Charles Neivert: Fertilizer Companies with
Source: George Mack of
The Energy Report
The recent tumultuous downturn in stocks has created deeper
values and new opportunity in the agricultural space. Dahlman
Rose & Co. Managing Director Charles Neivert is a near-term
bull on fertilizer companies, but the window could close and
diminish prospects in the not too distant future. In this
exclusive interview with
The Energy Report,
Charles talks about the complex dynamics that affect the farming
and fertilizer industries, and reveals his best pick for a core
: AGRIUM INC. - BHP BILLITON LTD. - CF INDUSTRIES HOLDINGS INC. -
CVR PARTNERS, LP - INTREPID POTASH, INC. - POTASHCORP - THE
The Energy Report:
Charles, I was looking at an un-weighted basket of fertilizer
stocks, and they were down about 23-24% for the last week of July
through the first six trading days of August. Has this opened up
some tremendous value for investors? Or is this downturn
signaling a commensurate slowdown in agriculture along with the
I think that as a group this is probably more of a signal of a
very strong value for investors over the next three to six
months-possibly longer than that depending on the company. We
don't see a great change in the agricultural landscape due to the
changing economy. It is certainly part of the things going on,
but it may have less bearing on the fertilizer names than some
other material spaces. That's simply because food is involved and
the grain crop out there that may have been damaged in some
ways-though possibly not quite as definitive as we might see in
other products. As a result, we think there is a lot of value in
The key difference is that it's food?
Yes. The demand for food is less elastic. Certain amounts
of food are needed to keep going and global inventory is limited.
This year, a number of grain crops were not exceptionally large.
As a result, we don't see a big rebuilding of inventories. The
potential is that the price of some of these grains could
continue to go up if the harvest does not come up. So, you could
see things going up even though the economy is backing off simply
because supply is being cut away.
It sounds like you are near-term bullish on some fertilizer
names, but that you have longer-term fundamental
Yes, that is the case. Company prospects really depend on
which nutrient is involved during which timeframe. The near-term
is very good, I think, for any nutrient given the food and grain
situation. However, as you mentioned, fundamentals for some of
these products could potentially deteriorate over time while
others are likely to be stronger for a little bit longer.
Again, given the nature of the agriculture business, it is
really difficult to have a very long-term outlook within the
context of a potentially extremely volatile production range,
meaning grains. That is because the grains can go anywhere from
very, very large harvest years to rather challenged times without
any real rhyme or reason. There are no traditional business
cycles. The agricultural cycles are all based on weather. If
weather is extremely cooperative across a broad range of
geographies, you could have an enormously large crop at a time
when you don't really
an enormously large crop. You may already have inventories, but
there is not much you can do about it.
You might also get a small crop on top of small inventories,
or something in-between. You don't have the same control,
particularly on the supply side, as you do with a manufacturing
operation that can back off production when inventories are long.
For the most part, the rules that governments have put into place
to enforce land set-asides to help control production, have
largely been abandoned. Those policies are no longer used,
particularly in the U.S. and even in some other areas. So, you
can get large or small crops completely opposite of what you
might want or need at that time.
Let me just flip here to the macro-economy for a moment. In
a detailed statement following a meeting of the Federal Open
Market Committee on August 9, the Fed signaled a prolonged period
of slow growth and, in an extraordinary comment, said that
interest rates are expected to remain low until mid-2013. How
does this affect the agricultural universe?
Well, those rates are pretty much focused on the United
States. So, I don't think it really has that much of an impact on
the Ag space. In fact, it may have none. Low interest rates, to
the extent that they affect the dollar could present some
potential challenges because the dollar is weak or because the
dollar is strong. That does have a lot to do with corn or soybean
costs to potential importers of U.S. products versus some
competitors. But, it will have nothing or little to do with what
the farmer is going to plant in any given year.
