Global population growth and escalating food demand underpins
long-term upside for potash, phosphate and nitrogen producers, but
fertilizer oligopolies may have jumped the gun last year with
aggressive rates that priced farmers out of the market. As farmers
expand acreage rather than boost yields in now-tired fields, grain
prices have backed off recent highs. That's why Robert Winslow,
agriculture research analyst and director at National Bank
Financial, is picking his stocks with care. In this interview with
The Energy Report
, he shares where he sees strengths and weaknesses in the industry
and names some interesting contrarian plays.
The Energy Report:
Your last interview took place in April of 2011. What have been the
major developments on the agricultural front impacting the
fertilizer markets since then?
Increased weather volatility, like last summer's drought in the
U.S., which led to modern-era highs in corn, wheat and soybean
prices, have had a significant impact on the market. Although grain
prices have softened of late, I believe you're likely to see
somewhat higher-than-usual grain prices through at least the first
half of 2013, given the persistent dryness in the U.S. corn belt
and wheat-growing regions. Grain prices drive farmer sentiment and
buying, and therefore the price and the demand for fertilizer.
We've seen some disconnects when it comes to potash, such as in
India: Because the rupee was devalued about 20% through 2012,
Indian farmers can't afford to pay the prices that the potash
companies would charge, and this resulted in subdued demand.
Chinese demand has been somewhat subdued as well. Globally, we've
had this really interesting dichotomy with high grain prices
buoying larger demand in places like North America and even Brazil,
but softening demand in yet other parts of the world with
country-specific issues. In total, we haven't seen the demand
strength in potash that you might have otherwise expected with this
high grain-price environment.
Some would say it's partly because grain prices are not
sustainable at these high levels. We are actually of that view.
Like any commodity, when the price gets too high, two very simple
things play out: demand destruction and supply response. You've
seen demand destruction over the last three-six months. For
example, high-cost ethanol plants have been shuttering production.
High-cost producers of cattle, pigs and chickens have been culling
their herds because they can't afford the feed costs unless meat
prices rise in conjunction, which they have not.
Then there's supply response. Farmers are expanding acreage by
moving into marginal land. You may not get robust yield on that
land, but you can still increase production, which we're seeing
play out now. Brazil is expected to increase soybean acreage by
8%-10% this year. With these dynamics playing out, the grain prices
are beginning to come down. We expect that by the second half of
2013 you should start to see lower fertilizer demand reflected in
pricing, even in the U.S. and Brazil. That is why we maintain a
fairly cautious view on the fertilizer sector at this stage.
How might continuing climate change and severe weather affect grain
prices and fertilizer demand?
Nobody really knows the answer. I don't pretend to, but I will say
that the stocks-to-use ratio for grains right now, globally, is
about 68-69 days of supply. It's relatively tight compared with the
last 30 years or so, and it doesn't take much to tip over and get a
real spike - or falloff - in grain prices. When you do get these
supply shocks through floods or droughts, the relatively tight
supply situation can move prices quite dramatically, which we saw
just this past year.
Many investors don't believe such price spikes are sustainable
and they aren't going to pay for them. We're probably at least two
years away from where we have a bit more of a buffer in the
stocks-use ratio to get us away from this tightness that is causing
more volatility in the grain price. In the meantime, we can expect
continued volatility in both grains and fertilizer equities.
How have the various segments of the fertilizer industry performed
in the last year and a half?
Potash has been the commodity with the most interest. We've been a
bit of an outlier in the investment community, with a rather
bearish view on both the commodity itself and on some of the senior
potash producer equities. We are of the view that the potash
oligopolies [and we all know who they are] have been rather
aggressive with their pricing. In a perfect world, you might be
able to raise your prices every year, but we don't live in a
perfect world. Places like India just couldn't afford the higher
prices, so they bought less. The oligopolies and agronomists are
right in saying that parts of the world, like India and China, need
more potash in the soil, but ultimately, demand is price
In 2012, global potash demand looked to be in the neighborhood
of 50 million tonnes [50 Mmt], which is below the levels we saw
back in 2004. Thus, the commodity usage has been basically flat to
down over the last seven-eight years - not a compelling investment
theme. But the potash price more than tripled over that period.
This aggressive pricing has since come back to bite the
oligopolies. I expect a demand recovery in 2013 because India has
been under-applying fertilizer, and it will need to make up for
that at some point. I doubt India would purchase its full
allocation, which would be six-seven Mmt, unless it can buy potash
near or below $400/Mmt. And if it does buy the six-seven Mmt, then
there's a good chance India might buy less again in 2014, with
Indian farmers trying to mine the soil. Of course, if the rupee
comes back with vigor, India would have more buying power.
On the supply side, there's tremendous brownfield supply
expected over the next three to four years. Most of it is coming
from the oligopolies themselves. It looks like the global supply
will be growing about 4% per year, on average, over the next four
years. So if your demand is flat and supply is up 4% per year, it
doesn't bode well for potash prices. That doesn't include the
greenfield supply that could come on from BHP Billiton Ltd. (
), K+S Potash Canada or any of the juniors that are working to
build mines. So the supply/demand dynamics are not, in our view,
compelling for potash over the next two years, particularly if we
get less volatile global weather patterns and grain prices trend
How do the prospects look in the other fertilizer segments?
Phosphate is looking rather interesting here. Not unlike potash,
there's a bit of an oligopoly situation, with Morocco controlling
half or so of the global phosphate rock market. It appears that
Moroccans really want to move more into the higher-margin business.
Instead of just selling rock to the world, they figure they can
make monoammonium phosphate and diammonium phosphate, which are
finished fertilizer products. This will make it rather challenging
for the non-integrated phosphate producers and/or companies that
still rely on imported rock. U.S. phosphate producers like The
Mosaic Co. (
) and Agrium Inc. (
), for example, rely or expect to rely to some extent on Moroccan
On the other hand, that should provide some interesting
opportunities for the greenfield phosphate companies, certainly in
North America, that are developing phosphate deposits. There are a
couple of companies in particular that you might want to keep an
eye on. One is d'Arianne Resources Inc. (DRRSF.PK) and the other is
Stonegate Agricom Ltd. (SNRCF.PK). Both are working on projects
here in North America. The next few years could be interesting for
Then how about the nitrogen products?
Unlike potash and phosphate, nitrogen isn't reliant on ore bodies.
It's produced all over the world, so you don't get the sort of
concentration you get in potash and phosphate. If you're investing
in that sector, you have to be a little careful, because we believe
that nitrogen producers in North America, in particular, are near
peak margins due to the low price of natural gas, which is a big
input component. In our view, you shouldn't generally buy equities
that are about to post peak earnings and peak margins, especially
when the market already expects those peak results.
Two companies in particular, Agrium Inc. and CF Industries
Holdings Inc. (
), have share prices near their all-time highs, and the market's
already valuing some pretty robust results for them. We would be
very cautious, and, in fact, we have an Underperform rating on
Agrium. That stock's trading a little over $102 today, and we have
an $87.50 target on it.
How are current commodity and financial market conditions affecting
plans for junior mining companies in the project development
It's a challenging time. Finance risk is the key challenge for a
lot of these junior companies, whether it's potash or phosphate.
That means that if you have an ore body or an asset, it needs to
have some competitive advantages, for example by being a low-cost
operation either at the mine level or through low distribution
costs. We look at projects like Allana Potash Corp. (ALLRF.PK) in
Ethiopia, for example, which looks to be well positioned as a
low-cost operation at the mine gate and could be one of the
lowest-cost delivered potash suppliers into India, which has no
domestic potash. Companies are better off when they have these
types of strategic advantages, but at the end of the day, the
finance risk is still an overwhelming one today.
There is one development stage fertilizer company that we're
most intrigued by, and that's MBAC Fertilizer Corp. (MBCFF.PK),
because its finance risk is now largely behind it - it is about to
move into production in the next few months or so. It has a
phase-one phosphate project in Brazil called Itafos, right in the
Cerrado, which is the breadbasket of Brazil. It also has another
phosphate asset to the north of the Cerrado. This company has a
logistic advantage because half of the phosphate fertilizer
manufactured in Brazil uses imported rock from Africa. We are
extremely interested in this stock and it has our Top Pick rating
in the sector. We have a $5.25 target on the stock with an
Outperform rating. Frankly, the company is a potential acquisition
target because there are parties that appear to be aiming to
consolidate the phosphate fertilizer sector in Brazil. We believe
MBAC Fertilizer is one to own for 2013.
It's nice to see some blue sky on the horizon.
I'm not a complete bear on the sector. There are some bright spots
in my coverage list.
Do you expect any other interesting M&A activity in this
industry due to current market conditions?
I don't see much particularly different about 2013 versus 2012 as
far as the macro call goes. There's been expectation for some time
that the Indians and/or Chinese would come in and buy up more of
the junior fertilizer companies to help secure supply, particularly
in the potash sector. That just hasn't happened yet. One thing
that's different about 2013 is that there should be a number of
bankable feasibility studies completed this year, which will help
derisk a number of the early-stage projects. It looks like Allana
Potash is expecting its bankable feasibility any day now and
d'Arianne Resources is expecting a bankable feasibility mid-year.
Elemental Minerals Ltd. (EMINF.OB) has a bankable study expected in
the second half of 2013 on its potash project in the Republic of
the Congo. Even IC Potash Corp. (ICPTF.PK), which is a company
looking to develop a sulfate of potash fertilizer project in the
U.S., expects a bankable study in mid- to late 2013 as well.
There are number of bankable feasibility studies coming, which
will help derisk these projects and could spur some investment by
the likes of the Indians, the Chinese and even the Brazilians as
they look to secure fertilizer, but time will tell. Because finance
risk is quite significant for these companies, they ultimately need
strategic partnerships and/or offtake agreements to help mitigate
that risk. So as these studies come out in the next 6-12 months,
that could change the equation for many of them. We'll have to wait
and see how that plays out.
You talked about MBAC, which you like. What's the situation with
We're bearish on that one. I believe we have the only Sell rating
for that stock on Bay Street and Wall Street. So if you like
contrarian views, that's us. The potash commodity supply/demand
situation is not particularly compelling. In terms of valuation, we
look at that company as having mid-cycle earnings around $3.05 a
share in our 2014 estimate. A typical multiple on mid-cycle
earnings tells us this stock is overvalued at $41-$42. The Street
and most analysts seem to love it. They believe it's worth $50+.
Considering the cyclical downside potential for grain, we're not of
that view. We had a sell on it for most of 2012 and it's been the
right call. We'll have to see how 2013 plays out.
What do you see ahead for fertilizer producers and how can
investors position themselves in this industry, if they like the
It's as simple as this: The correlation between grain prices and
agricultural equities, particularly the fertilizers, is quite high.
Grain prices have retreated of late but still appear to have more
downside risk than upside and we would argue over the next year or
so, barring unforeseen supply shocks, the trend for grain prices is
for further downside. If you're of that view, then the bias for the
agricultural equities would be down as well. So we're pretty
cautious here. We'd be inclined to sell into strength, if these
agricultural equities rally, and focus more on the supply/demand
fundamentals for grains. With that view, we have only a select few
buys and we're more cautious with a number of sells in our
And there's a little bit of news on the horizon for mid-year with
some of the smaller companies if they can get their act
That's correct, on the bankable feasibility studies coming out.
We greatly appreciate your time and input today, Robert.
Thank you very much.
This interview was conducted by Zig Lambo of
The Energy Report
is an agriculture research analyst and director at National Bank
Financial [NBF]. Prior to joining NBF, Robert was an analyst,
managing director, and the head of research at Wellington West
Capital Markets Inc. [WWCM]. Prior to WWCM, Winslow was a special
situations analyst at Orion Securities. Winslow began his career
at Solar Turbines Inc. [a Caterpillar company] in Dallas, TX,
where he was a senior product engineer. He has a Bachelor of
Science in mechanical engineering from Queen's University, a
Master of Science in mechanical engineering from Texas A&M
University, and a Master of Business Administration from Cornell
University. He also holds the Chartered Financial Analyst [CFA]
1) Zig Lambo of
The Energy Report
conducted this interview. He personally and/or his family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are sponsors
The Energy Report:
None. Interviews are edited for clarity.
3) Robert Winslow: I personally and/or my family own shares of the
following companies mentioned in this interview: None. I personally
and/or my family am paid by the following companies mentioned in
this interview: None. I was not paid by Streetwise Reports for
participating in this interview.
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
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