Agrium Inc: A Safer Way to Invest in Potash

Agrium's wholesale business gives investors exposure to potash while their retail business creates value and minimizes risk related to low potash prices.

Jan 23, 2014 at 9:10AM

Agrium (NYSE:AGU) may be the safest way for investors looking to gain potash exposure while minimizing risk related to low potash prices. Because Agrium's business includes both retail and wholesale, Agrium's stock price is not nearly as tied to global potash prices as peers Potash Corp (NYSE:POT) and Mosaic (NYSE:MOS). Agrium has a large retail business unit that sells crop protection products, crop nutrients, seeds and services to customers at over 1,200 retail locations and is the largest agricultural input retailer in the United States. Agrium's wholesale unit mines, manufactures and distributes potash and other nutrients, including phosphate and nitrogen.

The quarter
If we look at Agrium's Q3 numbers, we can see that while Agrium's wholesale unit struggled in the third quarter, but its retail unit's strong results helped to offset the weakness in wholesale. In Q3 2013, Agrium's retail division reported third quarter gross profit of $511 million, a $73 million increase from Q3 2012 while the wholesale division reported gross profit of $123 million (of which potash accounted for $27 million), down from $299 million in Q3 2012. The main reason for this drop in gross profit was lower nutrient prices and slower demand.

Of the North American potash majors, Agrium provides investors the opportunity to invest in potash without the stock price being tied too closely to global potash prices. Investors looking for purer potash plays might want to consider either Potash Corp or Mosaic. Potash Corp is mainly focused on potash production but also produces phosphate and nitrogen, while Mosaic's main business lines are potash and phosphate production.

We can see that because of Agrium's diversity across the agricultural spectrum, Agrium was the most insulated from low potash prices of the major potash companies and consequently Agrium experience the least decline in Q3 net earnings. Agrium reported Q3 2013 net earnings of $76 million compared with net earnings of $129 million in Q3 2012. Mosaic reported a much larger drop in net earnings during Q3 2013 with net earnings of $124.4 million compared to $417.4 million in Q3 2012, mainly as a result of lower potash and phosphate prices. Potash Corp's net earnings also suffered with Q3 2013 net earnings of $356 million, down from $645 million earned in the same period last year mainly as a result of weaker prices for all three nutrients and lower potash sales volume.

Potash prices
In July 2013, Russia's Uralkali cancelled its joint venture with Belarus' Belaruskali, which destroyed their gigantic marketing alliance. This joint venture, along with Canpotex, which is an alliance of Potash Corp, Mosaic, and Agrium, controlled roughly 70% of the global potash market before the breakup and had great influence on potash prices. Prior to the breakup, potash was selling for roughly $400 per ton. Following the breakup, potash prices slumped and settled in the $300 per ton range. Earlier this week, Uralkali signed a first-half sales deal with a Chinese consortium at a price of $305 per metric ton. This sales deal will likely give some stability to potash prices and may signify a floor or near floor in global potash prices. 

Final thoughts
With high global potash inventories, demand remains lower than normal and potash prices may stay depressed over the near- to mid-term horizon. In October, Potash Corp announced layoffs of 18% of its workforce, totaling 1,050 employees, in order to cut costs. In the longer term, potash prices should rise due to increasing global demand for the nutrient.

With potash prices at their lowest levels since 2010, Agrium's business model allows investors the opportunity to gain exposure to potash while also minimizing risk from a possible decline in potash prices through Agrium's retail unit and other wholesale products. Agrium has also recently increased its dividend by 50% from $2 per share to $3 per share on an annualized basis giving investors a current yield of 3.20%, and making Agrium all the more attractive.

Fool contributor Charles Sherwood has no position in any stocks mentioned. The Motley Fool owns shares of PotashCorp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers