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
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

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!