3 Triggers to Get Into Fertilizer Stocks
Favorable industry developments and predictions have re-energized fertilizer stocks and renewed my interest in the space. I strongly believe they are a hot bet not to be missed. Here are my reasons.
On track to set record
The U.S. Department of Agriculture's prediction of record corn plantations in the U.S. this year looks set to come true, considering the speed at which farmers are planting. Two factors are pushing U.S. farmers. First, there's the warmer-than-usual weather, particularly in critical growing regions like the Midwest. According to the USDA, 7% of the total annual corn crop has already been planted -- a pace not seen since 1980. Secondly, corn output is falling in other major corn-producing nations, such as Brazil and Argentina, due to drought.
Because corn requires a lot of nutrients, higher plantations will mean higher demand for fertilizers.
Low stockpiles are great news
With plantation in full swing, what about consumption? That's on track, too. Remember how the USDA scared the wits out of fertilizer stocks some months back when it reported up to 20% higher corn stockpiles? It's funny how things can change in a short span of time. As of March 1, corn stockpiles were at an eight-year low, indicating that consumption of the high-demand crop is surpassing traders' expectations. Higher demand for corn will push up prices, providing greater incentive for farmers to plant more. And when China -- the world's biggest corn consumer -- starts importing corn like never before, why worry about demand?
All eyes on China
If the news of China importing corn from Ukraine for the first time ever has made you think American corn is losing out, think again. China's purchase only shows how huge its corn requirement is and how fast it is surging.
According to official data, China imported nearly 1.3 million tonnes of corn in January and February. That's almost 75% of last year's total import figure! Not surprisingly, officials are expecting China's corn imports in 2012 to be more than twice that of 2011.
Most of China's corn imports come from the U.S; according to a USDA report, as of March 15 the U.S. has exported nearly 2.8 million metric tonnes to China this year. Compare this with 313,700 metric tonnes exported during the same period last year and you'll see where we're headed.
With things falling in place for the fertilizer industry, which companies could prove to be good bets?
Some ripe picks
My main picks would be those dealing in nitrogen, simply because it is the most important nutrient for corn. CF Industries (NYS: CF) is the best option, as it is the largest North American producer of nitrogen. CF's nitrogen sales surged 46% in the last quarter, with an astounding 79% jump in gross profits. The company is ramping up its nitrogen capacity and increasing production of the highly profitable nutrient urea ammonium nitrate, or UAN.
Terra Nitrogen (NYS: TNH) , which is a subsidiary of CF Industries, remains a good bet not only because of the nitrogen factor, but also because of the great dividends it pays (it currently yields 6.8%). Terra's stock hit its 52-week high a few days back. Both CF and Terra have predicted record corn plantations this year.
The new kid on the block, CVR Partners (NYS: UAN) , is another fertilizer player worth considering. It enjoys the advantages of internal input sourcing and strategic location. The company deals primarily in UAN and, thanks to soaring prices, reported a solid last quarter.
Apart from nitrogen players, companies like PotashCorp (NYS: POT) , Mosaic (NYS: MOS) , and Agrium are also poised to gain from the developments. The three are members of the legal cartel Canpotex, which controls all potash exports out of Saskatchewan -- PotashCorp being the largest owner. With Canpotex bagging an order from China recently, things are on a roll again for these companies. They are expanding production capacities in a big way, too.
The Foolish bottom line
The agriculture sector is an exciting space, no doubt about it. The flurries of reports and data released now and then keep things interesting. Fertilizer makers look set to make it big this year, and I'll keep updating you on relevant developments. Keep checking in at Fool.com for all your news and updates.
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At the time this article was published Neha Chamariadoes not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of CF Industries Holdings.Motley Fool newsletter serviceshave recommended buying shares of Potash of Saskatchewan. The Motley Fool has adisclosure policy.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.