Are Agrium Earnings in Big Trouble?

Agrium will release its quarterly report on Wednesday, and until last week, the company had done a reasonably good job taking advantage of the need for fertilizers from farmers and other agricultural producers. Yet leaving aside the expected drop in the company's net income when it announces its second-quarter results, the big question for the long-term prospects for Agrium earnings is how much the destruction of a key fertilizer industry cartel will affect its results well into the future.

Agrium differs somewhat from most of its fertilizer competitors, as it has a fairly large retail business that gives it a more vertically integrated operation that companies that concentrate only on fertilizer production. Nevertheless, Agrium is sensitive to the same trends in the fertilizer markets as its rivals. Let's take an early look at what's been happening with Agrium over the past quarter and what we're likely to see in its quarterly report.

Stats on Agrium

Source: Yahoo! Finance.

Will Agrium earnings stop growing for good?
Analysts have been nervous about Agrium earnings for months, cutting back on their June-quarter estimates by $0.35 per share and cutting full-year 2013 and 2014 estimates by about $0.55 per share each. The stock has dropped about 7% since early May in response to those deteriorating conditions.

Agrium actually came into the second quarter on a positive note, as investors looked past a drop in first-quarter sales compared to 2012 and focused instead on the expected recovery in planting conditions during the June quarter. With weather having played a big role in both last year's and this year's results, year-over-year comparisons didn't truly reflect Agrium's positive prospects for a strong year in 2013.

But the big hit to shares came in the past week, when Russia's Uralkali pulled out of the Belarus Potash Company cartel. The move threatens the stranglehold that it and fellow cartel Canpotex had over the potash fertilizer market, as potash prices are now expected to drop 25% or more from current levels. Yet while Agrium is part of the Canpotex cartel, rivals PotashCorp and Mosaic have far greater exposure to the potash market, as Agrium's share in Canpotex is only 9%. As a result, Agrium shares haven't fallen to nearly the extent of the declines that PotashCorp and Mosaic have seen.

Still, even though Agrium has benefited from its greater diversification, it has also faced headwinds from higher natural-gas prices. Agrium recently decided to suspend development on expansion projects that would have boosted nitrogen-fertilizer production by more than 30%, with moves from rival CF Industries and other players in the nitrogen business prompting concerns about competition. With nat-gas prices so volatile, making long-range future plans is tough for Agrium.

In the Agrium earnings report, watch to see what the company says about its ongoing Saskatchewan potash-expansion project, which is slated to boost production by 50%. With potash now in decline, it'll be interesting to see if Agrium goes back toward emphasizing nitrogen over mined fertilizer products. Either way, Agrium earnings could be in trouble in the long run if poor conditions result from recent news.

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The article Are Agrium Earnings in Big Trouble? originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool owns shares of CF Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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