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A look into Agrium’s largest wholesale segment: Nitrogen

Jose de la Puente

An investor's guide to Agrium, a high-dividend company (Part 4 of 7)

(Continued from Part 3)

Agrium’s Nitrogen segment

In 2013, Nitrogen represented 34% of Agrium’s gross profits. With an annual capacity of 5.5 million tonnes, Agrium (AGU) is the fourth largest publicly traded nitrogen producer worldwide. Other large Nitrogen producers include PotashCorp (POT), CF Industries Holdings (CF), Terra Nitrogen Company (TNH), and Yara.

What is Nitrogen?

Nitrogen can sell as ammonia or be upgraded to sell as urea, UAN solutions, or ammonium nitrate. Nitrogen products have an immediate negative impact in crops if the application rates reduce. For this reason, sales volumes are stable compared to potash and phosphate.

Agrium’s Nitrogen end markets consist of the agricultural sector (75%) and industrial sector (25%). Agriculture tends to be very volatile. Its sales peak in the second quarter. The industrial sector sees much more stability throughout the year.

What moves Nitrogen sales?

As with many other commodities, price is the main indicator for the Nitrogen business. Based on companies’ financial fillings, Agrium is able to sell its Nitrogen at a higher net price than peers due to lower freight costs. Historically, Agrium has sold urea at a 16% and 20% higher price compared to Potash Corp and CF Industries Holdings, respectively. For ammonia, these numbers drop to 13.4% versus PotashCorp’s prices and -6.2% for CF Industries Holdings’ prices.

Some analysts believe nitrogen prices are more volatile due to the high competition in the industry. For this reason, there are no price stabilizers like supply controls.

How well is Agrium selling nitrogen?

Natural gas is the most important input for nitrogen. Natural gas prices basically dictate the profitability of all nitrogen products. For this reason, natural gas is also a leading indicator for the Market Vectors Agribusiness ETF (MOO). This ETF accounts for all publicly traded nitrogen producers in the U.S.

You should know the main reason for the large difference in margins between Agrium and CF Industries. In the second half of 2013, Agrium’s margins were much lower than average due to disruptions in production facilities. Agrium usually operates at similar margins as CF Industries.

Analysts expect nitrogen fertilizer prices to remain low and even decrease. But for Agrium, this outlook might be offset by higher volumes through new nitrogen projects like the Borger brownfield expansion.

Continue to Part 5

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