The hot, dry weather that has battered much of the U.S. this
summer hasn't only left many Americans sweaty and irritable.
It also has had a big impact on the prices of corn and other
crops. Corn prices have increased about 15% this month amid
worries that near-drought conditions and high temperatures will
threaten crops in the Midwest.
In June, the U.S. Department of Agriculture said that 96.4
million acres of corn were planted in this year's crop, a 5% gain
from the prior year. But because of the hot, dry weather, the
expected yields might end up 10% to 15% lower than in 2011,
according to some estimates.
Those lower yields will reduce supply and increase demand for
corn, which in turn will drive prices higher. That's good news
for companies that make their money off of the corn market, such
asRentech Nitrogen Partners (
Rentech Nitrogen manufactures and sells nitrogen fertilizer
products such as ammonia, urea ammonia nitrate solution (
) and liquid and granular urea in the Mid Corn Belt region of the
Nitrogen fertilizer demand is driven by corn acreage and
production yields, which are in turn driven by corn prices and
gross farm revenue per acre.
The rising price of corn has been mirrored by an increase in
Rentech Nitrogen's stock price. It has gained about 35% since
The entire fertilizer sector has followed suit. The 17 stocks
in IBD's Chemicals-Agriculture group are up 21% since hitting a
four-and-a-half month low on May 18.
Why the uptick?
"The probability of hitting the current USDA estimate of 166
bushels per acre has been reduced, while the probability of lower
yields has increased," Charles Neivert, managing director at
Dahlman Rose, noted in a recent report. "This implies a higher
corn price, more acreage for next year, and a stronger fertilizer
Rentech Nitrogen is a master limited partnership that went
public in November at an opening price of 20. It was spun off
byRentech Inc. (
), an alternative-energy company that develops and commercializes
a patented and proprietary process, called Fischer-Tropsch, that
converts feedstocks to liquids.
Rentech Inc. still owns a 61% share in Rentech Nitrogen.
Financially, however, the companies live in alternate
Even though Rentech Inc. dates to 1981, it has still never
turned a profit. That's partly because the company spends so much
money developing products that have yet to find a lucrative
In contrast, Rentech Nitrogen has already grown earnings in
triple digits in each of its first two quarters as a publicly
One reason for Rentech Nitrogen's success is that it sells
products that are in high demand, watchers say. Another reason is
that it operates smack in the middle of the country's top
The company's East Dubuque, Ill., facility is one of the main
producers of nitrogen fertilizer products in the Mid Corn Belt
On its website, Rentech Nitrogen boasts that the location
"allows us to sell more of our ammonia during application
seasons, as opposed to the off-peak fill season, because our
customers in the Mid Corn Belt typically experience two
application seasons for ammonia every year: one in the spring and
one in the fall."
The company says its customers are willing to pay premium
prices for nitrogen products during application seasons, "so we
seek to maximize sales during these peak periods."
Another benefit of the Illinois facility is that it is located
a mile from an interstate natural-gas pipeline system. Easy
access to the pipeline gives Rentech Nitrogen the flexibility to
buy natural gas from different regions of the country, as well as
from several major natural-gas suppliers.
Having such a wide range of options means the company can shop
around for lower prices.
That's important because Rentech Nitrogen's facility uses
natural gas to convert nitrogen gas to a form that can be used on
Thanks to fracking technologies that make it easier to produce
natural gas, prices of the fuel continue to trade near historic
"As variable costs have declined, domestic nitrogen producers
have developed a competitive advantage," analyst Matthew Farwell
of Imperial Capital said. "We project that natural gas comprises
roughly 50% of Rentech Nitrogen's cost of sales, or 40% of
The combination of low production costs and high demand for
its products have driven financial growth at Rentech
The company posted first-quarter revenue of $38.5 million, up
61% from the prior year and well above the $22 million projected
by Imperial Capital.
Rentech Nitrogen logged operating income of $20 million and
adjusted EBITDA of $22 million, also above estimates.
"The Rentech Nitrogen fertilizer plant operated at 100%
up-time and benefited from larger-than-expected shipments related
to the extended spring application season," Farwell noted.
As a master limited partnership, or MLP, Rentech Nitrogen
trades in units instead of shares. It posted first-quarter
earnings of 51 cents per unit. Analysts polled by Thomson Reuters
expect Rentech Nitrogen to post full-year profit of $2.76 per
MLPs return cash to unitholders through distributions. These
are usually paid on a quarterly basis. In May, Rentech paid a
first-quarter distribution of $1.06 per unit.