Fertile Ground for Gains

With the world's biggest fertilizer firm reporting earnings, I figured it's a good time to check in on the sector.

No, Potash Corp of Saskatchewan (NYSE: POT  ) hasn't reported yet. I'm talking about the biggest company by sales, not market capitalization.

Yara International is the Nokia (NYSE: NOK  ) of nitrogen. The Norwegian powerhouse commands around 7% global fertilizer market share. Like Agrium (NYSE: AGU  ) and CF Industries (NYSE: CF  ) , Yara is enjoying tremendous demand for its nitrogen products. Costs -- 70%-90% owing to natural gas, depending on the product -- are rising, but high demand from the world's agricultural end-users has lifted fertilizer prices at an even faster clip.

As with fertility goddess PCS, Yara sources low-cost gas in Trinidad, and the company has also secured supply in the Middle East. This is important, because European natural gas prices have gone through the roof. I'm less familiar with other nitrogen producers' natural gas supply chains, but Fools ought to be laser-focused on this absolutely critical component.

The commodity nature of nitrogen may help explain Mosaic's (NYSE: MOS  ) decision to pass off its Saskferco stake to Yara this week. Mosaic is tops in phosphate, and is also pursuing more potash prowess. The company's nitrogen operations were decidedly non-core, and are a better fit for the highly integrated Yara.

Speaking of potash expansions, PCS just announced it's increasing capacity by 2.7 million metric tons. The gains are all coming from either de-bottlenecking or expanding current projects, and at a cost 60% below building a brand new mine. Production will come online faster, too. Such are the perks of excess capacity.

There are a few other global developments worth mentioning. On May 1, China raised its export duties on urea from 35% to 135%. This mirrors the country's recent curbs on the production of aluminum -- another energy-intensive product. That tariff lifted urea prices 50%, and they're moving even higher of late, at least partially on news of various delays to Middle Eastern projects.

Rounding out the week's events was Canpotex's (the Canadian potash alliance) roughly 20% price hike from current levels, to $1,000 per metric ton. The same day, Belarusian Potash, Canpotex's Eastern European analogue, kicked its latest Sri Lankan contract up to $1,050. You thought iron ore ogres Vale (NYSE: RIO  ) and Rio Tinto (NYSE: RTP  ) were having all the fun? These potash combines are wielding simply tremendous market power today.

Of the fertilizer pros mentioned, Agrium is a Fool favorite, boasting a full five-star ranking in Motley Fool CAPS. Weigh in on the firm's future with a call of your own, right here.

Fool contributor Toby Shute doesn't have a position in any company mentioned. The Motley Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (5)

Comments from our Foolish Readers

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  • Report this Comment On July 17, 2008, at 5:40 PM, edlwhite wrote:

    One item in this article is incorrect. You state that PCS just announced that it is increasing potash capacity by 2.7M tonnes. However, it is POT which just announced it is increasing potash capacity by 2.7M tonnes. You should be careful about which company you are atributing a capacity gain of a 2.7M tonnes of potash to.

  • Report this Comment On July 17, 2008, at 5:49 PM, XMFSmashy wrote:

    PCS = Potash Corporation of Saskatchewan = POT

  • Report this Comment On July 17, 2008, at 5:57 PM, edlwhite wrote:

    To TMFSmashy:

    That is nice to know. However, PCS is actually a listed company on the NYSE. Admittedly it would not be likely to be increasing potash capacity. However, if the author is using stock symbols to identify companies, the author should use the correct stock symbol for the comment being made. My comment still stands. The article as it is is misleading in the extreme. It also does not give POT credit for the relatively good news it has announced.

  • Report this Comment On July 18, 2008, at 2:23 PM, edlwhite wrote:

    Since you are touting POT in this article, I want to add that two analysts raised their price targets on POT this morning (July 18). RBC raised its target from $340 to $370. UBS raised its target from $285 to $320. Of note is the fact that both of these raises were $35 higher. One might think that this is the amount each analyst thought the price woudl increase in response to the higher earnings resulting from the higher potash prices just instituted by Canpotex ($1000/tonne -- a 21% increase). Also POT has a recent press release which states they are planning 2.7M tonnes of new potash production capability by 2012. Recently an analyst also put a price target on POT of $425 (I believe it was Canacord). This last one was before the Canpotex price increase was announced. Thsi shoudl tell you how highly thought of POT is.

  • Report this Comment On July 18, 2008, at 2:25 PM, edlwhite wrote:

    Somehow the information about these price target increases does not seem to have gotten out to the general public. It was on the DJ news wire this morning.

  • Report this Comment On July 30, 2008, at 8:13 AM, AnomaLee wrote:

    I agree that the ticker should've been used in place of an abbreviation to eliminate confusion, but POT is a monster. I only wish I would've gotten into the company, and I'm still weary of buying to-date because of its run-up.

    But, I figure the cycle is sustainable regardless of ethanol subisidies or not. The world will continue to switch to high-yield crops which require more fertilizer. I've blogged on a bit about this on CAPs. This cycle is becoming permanent as demand for planting increased, fertilizer prices increased along with grain prices, and now companies like Kraft have passed on these costs to the consumer.

    Eventually, companies like Tyson(who've been beaten up) will pass these costs onto consumers and we will see much higher meat prices as meat producers pass their costs on as well.

    It's all part of the cycle and how money and nominal value really increases...

    Good write up...

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