSX Right Now

Given the massive correction, long-term investors can start buying stocks like Shopify and goeasy to outpace the broader markets by…

Read more »

Aircraft wing plane
Investing

Air Canada Stock Is a Fantastic Deal Right Now

Air Canada (TSX:AC) is a great stock to own, as market fear turns into hope amid falling recession fears.

Read more »

Pixelated acronym REIT made from cubes, mosaic pattern
Investing

Beginner Investors: Get Passive Income by Investing in REITs!

You can get passive income by investing in REITs like Northwest Healthcare Properties REIT (TSX:NWH.UN).

Read more »