Last week, Mosaic (MOS 0.59%) announced that it would delay the final 2 million tons of its potash expansion strategy until such time as it becomes more profitable to bring those projects back online. This move slightly echoes a similar one made by Vale (VALE -0.08%) in March when it announced it would pull out of an Argentinian potash project. While Vale said it was due to Argentinian inflation and tightly controlled exchange rates, there's no denying that potash prices have gone down in the last year, while natural gas prices, an important source of fuel for mining, has gone up precipitously.
Henry Hub Natural Gas Spot Price data by YCharts
Other than putting off its expansion plans, Mosaic seems unconcerned with current prices for its product and its fuel. Rather than hoard the cash savings from the project delay, company management made comments recently indicating that they intend to redistribute about $2 billion in cash surplus to shareholders via share repurchases, and also said that they plan to grow the dividend as earnings grow. That might not sound like much, but until 2008, the company didn't even have a dividend, and it remained a bare nickel until little over a year ago.
Mosaic isn't alone. Potash rival Potashcorp (POT) also recently announced it would raise its dividend by 25%. Both companies are signaling confidence in their long-term prospects despite current softness in the market, and with good reason. However this year or next year plays out, farmers worldwide are going to have to double crop yields by 2050 to feed a growing population, and fertilizer will play a big role.
It's not all about potash
You might worry, as my colleague Maxx Chatsko does, that higher natural gas prices will have an even worse effect on nitrogen fertilizer companies. Nitrogen companies use natural gas as a fuel, but also as a feedstock to create nitrogen, so it ends up being one of a nitrogen producer's highest costs. Maxx points out that "natural gas represented about 70% of production costs for Terra Nitrogen (NYSE: TNH) in 2012," and points to CVR Partners (UAN -0.46%) as having an advantage over Terra, because CVR uses a different process with a – currently – cheaper feedstock.
That's a great observation, and it's true that CVR has an advantage over some natural gas-based producers. However, Terra Nitrogen has its own advantage -- it hedges its natural gas costs, allowing it to keep input costs relatively steady and, sometimes, to even profit when its own cost of business goes up. While CVR's operating margin expanded an impressive five percentage points in the recent quarter, Terra increased its margin by 11 points. Despite natural gas prices being nearly 60% higher this quarter, Terra only realized about a 2% increase, due to the benefit of its hedges.
Of course, it's always better to rely on a clever business model than a clever commodities trader, but in some sense, CVR's cost advantage relies just as much on the fluctuations of natural gas prices as Terra's hedging strategy.
The Foolish bottom line
With natural gas prices rising and fertilizer prices falling, there's some reason to worry about fertilizer companies. But in the long term, these companies will be critical to the world's food supply, and even in the short term, the companies' management teams don't seem nearly as worried about things as their depressed stock prices might suggest. Now may be the time to be greedy while others are being fearful.
