What the Russia-Ukraine Crisis Means for Fertilizer Companies

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

The ongoing dispute over Crimea has sent the entire market through its shares of ups and downs, but when the dust settles the long-term effects on nitrogen-producing fertilizer companies like Potash Corp (NYSE: POT  ) , CF Industries (NYSE: CF  ) , and Agrium (NYSE: AGU  ) may be positive.

Nitrogen is largely about natural gas
In many ways, natural gas prices may actually be a better indicator than fertilizer prices for predicting how North American fertilizer companies will perform, due to the need for natural gas to synthesize ammonia. Volatility in the supply and demand (and inevitably also the cost) of natural gas both domestically and abroad typically far exceeds that for fertilizer products, further intensifying the impact of natural gas on the nitrogen fertilizer market.

Intense fluctuations in natural gas prices make the global supply and demand projections for nitrogen prices in need of constant revision and largely speculative in nature. Yes, demand for nitrogen-based fertilizers is expected to increase at a slow and steady rate over the next few years, but demand is just one small cog in the complex machine responsible for determining fertilizer prices.

What makes the situation in Ukraine unique to the fertilizer industry is that nitrogen commodity prices have typically been established by Ukrainian producers. These producers have historically paid more for natural gas than North American producers, and subsequently they need to sell nitrogen fertilizers at higher prices to make the business viable.

Ukraine has significant natural gas reserves, but its consumption of natural gas still far overshadows the country's production, thus necessitating significant imports from Russia. The natural gas trade between Russia and Ukraine has always been a sensitive entity. Since the dissolution of the Soviet Union, gas disputes between Russia and Ukraine have been commonplace regarding debts, suspended deliveries, and transit issues (much of the Russian gas supplies intended for Europe had to make its way first through Ukraine).

While recent agreements between the two countries suggested the potential for Ukrainian fertilizer producers to source more affordable natural gas from Russia, the likelihood of these agreements to hold up under current political conditions is highly unlikely. The more likely near-term result is a significant increase in gas prices for Ukraine.

Natural gas prices and the corresponding nitrogen prices realized in Ukraine are just one-half of the story for North American fertilizer producers. The second consideration that cannot be ignored is the domestic price of natural gas. The key to strong margins for North American producers is a strong disparity between their natural gas expenses with the costs incurred for natural gas by Ukrainian producers. As the gap widens, the margins grow. Though the domestic price of natural gas has been relatively high throughout the beginning of the year, futures prices are dropping with hopes that spring weather will finally ease the heating demand.

Just over a month ago, the situation was very different from where it sits today. Though civil unrest in Ukraine was more than evident, the situation seemed relatively calm until demonstrators clashed violently with police in mid-February. Prior to that, Ukraine saw potential for decreasing natural gas prices from Russia, and natural gas futures prices in the U.S. were rising. This sudden transformation in the global fertilizer picture should serve as a reminder to the volatility of nitrogen prices. Should the U.S. decide to export natural gas to Europe in an attempt to limit Russia's political and economic influence in Ukraine and Europe, the expected price increases could be tempered.

The takeaway
Because natural gas is the most expensive component in the production of ammonia, the natural gas market has as much to do with the success of nitrogen-based fertilizer investments as does the actual fertilizer market. Volatility in Eastern European and North American natural gas prices makes fertilizer prices and nitrogen producers' profits more difficult to project than might be expected for a seemingly straightforward commodity. However, with the most recent developments in the global fertilizer industry taken into consideration, North American producers should see favorable conditions moving forward.

OPEC is absolutely terrified of this game-changer
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2889447, ~/Articles/ArticleHandler.aspx, 8/30/2015 6:56:13 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Shamus Funk

Shamus is a freelance writer for the Motley Fool focusing on energy, agriculture, and materials. He has his Ph.D. in Chemistry from North Dakota State University. After graduation, Shamus worked at a small biotechnology firm before becoming a professor of chemistry.

Today's Market

updated 1 day ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:00 PM
AGU $103.01 Up +0.16 +0.16%
Agrium, Inc. (USA) CAPS Rating: ***
CF $57.47 Down -0.41 -0.71%
CF Industries Hold… CAPS Rating: *****
POT $25.95 Up +0.18 +0.70%
PotashCorp CAPS Rating: ****