Deere & Company (DE), Agrium Inc. (USA) (AGU), Terra Nitrogen Company, L.P. (TNH): A Number of Factors Could Hurt These Agricultural Companies

Page 1 of 2

Deere & Company (NYSE:DE) reported higher than expected quarterly earnings earlier this month as sales of tractors and harvesters in the Americas rose. However, there are concerns that this could be the end of the farming boom that has gripped the global economy for the last few years as record wheat, cocoa and coffee prices all reach multi-year lows. Falling crop prices generally signal lower earnings for Deere & Company (NYSE:DE) as cash receipts from crop sales usually move in line with orders for equipment. The wealth affect from high crop prices will lead farmers to spend more. However, cash receipts are expected to fall 8% this year from last and then a further 4% next year-all bad news for Deere & Company (NYSE:DE).

Deere & Company (NYSE:DE)

Oversupply in the market

Corn prices hit $8.49 a bushel during 2012 as the drought in North America devastated crops. Unfortunately there is a trend in the farming industry for farmers to over plant for the next season after a season of extremely high crop prices. The primary example of this is in the market for Sugar,  in particular London sugar, which hit a high of $850 during 2011, spurring farmers to overplant and now market oversupply has forced the price down to $491 .

Moreover, a quick search on Google for ‘record crops’  will show you that Brazilian coffee, corn and soybean crops are all at record levels, which will depress prices further, reducing cash receipts and consequently Deere & Company (NYSE:DE)’s sales.

However, this oversupply is beneficial to Canadian fertilizer company Agrium Inc. (USA) (NYSE:AGU), which makes money if the crops are highly profitable or not. That said, Agrium Inc. (USA) (NYSE:AGU) is more affected by the weather and planting seasons, so the company’s earnings are highly volatile. Indeed, an unseasonal first half of colder weather hit Agrium Inc. (USA) (NYSE:AGU)’s second quarter earnings (Universal also has the same problem with its tobacco crop) although the company’s revenue still expanded by 4% earnings for the second quarter fell 14% year-on-year .

Still, Agrium Inc. (USA) (NYSE:AGU) is a relatively defensive company as farmers will always need to fertilize their crops no matter what cash receipts they receive — there has been a trend in recent years for farmers to plant even more as the price  of the crop falls, exasperating global oversupply but increasing Agrium’s profitability.

Potash problems

Having said that, Agrium Inc. (USA) (NYSE:AGU)’s biggest worry has now become its potash operations. Potash is a mineral containing potassium, which is used in fertilizer production . Agrium’s vertically integrated fertilizer supply chain means that 4% of the company’s revenue and 8% of gross profit is linked to potash production. Unfortunately, the price of potash has recently been subject to much volatility as this excerpt from Yahoo Finaince explains:

On July 30, Uralkali, one of the largest potash producers, announced its decision to break out of a joint-venture from Belarus Potash Company (BPC) to sell potash to the global market. Until recently, Canpotex (a joint-venture between Potash Corp., Mosaic Co., and Agrium) and the Belarus Potash Company (a joint-venture between Uralkali and Belaruskali) had occupied ~70% of global trade of potash (add FSU and Canada together in the chart above). The duopoly has given potash producers much power to sell their products at higher prices than what prices would be in a much competitive market.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Top 10 Highest Paying Jobs in the World

Most Expensive Day-Care in New York City

The 10 Cheapest Places to Retire Abroad

Top 10 Most Expensive Luxury Cars in the World – 2014

Killer Small Business Ideas

The 50 Best Personal Finance Blogs

Most Expensive Apartments in New York City

Bloodiest UFC Fights Ever Fought

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!