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From production cuts to falling crop prices, a flurry of recent developments and news has left the fertilizer space in the lurch. Many believe it's going to be a tough ride for fertilizer stocks now. I second that, but only partially.
Most of the issues that have cropped up seem to have bearing only in the short term. I believe the fertilizer industry remains a good bet in the longer run. Here's why.
The first event that caught many off guard was the announcements of production cuts by chemical majors PotashCorp (NYSE: POT ) and Mosaic (NYSE: MOS ) . After temporarily shutting down two facilities, PotashCorp plans to close its third potash mine in Saskatchewan for four weeks in February. Mosaic is reducing its phosphate production in the next three months, citing cautious buyer behavior and oversupply in the market as reasons.
The interesting thing is that these very companies are expecting bumper demand -- Potash forecasts record potash industry shipments in 2012, and Mosaic expects record phosphate demand for the full year. They are also expanding in a big way. So I'm not reading much into the cuts, as the outlook for the longer term remains upbeat.
Emerging economies to fuel growth
The other factor that strengthens my bullish stance is the rising demand for fertilizers in developing nations. Canpotex -- the three-member cartel of Potash, Agrium (NYSE: AGU ) , and Mosaic that controls the export of potash from Saskatchewan-- had a rocking 2011, with India and China signing deals at high rates.
Here too, there has been a small hiccup, as India says it will refrain from signing new potash contracts until July owing to enough inventories in hand to meet current needs. This may slow down the order flow for Canpotex, but only for a short while. India will need more fertilizers as crop production in the country goes up in tandem with the burgeoning population. Additionally, India might reintroduce state control on fertilizer prices (primarily for potash and phosphate), which is likely to boost usage and hence exports to the country.
It's a full circle
The biggest challenge for fertilizer companies probably is a dip in crop prices -- something we are already witnessing after the U.S. Department of Agriculture came out with its latest report on higher stockpiles of essential crops. A lower crop price realization may make farmers overlook or delay fertilizer application. Yet demand for crops like corn (which needs a lot of nutrients) is likely to stay put as it is a staple food item and is used both for livestock feed and for producing ethanol. And let's not forget that corn is a big export commodity. China's biggest-ever purchase of 900,000 metric tons of American corn last year was proof of the crop's surging demand. No wonder, then, that major nitrogen players Terra Nitrogen (NYSE: TNH ) and CF Industries (NYSE: CF ) have predicted record corn plantations this year.
Growing global population and rising spending power (especially in the emerging nations) should keep the demand for fertilizers firm. Add unfavorable weather (like the kind Argentina -- the second-largest corn exporter in the world -- is currently facing) to the equation and we may again see less-than-expected yields pushing up prices.
The Foolish bottom line
Fertilizer makers performed superbly last year, although their stock prices proved laggards. Fear seems to be holding these stocks back, but I see no reason for panic as we'll need fertilizers as long as crops are grown, and crops will be grown as long as we need to feed ourselves.
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