The fertilizer industry is still stuck in a rut and remains buffeted by a slew of headwinds including low prices of nutrients and depressed farm income. These factors continue to weigh on the performance of the companies in the space as witnessed in the first half of 2016.
While long-term fundamental for the fertilizer industry remains intact given the continued growth of global population and concurrent rise in food consumption, a number of challenges continue to hamstring the industry. The near-term outlook for the fertilizer space still remains smoggy due continued pricing pressure, still weak agriculture market fundamentals and weakness across certain key consumer markets.
Let’s take a look at some of the key issues that are still hurting the stocks in this space.
Headwinds from Weak Nutrient Prices
Fertilizer companies remain exposed to a difficult pricing environment. Global capacity expansion continues to exert pressure on fertilizer prices.
Prices for potash (a major nutrient), which are already at their lowest levels since 2007, continue to be hurt by elevated supply. Prices of the commodity are down roughly 25% from one year ago.
Potash prices came under pressure following the exit of the world's largest potash maker, Uralkali Group from one of the biggest potash cartels – the Belarus Potash Company (“BPC”) – in 2013. In addition to creating an uncertain pricing environment, the cartel dissolution also led to increased competition in the potash market.
The potash market is expected to remain oversupplied in the near future, thereby weighing on prices. Moreover, both China and India – two major potash consumers – have recently signed their potash contracts for 2016 at prices ($219 per ton and $227 per ton, respectively) that are roughly 30% lower than last year. These weak contract price levels further suggest that pricing pressure may not alleviate any time soon.
Moreover, depressed global energy prices and higher supply have contributed to a softer nitrogen pricing environment. Abundant nitrogen supply driven by new production capacity is expected affect global prices in the second half of 2016. Urea prices are expected to remain under pressure in the near term, partly due to high levels of Chinese export supplies.
Weak nutrient prices dragged down profits of major fertilizer makers in the second quarter of 2016 and are expected to remain a major headwind in the near to medium term. As such, margins of these producers will remain squeezed given a weak fertilizer pricing environment.
Depressed Farm Income: A Drag on Buying Decision
Agriculture market fundamentals remain weak and there is a continuous negative sentiment among agriculture investors that can create uncertainty in the near term. According to the U.S. Department of Agriculture (USDA), U.S. farm income is expected to slip 3% to $54.8 billion in 2016 to the lowest level since 2002. This would also mark the third consecutive year of decline. Lower farm income unfavorably impacts grower’s nutrient purchasing decisions.
The USDA outlook reflects depressed prices resulting from excess supply of crops and livestock. While prices of major crops (such as corn and soybeans) have recovered of late, they remain at their multi-year lows.
The prevailing softness in agricultural commodity pricing is a concern for fertilizer companies as it is hindering fertilizer use by farmers given the adverse effect of lower crop pricing on growers’ income.
Weakness in Major Consumer Markets
Insipid economic growth in certain key markets is also affecting the fertilizer industry. The crop protection market remains under pressure, in part, due to a slowdown in Brazil. Agricultural market conditions remain weak in Brazil impacted by cautious buying by farmers and the uncertain political and economic situation in that country. Tighter profit margins and credit are making growers in Brazil more cautious in their spending.
Moreover, economic slowdown in China is also affecting demand for potash in this major market. Weaker demand in India and cautious buying in Brazil have also contributed to a depressed market environment for phosphate. A challenging currency environment coupled with economic weakness has also contributed to a sluggish demand environment for nutrients across certain emerging markets.
5 Stocks to Avoid Now
Amid the prevailing challenging scenario, it would be a prudent move to get rid of certain companies in the fertilizer space that show weak fundamentals. For that, we have screened sell-rated fertilizer stocks that have either witnessed downward estimate revisions over the past few weeks or are expected to see a decline in earnings for the current year.
Potash Corporation of Saskatchewan Inc. POT
Canada-based Potash Corp. makes and markets fertilizers and associated industrial and feed products globally. It produces three primary plant nutrients – potash, phosphate and nitrogen. The company currently carries a Zacks Rank #5 (Strong Sell). The Zacks Consensus Estimate for the current fiscal has declined 20% over the past 60 days.
The Mosaic Company MOS
Minnesota-based Mosaic is a leading producer and marketer of concentrated phosphate and potash for the global agriculture industry. It is the largest producer of finished phosphate products globally. The company currently holds a Zacks Rank #5. Its earnings for the current year are expected to tumble roughly 82.4% year over year.
CF Industries Holdings, Inc. CF
Headquartered in Deerfield, IL, CF Industries is one of the largest manufacturers and distributors of nitrogenous fertilizer and other nitrogen products globally. The company’s principal nitrogen fertilizer products are ammonia, granular urea, urea ammonium nitrate solution (UAN) and ammonium nitrate (AN). CF Industries currently sports a Zacks Rank #5. The Zacks Consensus Estimate for the current fiscal has declined 34% over the past 60 days.
Agrium Inc. AGU
Canada-based Agrium is a leading global producer and marketer of fertilizer and a major retail supplier of agricultural products and services in North and South America. The company currently holds a Zacks Rank #5. Its earnings for the current year are expected to decline 26.3% year over year.
CVR Partners, LP UAN
Texas-based CVR Partners makes and markets nitrogen fertilizers including ammonia and UAN in the U.S. Its products are used mainly by growers to improve yield and quality of their crops. The stock currently carries a Zacks Rank #4 (Sell). Its earnings for the current year are expected to decline 37.5% year over year.
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