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Key drivers that CF Industries managers deem important in 2014

Xun Yao Chen

Why CF Industries' earnings call is a must for investors (Part 4 of 4)

(Continued from Part 3)

Lower corn plantation

As corn prices have now fallen, CF Industries expects farmers to plant 92 million acres of corn in 2014, which is below the current estimated 97 million acres for this year due to lower expected corn prices in 2014. On the other hand, wheat plantation is expected to be slightly higher in 2014 than this year.

Nitrogen use is expected to lower in 2014

Because of lower projected corn acreage, nitrogen use in 2014 is expected to be 13.3 million metric tonnes, slightly lower than this year. As the chart above shows, nitrogen consumption in the United States has closely mirrored corn plantation. But since 2006, planted land acreage has increased significantly—possibly because nitrogenous fertilizers became really expensive as input costs like oil and coal rose.

Key factors to look out for

The weak global urea market is expected until the end of the year, but price recovery is possible if certain factors align, the company said. This includes reduced Chinese exports and strong demand in both the U.S. and Europe, which will nonetheless be driven by crop prices. The Chinese urea industry will be a key determinant of global prices through 2014, and much of it will depend on production costs (coal prices) and tax policies. This is because in the nitrogenous fertilizer business, input supply cost is currently more important than demand.

For planning purposes, CF assumes an unchanged export tax and urea exports of around 6 million metric tonnes in 2014 compared to close to 8 million metric tonnes in 2013. As the Chinese government typically reviews export taxes in December, investors should look towards signs of where urea prices and China’s food inflation are heading too. If food inflation is high in China, policymakers could be cautious because they may risk making fertilizer prices high for farmers who want to purchase more for next year.

Temporary earnings loss recovered

Despite share prices falling slightly on the day after the earnings announcement, prices have pretty much recovered and are above that level now. Terra Nitrogen Company LP (TNH), the majority of which is held by CF, was also negatively affected, but prices hasn’t fallen more. Agrium Inc. (AGU), which also derives a large part of its earnings from manufacturing nitrogenous fertilizers, fell too, while Potash Corp. (POT) saw a limited decline.

CF is slightly more optimistic despite seeing possible weakness, in our view. This contrasts with Potash Corp.’s (POT) more negative view (see Why Potash Corp.’s earnings call was so important for the industry). What does this mean? It means that the industry’s current outlook is still mixed and underperformance is possible until key drivers like coal or crop prices in particular start rising again. Until then, fertilizer companies and the Market Vectors Agribusiness ETF (MOO) may be more value plays as opposed to high–growth momentum plays.

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