Charles, what are your institutional investor clients
telling you now during this selloff? Are they holding off on
buying stocks for fear of needing cash for redemptions at this
Each portfolio manager may take a different tack, so really
this one is a little hard to answer. My guess is that now people
are moving and seem to like the Ag space for the time being. We
are seeing good activity. A lot of it is to the buy side where
activity levels are good.
Can a case be made that some of these plant nutrient
producers are defensive stocks?
In the current environment, you can make that argument.
They are not typically defensive in the way you think of a food
stock in a recession. In a recession, these guys get hit. When
grain production is being challenged, they become defensive
Potash is traded in a negotiated market, not a globally
efficient and tight market. But we have seen some transactions of
$490/ton in India. Could this represent an upward trend?
Well, the price of this product has been coming up for over
a year now as demand has come back from the trough of 2009. I
won't say it's impinging on capacity, but it starts to be a snug
market because we have run through a fair amount of inventory
over the last year to a year-and-a-half. That is what ultimately
justifies the fertilizer price. For the sake of argument, if this
year's crop turned out to be extremely large and we rebuilt
inventories substantially, fertilizer pricing would have a very
tough time going up from here. By the same token, if the crop
comes in short, and the way it's looking, it would increase the
price of grains and therefore be a bit supportive of a price
increase in potash. What we found in 2008 was that crop price is
a very important determinant in what the fertilizer price can
Are you currently bullish on potash as a commodity?
No. Near term I like all the names and products, but on a
longer-term basis, I'm not as bullish. I see an awful lot of
capacity on the horizon. Some has begun to come up and more is
coming over the next few years. It will be a pretty steady stream
from a very wide variety of potential producers and some new
At what price-per-ton would you be bullish on potash
I don't look at the price of the product as a sign at all.
I look at the price and prospect for the grains and consider what
needs to happen from that point. So, when grains are at low
prices and the crop is looking strong, I'm not going to be
Is the extraordinary heat wave in the U.S. affecting
It's definitely affecting crops. The timing of the heat
wave is also an issue. If you get periodic rain, it reduces that
impact. But, there are times where heat can be extremely damaging
and other times when it's less damaging. If heat hits at certain
points of the growth cycle, plants can be far more damaged than
at other stages of their growth. The heat that came through the
Midwest earlier in the year hit around a time when certain plants
were going through a key stage maturation, and that can be a
Is there a play for investors on drought-resistant
Seeds haven't yet gotten there. There is no seed out with
the label of drought-tolerant. It's hard to say resistant. It's
really a matter of degrees. If you get no water, nothing will
help you. But, if you get smaller amounts than normal, some seeds
under development will still produce near- or full-yields under
less-than-ideal conditions, but they are not in the market yet.
They are within a few years, so the claim goes, and we will see
when they make it. All the major seed players are working on that
particular trait. You can get into the companies that would
provide that pipeline by looking at the typical seed names of the
world-du Pont de Nemours & Company (
) and Monsanto Company (
Low equity prices have left a lot of companies with cash on
their balance sheets. What does this bode for M&A
It's a tough call. It depends on the product because some
of the markets may be so consolidated already that it will be
difficult to get anything by the antitrust people. Cheap prices
may or may not allow for acquisition because people will look at
the price from six weeks ago for comparison. A perfect example is
PotashCorp (TSX:POT; NYSE:POT)
went through when
BHP Billiton Ltd. (NYSE:BHP; OTCPK:BHPLF)
took a run at them. The stock was down in the high '80s to
low '90s for a long time. BHP was thinking it could get the
company for $130, but just before the offer, PotashCorp's share
price went up to $106 because the wheat market in Russia started
to give way. Russia was experiencing a serious drought. The
prices started to move up, and even though the $130 offer was
actually still a pretty substantial premium, it was not accepted.
Not only was it not accepted by the company, but, as conditions
in the grain marketplace worsened with stress from the U.S. corn
crop, that price got even higher. So, it easily surpassed the
offer number. Either people were expecting a much higher bid, or
something is going on that makes the stock just worth more-like
getting another bid. When the BHP bid was pulled, the stock
What are you telling your clients right now Charles? Where
are the value and the growth stories?
