This collapse is expected to pressure Potash prices sending them down to $300 per tonne in the second half of the year, down from $400 in the first half. As large parts of Agrium’s operations rely on potash, management expects a $10 change in the price of potash will hit net earnings by $9 million. So, a $100 fall will wipe $90 million off net earnings, that’s a 12% hit to third quarter earnings based on net income of $750 million during the second quarter.
There is also trouble brewing within the nitrogen fertilizer business. The low price of coal has led to a high output of cheap, Chinese urea, a key nitrogen fertilizer ingredient , which is pushing down global prices. This will affect nitrogen fertilizer producers such as CF Industries and Terra Nitrogen Company, L.P. (NYSE:TNH). That said, Terra Nitrogen Company, L.P. (NYSE:TNH)’s small size and location to farmers here in the US could allow the company to extract a premium from its customers. Considering the company only has one production facility and already high margins with relatively low fixed costs, it is unlikely the firm’s earnings will be damaged as much as the larger, national CF Industries. Moreover, lower urea input costs could lead to even wider profit margins.
Having said all of that, it is entirely possible that the lower fertilizer costs will improve farmer’s margins next year, pushing up crop cash receipts. This would be positive for Deere & Company (NYSE:DE). However, as of yet there is little evidence that this will happen. The most likely scenario is that crop prices will continue on their downward trend unless the weather suddenly changes.
Often thought of as a defensive industry for the long term, the outlook for both the fertilizer and farm equipment markets is starting to become foggy. It is likely that Deere & Company (NYSE:DE)’s revenue will fall next year, and the falling price of potash will hit Agrium Inc. (USA) (NYSE:AGU)’s earnings significantly. So, while farming is a good long term investment, over the short term there could be volatility.
The article A Number of Factors Could Hurt These Agricultural Companies originally appeared on Fool.com and is written by Rupert Hargreaves.
Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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