Record Corn Crop Sows Vast Uncertainty
ALAN R. ELLIOTT, INVESTOR'S
Posted 04/27/2012 02:17 PM ET
tend to be plain-spoken and often understated people.
But the farm business lately has become one of superlatives.
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.
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.
fortunes — including those of fertilizer makers
— hang in the balance.
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
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.
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.
shoes are set to drop in the coming week.
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
past Wednesday, Mosaic (MOS)
updated its market outlook, saying "domestic and
international crop nutrient markets have strengthened
significantly" since its quarterly report March
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.
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.
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.
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
prevailing question now, with the group more than 350%
above its 2008 low: Is there still room to run? Syngenta,
CF and CVR are coiled into possible bases. And Goldman's
Drucker Mann remains bullish on the group headed into
of Friday, IBD's ag chemicals group ranked No. 28 out
of 197 groups.
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.
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.
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.
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.
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.
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.
prices have continued to fall, although analysts generally
agree prices are at or near a bottom.
the industry heads into the crucial fertilizer-buying
season, shortages are occurring throughout the usual
distributor-based supply channels — particularly for
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.
result has left the entire industry suddenly and unintentionally
shifted to a just-in-time supply model.
resulting rebound in urea prices may benefit CF, in
particular, which operates its own chain of distribution
centers across the corn belt.
do prices go from here?
see," Jackson said. "The question becomes
one of trying to keep prices up, and absorb new volume."
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.
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.
North America, there is probably not much more room
for industry concentration from a regulatory perspective,"
said Oliver Hatfield, a director with Integer Research
there may be room for newcomers.
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.
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
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.
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.
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.
gas prices have) been a great advantage to the North
American industry," Hatfield said. "Their
competitive position has, within a couple of years,
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.
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.
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
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
will have to be priced into the futures market,"
prices will be under tremendous pressure, with corn
heading toward $4 a bushel, Hackett says. Farmers will
cut costs, including fertilizers.
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."