The fertilizer industry is showing signs of stability of late, taking succour from improved pricing and demand dynamics for certain major crop nutrients and a firming farm economy.
While still-weak agricultural commodity prices remain a roadblock, strong usage in major consumer markets is driving demand for primary crop nutrients. Needless to say, the ever-growing world population and the concomitant need to beef up food supply to feed more mouths remains a prime catalyst for fertilizer demand growth.
The Zacks Fertilizers industry
has outperformed the broader market over the past three months. While the industry has gained roughly 12.1%, the S&P 500 has returned around 6.3%.
Let's do a quick health check of the fertilizer industry by delving deeper into certain key factors.
Potash Market Showing Strength
The potash market has stabilized this year from the 2016 lows. Potash prices have recovered this year after feeling gravity's pull in 2016, supported by improving demand and tighter supply conditions. Most producers of this major nutrient, including Potash Corp. of Saskatchewan Inc. POT and Agrium Inc. AGU witnessed a spike in prices in the third quarter that drove their potash margins.
Demand for potash also has been strong in key markets. Potash Corp., a major producer of the nutrient, saw healthy demand for potash in the third quarter and expects consistent customer engagement through the balance of 2017, supported by healthy consumption trends with contracts with both China and India in place. The company envisions 2017 to be a record year for potash demand and expects global demand in the band of 62 million to 65 million tons.
Potash Corp. sees strong consumption in China driven by a shift to more potassium-intensive crops like vegetables and fruits. The demand environment also remains healthy in Brazil, another important market, driven by higher crop acreage and application rates. Strong affordability and the need to replenish nutrients are also expected to support fertilizer demand in North America.
Moreover, the government of India's move to cut the Goods and Services Tax (GST) rate on fertilizers from 12% to 5% is a welcome news for famers in that country. It also augurs well for potash demand in India, one of the world's top buyers of the nutrient.
According to Agrium, potash market is expected to remain tight through the rest of 2017. As such, higher demand from major consumers coupled with tight supply should further drive up potash prices.
A Rebound in Nitrogen
Another positive is the recent rebound in the nitrogen space. The nitrogen market is seeing improving demand and pricing fundamentals. According to CF Industries Holdings, Inc. CF , a major producer, the third quarter witnessed a rapid increase in the global price of urea from second quarter, which was driven by considerably lower Chinese exports and strong global demand (especially in India and Brazil). The company expects consistent global nitrogen demand growth moving ahead.
Moreover, Agrium, in its third-quarter call, said that nitrogen prices have witnessed sharp increase (of more than 50%) since the lows seen in July, buoyed by low level of Chinese urea production and solid import demand from India. Higher domestic coal prices coupled with increased focus on reducing pollution has led to a reduction in Chinese urea production.
Agrium also sees positive supply-demand fundamentals for nitrogen in the medium term. Continued strong demand and tighter market conditions augur well for nitrogen prices in the fourth quarter.
Phosphate Market a Mixed Bag
Excess capacity continues to hurt prices of phosphate as witnessed in the first three quarters of 2017. Phosphate markets are expected to remain oversupplied through this year (with new capacity reportedly coming from Morocco and Saudi Arabia), thereby putting pressure on prices.
However, demand environment for the nutrient remains favorable. The Mosaic Company MOS , one of the biggest producers of phosphate, noted in its September quarter earnings call that demand remains strong as farmers are looking to replace nutrients from the soil in most of the major regions globally. The company also envisions demand growth to absorb new supply additions.
A Stabilizing Farm Economy
U.S. farm income is expected to tick up this year after three straight years of decline due to low commodity prices. Per the U.S. Department of Agriculture's (USDA) recently released November 2017 forecast, net U.S. farm income is expected to go up 2.7% to $63.2 billion in 2017.
The upturn in profits is likely be driven by higher cash receipts from the sale of crop inventories. The USDA expects cash receipts to go up 2.4% to $365.1 billion in 2017.
While the USDA's profit forecast for this year is still a far cry from the record $123.8 billion achieved in 2013, it gives signs of stability in the farm economy and suggests that the sector may have finally hit the bottom. Higher anticipated farm income is expected to positively influence farmers' nutrient-purchasing decisions.
Crop Pricing Remains a Concern
The prevailing softness in agricultural commodity pricing remains a concern for fertilizer and agricultural chemicals companies. Prices of major crops (such as corn and soybeans) remain at their multi-year lows as markets remain awash with grains. An expected bumper corn and soybean harvest is likely to put a cap on crop prices in 2017.
The USDA's harvest outlook indicates another bumper year of production. The USDA, in its November report, raised its corn harvest forecast for the 2017/18 crop year. It now sees corn production to be 14.578 billion bushels, up 298 million from its October forecast, on record yield. The USDA also predicts record soybean production of 4.425 billion bushels. This is expected to aggravate the grain glut and restrict crop prices.
3 Fertilizer Stocks to Bear Fruit
Despite a few lingering headwinds, the overall fundamentals for the fertilizer industry are improving on the back of improved demand scenario for nutrients and an upswing in the farm economy. Moreover, the constant need of farmers to nourish their crops, replenish nutrients in the soil following a harvest and boost yields to feed a growing world support the bullish case for fertilizers.
Below we highlight three fertilizer stocks, armed with a solid Zacks Rank, that are worth considering for investment in the prevailing operating environment.
The Mosaic Company
Headquartered in Plymouth, MN, Mosaic is a solid choice armed with a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.
The company has an expected earnings growth of 14.4% for 2017. It also has a long-term expected earnings per share growth rate of 9.5%.
The Zacks Consensus Estimate for 2017 and 2018 for the company's earnings has also increased by around 27.8% and 11.1%, respectively, over the past month. Mosaic also delivered positive earnings surprise of 72% in the last reported quarter.
Sociedad Quimica y Minera de Chile S.A. SQM
Santiago, Chile-based Sociedad Quimica is another attractive pick with a Zacks Rank #2 (Buy). The company has an expected earnings growth of 56.9% for 2017. It also has a long-term expected earnings per share growth rate of 32.5%. The stock has also gained 89.6% year to date, significantly outperforming the Zacks Fertilizers industry's gain of 11% over the same period.
Annual estimates for Sociedad Quimica have also moved north over the past 30 days, reflecting analysts' confidence in the stock. Over this period, the Zacks Consensus Estimate for 2017 and 2018 for the company's earnings has increased by around 3.1% and 6.5%, respectively.
Intrepid Potash, Inc. IPI
Our next pick in the space is Denver, CO-based Intrepid Potash, carrying a Zacks Rank #2. The company has an expected earnings growth of 78.7% for 2017. It also delivered positive earnings surprise of 50% in the last reported quarter. Moreover, the stock has gained a solid 83.6% year to date, significantly outperforming the Zacks Fertilizers industry's gain of 11%.
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Potash Corporation of Saskatchewan Inc. (POT): Free Stock Analysis Report CF Industries Holdings, Inc. (CF): Free Stock Analysis Report Agrium Inc. (AGU): Free Stock Analysis Report Sociedad Quimica y Minera S.A. (SQM): Free Stock Analysis Report Mosaic Company (The) (MOS): Free Stock Analysis Report Intrepid Potash, Inc (IPI): Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research