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The fertilizer industry is gradually gaining momentum, courtesy of an improving demand and pricing dynamics for major crop nutrients. Healthy global demand along with reduced supply, especially from China, is providing support to global prices of nitrogen, a major crop input. Moreover, prices of phosphate and potash have gained strength this year on the back of strong global demand. Fertilizer makers are poised to gain from favorable nutrient demand and pricing in the near future.
Favorable Zacks Industry Rank
The industry currently carries a Zacks Industry Rank #51, which places it in the top 20% of more than 250 Zacks industries. The favorable rank reflects the industry’s strength. Our back testing shows that the top 50% of the Zacks ranked industries outperforms the bottom half by a factor of more than two to one.
The Zacks Fertilizers industry has also outperformed the broader market in a year’s time. While the industry has gained roughly 22.9%, the S&P 500 has returned around 16.1%.
Nitrogen Market – Showing Signs of Recovery
The nitrogen market is witnessing an improvement in demand and pricing fundamentals. Lower natural gas costs are also acting in favor of nitrogen fertilizer makers in North America, providing support to their margins.
According to CF Industries Holdings, Inc. CF, a major fertilizer producer, the outlook for nitrogen prices is positive for the second half of 2018 as global nitrogen price continue to recover. Moreover, strong global demand along with reduced supply is likely to provide support for global nitrogen prices in the near term.
CF Industries also expects a strong demand in Brazil during the second half of 2018 as the country looks to compensate for lower imports in the first half. Additionally, the closure of two Petrobras nitrogen plants is likely to support to nitrogen prices.
Strengthening Potash Market
The potash market has stabilized this year, courtesy of improving demand and tighter supply conditions. According to The Mosaic Company MOS, global demand and supply for the potash market is balanced and prices are also holding up. Notably, producer shipments during the first half of 2018 continued at strong pace, following last year’s trend.
Momentum in Phosphate Market Likely to Continue
Prices of phosphate have remained strong this year. According to Mosaic, global phosphate demand is expected to reach a record level in 2019. New supply is likely to come at a relatively slower pace compared with the growing demand, per the company. As such, the momentum in the phosphate market is expected to continue in 2019.
Crop Pricing, Lower Farm Profits & Trade Tensions are Concerns
Weak agricultural commodity prices are a roadblock in the near future. Persistent pressure on crop commodity prices is hindering the recovery of the industry. Prices of major crops (such as corn and soybeans) are at multi-year lows due to a supply glut.
Another concern is the expected decline in U.S. farm income in 2018. Per the U.S. Department of Agriculture’s (USDA) recent outlook, net farm income is projected to fall 13% year over year to $65.7 billion in 2018. Net cash farm income is also projected to decline 12% to $91.5 billion.
Moreover, concerns over escalating trade tussle between the United States and China are weighing on crop prices in North America. In July, China imposed tariffs on $34 billion worth of U.S. goods, including agriculture products. As such, downward pressure on agriculture commodity prices is likely to continue over the near term amid trade tensions.
3 Fertilizer Stocks to Consider
Despite a few persisting headwinds, the overall fundamentals of the fertilizer industry are improving on the back of higher demand and pricing dynamics for nutrients. 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, all carrying a favorable Zacks Rank, that are preferable investment options in the prevailing environment.
Based in Deerfield, IL, CF Industries is a solid choice, carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The company has an expected long-term earnings growth rate of 6%.
The Zacks Consensus Estimate for 2018 and 2019 earnings increased by around 43% and 9%, respectively, in the past 60 days. The company also delivered positive earnings surprise of 50% in the last reported quarter.
Nutrien Ltd. NTR
Saskatoon, Canada-based Nutrien currently carries a Zacks Rank #2 and has an expected long-term earnings growth rate of 14%.
The Zacks Consensus Estimate for 2018 and 2019 earnings increased around 8.4% and 5.7%, respectively, in the past 60 days. The company delivered positive earnings surprise of 6.5% in the last reported quarter.
CVR Partners, LP UAN
The Sugar Land, TX-based company currently carries a Zacks Rank #2. The Zacks Consensus Estimate for 2018 and 2019 has improved 26% and 2%, respectively, over the last 60 days. It also delivered positive earnings surprise of 37.5% in the last reported quarter.
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