Hackett Advisors in the News


Potential Record Corn Crop Sows Vast Uncertainty

Posted 04/27/2012 02:17 PM ET

Farmers tend to be plain-spoken and often understated people. But the farm business lately has become one of superlatives.

Farm incomes spiked to record highs in the past two years, despite the nation being mired in a molasses economy. This year, market conditions coaxed U.S. farmers to plant an estimated 96 million acres of corn, shattering a World War II-era record. If the season goes well, the harvest will also be a record.

No one is exactly sure what that might mean. Some expect a vast surplus of corn and a meltdown in prices. Others say, even with global economies sputtering, demand will meet or exceed the record supply.

Many fortunes — including those of fertilizer makers — hang in the balance.

An unusually warm spring has given the planting season a healthy launch, and Thursday's first-quarter earnings report from Potash Corp. of Saskatchewan (POT) was read closely for clues.

The company reported earnings down 33% to 56 cents. Analysts had called for a 21% decline. Revenue of $1.75 billion was down 21% from a year earlier. Analysts had expected a 14% slip.

The results said farmers and distributors remained on the defensive and wary of high prices, despite a sharp drop in pricing last fall.

"The degree of caution experienced in the first quarter exceeded our expectations (especially in North America)," the company said in its release. Management said demand picked up near the end of the quarter, a trend the company expects to continue.

Other shoes are set to drop in the coming week.

CVR Partners (UAN) reports Wednesday. CVR, which went public a year ago, produces nitrogen fertilizer through the innovative use of an oil-refining byproduct. CF Industries (CF), the leading U.S. producer and distributor of nitrogen fertilizers, reports Friday.

This past Wednesday, Mosaic (MOS) updated its market outlook, saying "domestic and international crop nutrient markets have strengthened significantly" since its quarterly report March 28.

Mosaic's release cited an early spring season in North America and increased shipments to South America. The forecast was just what Goldman Sachs analyst Lindsay Drucker Mann had called for in an April 13 note.

"Upbeat management tones," Drucker Mann wrote, will be key to encouraging "investors to look through the select (first-quarter earnings) misses we anticipate towards a better back half" of the year.

Collectively, the group has had a wild run. It crumbled after a steep peak in 2008. It recovered and topped that high last August, only to fall back when fertilizer prices collapsed in the third quarter.

The group again moved to new high ground in February. That rise — led by Syngenta (SYT), Terra Nitrogen (TNH) and thinly traded American Vanguard (AVD) — returned the agricultural chemicals group to the leading ranks of industries tracked by IBD.

The prevailing question now, with the group more than 350% above its 2008 low: Is there still room to run? Syngenta, Agrium (AGU), CF and CVR are coiled into possible bases. And Goldman's Drucker Mann remains bullish on the group headed into first-quarter reports.

As of Friday, IBD's ag chemicals group ranked No. 28 out of 197 groups.

Business Climate

The central theme of the fertilizer industry over the past half-decade has been consolidation. That has left 10 of 16 stocks in the agricultural chemicals group with market capitalizations above $10 billion. It has also left production concentrated in fewer hands.

Fertilizers consist of three basic nutrient types: nitrogen, potassium and phosphate. Demand for all three toppled late last year, sending prices — as well as the industry's stocks — into a deep dive.

In January and early this year, Potash Corp., Mosaic and the large Russian producer JSC Uralkali all announced cutbacks in their production of potash, which are mined salts that provide the potassium chloride used in fertilizers.

That supply-side "discipline has allowed potash prices to remain on a flattish to slightly down trajectory over the last few months," rather than falling off a cliff, said BMO Capital analyst Joel Jackson.

The price of nitrogen-based fertilizers, refined mainly from natural gas, rebounded sharply this year. Urea, a dry, granular form of nitrogen fertilizer, saw prices rocket 62% so far this year.

Many farmers have refused to buy at what they consider inflated prices and turned instead to the liquid form known as UAN — urea ammonium nitrate. That lifted UAN prices.

Phosphate prices have continued to fall, although analysts generally agree prices are at or near a bottom.

As the industry heads into the crucial fertilizer-buying season, shortages are occurring throughout the usual distributor-based supply channels — particularly for nitrogen fertilizers.

Farmers held back on their seasonal pre-orders late last year, unsure of how year-end demand numbers would pan out. Distributors, who took massive write-offs after the price spike in 2008, also broke tradition and refused to assume risk by stocking up ahead of planting season.

The result has left the entire industry suddenly and unintentionally shifted to a just-in-time supply model.

The resulting rebound in urea prices may benefit CF, in particular, which operates its own chain of distribution centers across the corn belt.

Where do prices go from here?

"We'll see," Jackson said. "The question becomes one of trying to keep prices up, and absorb new volume."


The vast majority of the world's potash is produced in Canada, Russia and Belarus. Nearly 70% of the world's potash supply is marketed by two consortiums: Canada's Canpotex, made up of Agrium, Mosaic and Potash Corp., and Belarussian Potash, which is JSC Belaruskali and JSC Uralkali.

Phosphate has slightly more diverse sources. It's mined in rock form in the U.S., China, Brazil, the Middle East and Africa. The Ma'aden mine in Saudi Arabia is ramping up toward estimated new production of 3 million metric tons per year.

"In North America, there is probably not much more room for industry concentration from a regulatory perspective," said Oliver Hatfield, a director with Integer Research in London.

But there may be room for newcomers.

In Canada, BHP is exploring the launch of a 10 million metric ton potash mine in a global market that is 55 million to 60 million tons.

BHP has not yet committed to the kind of heavy spending needed to get the project off the ground. But, after losing its months-long battle to acquire Potash Corp. for $40 billion, the heavyweight miner turned around and spent $343 million to acquire Canada-based Athabasca in 2010.

In Brazil, another diversified miner, Vale (VALE), has been consolidating both potash and phosphate production. The company committed $15 billion in spending by 2020, aimed at becoming a leading fertilizer producer.


In the U.S., fertilizer stocks are often seen linked to corn prices. Outside the U.S., that link is more hazy, according to Integer's Hatfield.

Natural gas prices, on the other hand, have been a reliable predictor of nitrogen fertilizer prices. The glaring exception to this rule is the recent rise in nitrogen prices in the U.S., just as natural gas prices have slid to a 10-year low. Gas prices elsewhere, however, are little changed.

"(Low gas prices have) been a great advantage to the North American industry," Hatfield said. "Their competitive position has, within a couple of years, dramatically improved."

Looking toward the end of the year, many analysts see grain supplies remaining tight, keeping upward pressure on corn prices, even if the harvest comes in at full capacity. A majority of analysts, including Goldman's Drucker Mann, see corn holding above $6 a bushel for the year.

The corn bears point to China's slowing economy and continued soft demand in the U.S. and Europe. While December 2012 oil futures continue to hold above $104 a barrel, December corn trades near $5.40 a bushel, 12% below current levels.

Speculative holders of corn contracts — as opposed to commercial traders who represent end users — have fallen of sharply. Short-sellers of fertilizer stocks are ramped up to near-record levels.

Shawn Hackett, president of Hackett Financial Advisors, says that all probabilities suggest, come the fall, the industry will face a surplus of at least a billion bushels of corn.

"That will have to be priced into the futures market," Hackett said.

Grain prices will be under tremendous pressure, with corn heading toward $4 a bushel, Hackett says. Farmers will cut costs, including fertilizers.

"So, the outlook for fertilizer heading into the latter part of this year, and into expectations for 2013," Hackett said, "looks like it's going to be a pretty rough year for them."



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