The name we like the most in the group is
CF Industries Holdings Inc. (
because we see the pressure on the corn crop in particular
leading to a very positive, constructive situation for corn into
2012. The biggest beneficiary of a corn crop that needs to have a
very large planting is more likely to be a name that is heavy in
nitrogen, as opposed to one heavy in potash and
We think there is going to be a fairly significant increase in
corn acres planted next year, and if you need acres in corn, the
U.S. doesn't have a lot of new, unplanted acres to go after and
would have to probably use acres currently in another crop. Often
that tradeoff is in soybeans, which would result in an increase
in the application of nitrogen.
Even in this downturn, CF Industries is still up 82% over
the past 12 months and it's flat over the past month. So, it's
held up pretty well under this pressure.
CF Industries is our only straight-out buy. We've been
recommending this stock for a long time. Even when I was less
constructive on the industry, this was the name we liked the
Even though CF Industries is your only straight out
buy-rated stock, you still recommend that money managers create a
basket of these stocks, do you not?
And, what would that basket include?
We are sort of constructive on all the fertilizer names, at
least through the fall application season and possibly a bit
beyond. CF is only in nitrogen with some phosphate exposure and
no potash exposure. So, we would tell people to get some potash
exposure, but pick your name carefully. We lean toward PotashCorp
as a name, but you have to look at it at that moment in time and
see how the company is performing against
The Mosaic Company (
Intrepid Potash Inc. (
. It's really a close call based on a lot of different metrics.
That is why we recommend a basket within the group to your
preferred weighting. You have to own some of everything, but
include some of all of the nutrients. You could cover it all with
two or three stocks in the basket.
We have upgraded the entire industry to an attractive level,
and in a strong agricultural situation, you don't want to be left
completely unexposed to one particular nutrient because they will
all move well and you want to catch some of that. It's always
hard to tell which one will be the best of the group.
These companies are all mid- and large-cap. Are there any
small- or smaller caps under a billion dollars where investors
might be able to get a little more leverage?
The only one that I deal with that gets down close to that
CVR Partners LP (UAN)
. It is a pure play on the nitrogen side structures as an MLP
(Master Limited Partnership). It features a good payout, but
tends to mute the share price a bit.
Want to mention any other phosphate, potash or nitrogen
The only company I haven't mentioned in the universe
Agrium Inc. (AGU)
. I hesitate to use the word defensive play, but it has a big
retail operation that it uses very effectively to move an awful
lot of product. It does very nicely in that business. It is also
spread across all the nutrients. It has nitrogen, potash and
phosphate exposure. It also happens to be based-in and sell a lot
of product in Canada, which means that it is a bit isolated from
the rest of the market. That actually gives the company a pricing
advantage because the market up there is a bit higher-priced. Its
big retail exposure is sometimes a little bit of a turnoff if
what you are trying to do is play the fertilizer space in a pure
way. It's a good company and well run. But, people tend to look
at it and say it's not exactly what they are after.
Charles, thank you very much for your time today.
In May 2009,
joined investment bank Dahlman Rose & Company LLC as
managing director to head the firm's new Agriculture and
Chemicals Research division. Prior to Dahlman, Charles was an
executive director at Morgan Stanley where he re-launched the
firm's commodity, specialty and fertilizer chemical equity
research practice. He was also co-founder and president of New
Vernon Associates, an equity research boutique specializing in
global chemicals, which was awarded Institutional Investor's
"Best of the Boutiques and Regionals-Commodity Chemicals" honor
for nine consecutive years. At New Vernon, Charles conducted
all fundamental industry research on a global level, including
analysis and forecasting of 50 distinct chemicals. He earned
his Bachelor of Arts degrees in chemistry and economics from
the University of Pennsylvania.
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1) George Mack of
The Energy Report
conducted this interview. He personally and/or his family
own shares of the following companies mentioned in this
2) The following companies mentioned in the interview are
The Energy Report:
3) Charles Neivert: 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.
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