Am I the only one confused here? The U.S. Department of Agriculture had left the fertilizer space in a lurch when it came out with reports of higher corn stockpiles. But then last month, the USDA turned around and predicted the highest-ever corn plantations by U.S. farmers this year.
Those two things seem contradictory. Higher inventories suggest lower corn prices, which should depress demand and make it a less attractive crop for farmers. So why is corn-planting on the rise? Looks like no one has the perfect answer.
But you may have reacted too quickly if you sidelined fertilizer stocks after USDA's first report. I was bullish on the fertilizer space then, and the latest report has only strengthened my stance further. Corn is a "high-demand" crop given its multiple uses as livestock feed, a food staple, and a raw material for biofuels. Increasing global consumption, especially in populous countries such as China and India, will likely sustain the demand for the crop in the coming years.
Let's take a look at some good investment ideas from expected bumper corn crops this year.
The fertilizer bets
Nitrogen is the most important nutrient for corn production, and major player CF Industries (NYSE: CF ) is ready for the show. It posted record revenue as well as profits for 2011. CF's fourth-quarter net income more than doubled to $438.9 million as revenue surged nearly 42% from the comparable period last year. CF has also wisely locked-in favorable prices on much of its natural gas needs for this year through derivative contracts. The company is aggressively adding capacity to brace for higher nitrogen demand in the future, and has projected record corn plantations this year.
Terra Nitrogen (NYSE: TNH ) is a pure nitrogen player, making it one of the best companies that can take advantage of a corn run-up. Terra's fourth quarter was a bumper crop of its own, with sales and net income surging 41% and 97%, respectively. The stock also has a handsome dividend yield of 8.5%. What I read? Solid margins and solid returns.
Agrium (NYSE: AGU ) is another big producer of nitrogen, potash, and phosphate. Its fourth-quarter revenue and net income climbed 33% and 43%, respectively. The company is a part of the three-member cartel that controls all potash exports out of Saskatchewan. Agrium will start a major expansion program at its potash facility in Saskatchewan this year, which will increase capacity by nearly 50%. Expansion is expected to be complete by 2014. Potash is another important nutrient in the production of corn, and Agrium provides good exposure here.
Monsanto's corn seeds might have been bug-bitten, but there's a lot in the company that's worth watching. It smashed Street estimates with a solid first quarter as rising global demand for corn pushed its revenue up by 33%. I am keeping a watch on its drought-tolerant corn, which is ready for on-farm testing after being deregulated by the USDA. The company is looking at a 2013-2014 commercial launch. The product could narrow Monsanto's gap with competitors, as well as boost its top and bottom lines.
Tractor giant Deere had a great 2011, and is all poised to grow bigger this year. The company reported record first-quarter earnings of $532.9 million, backed by an 11% rise in revenue. Deere's growing presence in China, India, and Brazil places it well to gain from the high demand and produce of corn. What's more, the company raised its quarterly dividend twice last year.
The Foolish bottom line
Reports that pop up every now and then tend to play a lot of games with agriculture stocks. Fears come and go, but the long-run story remains bullish. Corn is an essential crop, and farmers are unlikely to ever shy away from growing it. As such, companies like those mentioned above become interesting ones to watch.
I'll follow up with detailed analysis of each of these companies soon. Keep following this space for all news and updates by adding all your favorite companies to your stock watchlist.
- Add CF Industries to My Watchlist.
- Add Terra Nitrogen to your stock Watchlist.
- Add Monsanto to My Watchlist.
- Add Agrium to My Watchlist.
- Add Deere to My Watchlist.