Fertilizer stocks: Current rough patch could be the time to buy

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The long-term argument in favour of fertilizer stocks is as compelling as it is simple: More people need more food. But are short-term concerns getting in the way of a good buying opportunity?

The backdrop for fertilizer has become remarkably muddled recently. Investors have had to wrestle with shuttered cartels, shifting production goals, massive new mine construction and low crop prices – and determine what it all means for the profitability of key producers.

Concerns have won out, for the most part. The share price of Potash Corp. of Saskatchewan Inc. is no higher today that it was four years ago, while Agrium Inc.'s share price has drifted sideways for the better part of two years.

No doubt, the concerns are real. After OAO Uralkali, the world's largest potash producer, walked away from a joint marketing group last year to focus on producing as much fertilizer as possible, potash prices fell 30 per cent over fears that a scarce resource was now looking plentiful.

Other companies are keen to step up their own production. BHP Billiton Ltd. has its eye on developing the massive Jansen mine in Saskatchewan at a later date, while rival Rio Tinto is moving ahead with its Albany potash project in the same province.

This week, Cowen & Co. analyst Charles Neivert took low U.S. crop prices as a reason to slash his target prices on Potash Corp., Agrium, CF Industries Holdings Inc., Mosaic Co. and others.

Where grain prices go, he argued, fertilizer prices were sure to follow since farmers will have less money to spend.

Andrew Wong, an analyst at RBC Dominion Securities, is more upbeat about the sector, but nonetheless sprinkled his latest research note with some cautious predictions.

"We expect phosphate and potash demand growth will be flat in 2015 – with declines in North America offset by modest improvements in international markets – although the risks to our forecasts are skewed to the downside," he said.

And although he has an upbeat view on Agrium and its retail operations, he's only lukewarm on Potash Corp., arguing that the stock is fairly valued given that the market for potash remains "challenging."

Indeed, he believes that the stock's best feature is its relatively robust dividend yield of 4 per cent, which provides some downside protection. Ouch.

No doubt, the fertilizer market has been hit with a number of setbacks, and the rising uncertainty has likely scared off a lot of investors who, let's face it, prefer a backdrop of good news.

But all the fretting over short-term concerns has left a huge opportunity for investors who are willing to make a long-term bet on the sector – say, looking well beyond the latest harvest forecasts.

Indeed, the cool reception to fertilizer stocks suggests that expectations are low right now. That means that a lot of disappointment has been built in to share prices, leaving a lot of upside gains when the fertilizer market improves.

It will. The bet on fertilizer rests on a couple of solid foundations that will take some time to play out.

The world's population is set to grow by another two billion by 2050, according to the United Nations – and the Food and Agriculture Organization estimates that food production will have to rise an astounding 70 per cent to meet the needs of a "larger, more urban and richer population."

For sure, fertilizer alone isn't going to drive up food production that much, but it is likely going to form an important part of the solution as farmers are pushed to get more from limited land, water and other resources.

The path for fertilizer stocks isn't straight up. But if you can ignore the near-term gyrations and occasional setbacks, the next decade is going to be sprouting big gains.