The U.S. Department of Agriculture (USDA) says farm revenues are headed for their biggest drop since the Great Depression. Equipment companies are already struggling and investors are wondering how this will affect a company like Agrium Inc. (TSX:AGU)(NYSE:AGU) as it prepares for the spring planting season.
The USDA says sales are expected to come in at $182.6 billion, roughly 8% lower than 2014. The projected annual decline will be the third in a row and the largest one-year decrease since the early 1930s.
Equipment retailers are already feeling the pain. Deere & Co. recently slashed its 2015 net income forecast and has laid off staff as it strives to reduce costs amid the slowdown in sales from customers in both the U.S. and Canada. Deere’s fiscal Q1 equipment sales for the quarter ended January 31, came in at $5.6 billion, a 19% drop compared to the same period last year.
Will Agrium get hit?
Agrium Inc. sells seed, fertilizer, and crop protection products to growers through its global network of more than 1,250 retail stores. The company is the largest supplier of these products in both the U.S. and Canada, and the difficult times hitting the agriculture industry could affect sales in 2015.
In its Q3 2014 earnings statement, Agrium warned investors that record crop production in the U.S. was putting pressure on prices and hindering its customers’ profit margins.
The company said North American farmers might delay committing to their 2015 acreage mix and could defer crop nutrients purchases. Agrium also forecasted a possible 3% drop in North American crop nutrients consumption this year.
With all this bad news floating about, why are Agrium’s shares doing so well?
Wholesale strength
Agrium’s integrated business model is one of the reasons it is a market favourite. The retail division normally provides a steady and reliable income stream to help offset the volatility on the wholesale side. In 2015, the wholesale business is likely to be the one that delivers the best results.
Agrium’s largest operation is the production of nitrogen, which requires huge amounts of natural gas. In Q3 2014, Agrium paid an average of US$4.00 per million British thermal units (MMBtu) for the natural gas it used. The price has fallen off a cliff in the past few months, and now trades below $3.00/MMBtu. This should help drive nitrogen margins higher through most of this year.
Investors should also see strong results from Agrium’s potash group. The company just completed a multibillion-dollar expansion at its Vanscoy potash facility and the added production will boost revenues as the project ramps up to full capacity.
What should investors do?
Agrium is a great long-term story, but the stock has rallied more than 40% in the past four months. At this point, it might be best to wait for the Q4 2014 earnings report to come out before deciding to jump in.
