Fertilizer producers have taken it on the chin recently to the point that many investors are forgetting that people continue to eat. With strengthening food demand in emerging markets coupled with continuing supply constraints due to arable land and water issues, fertilizer companies are a great long term story.
The Fertilizer Market
According to the International Fertilizer Industry Association, key factors that impacted fertilizer companies in the 2012/13 growing season were changes in subsidies in India that significantly reduced demand for K (potassium) and P (phosphorus) based nutrients. Also, China also held back on orders due to inventory build from prior years.
The 2012/13 growing period was also negatively impacted by severe weather issues. In North America the most severe drought in decades ended crop seasons early driving corn output down 17% and in South America the La Niña effect contributed to the soybean crop falling 15%. Overall global grain production was down by 4.5% according to a study by the USDA. As a result fertilizer use trailed off as well. Only N (nitrogen) based fertilizers showed positive demand growth.
The end result of a poor 2012/13 crop season globally where production fell short of consumption in much of the world is severely decreased foodstuffs. These levels need to be replenished quickly. Fertilizer companies impacted by the past year should benefit from anticipated aggressive plantings in the 2013/14 season.
Companies Set to Benefit
Among companies with bright long-term outlooks due to both the expected demand rebound and longer term trends is a smaller company that I mentioned about a year and a half ago called Intrepid Potash, Inc. (NYSE:IPI). Intrepid has had a wild ride and sits a few dollars per share below where I left it.
In Intrepid’s favor is that it is the United States’ only pure play potash producer. Its location of assets in Utah and New Mexico give it a transportation advantage to many of its end users which strengthen its margins. Intrepid Potash, Inc. (NYSE:IPI) also has a good mix of industrial and agricultural customers which affords the company safety through diversification. The company provides 9.2% of all potash in the United States.
Beyond Potash, the company is one of two producers of the emerging product sulfate of potash magnesia which is used for the growing vegetable and fruit markets. Their balance sheet is strong with the addition of a new low interest debt offering of $150 million which was their first debt to speak of. As outlined in its investor presentation, Intrepid is using the funding to expand production and reserve lines in anticipation of growing demand.
Operating at the opposite end of the size spectrum from Intrepid is Potash Corp./Saskatchewan (USA) (NYSE:POT) which is the largest producer of potash in the world. After a disappointing 2012 in which orders from India and China lagged, the company is projecting an imminent rebound in demand. Judging from two recent contracts, one from China and one from India, Potash’s projections of exceeding last year’s potash output by 4 to 6 million tons seem likely to occur.