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Fertilizer sector buoyed by strong results, outlook

Michael Wilson, president and CEO of Agrium, addresses the company's annual meeting in Calgary on May 12.


Better performance than expected in the second-quarter by Agrium drove the company's share price up 3.6 per cent and buoyed stock prices for the rest of the fertilizer sector on Wednesday.

Calgary-based Agrium said profit rose 37 per cent on a 7-per-cent rise in revenue, topping most analysts' expectations. "We were able to achieve these results due to the dramatic rebound in global potash demand," Mike Wilson, Agrium's president and chief executive officer, told analysts on a conference call.

Potash sales volumes soared almost nine times higher than the same period last year. The outlook for the remainder of the year and 2011 looks promising, thanks to several factors, he said. An early harvest date in the U.S. this year will give farmers more time to fertilize land. Global demand is significantly higher than it was in the recession, but still behind historical averages in some regions.

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"We believe crop nutrient inventories for North American retailers is very low for all products, and that major restocking will be required as we enter the fall season," Mr. Wilson said. "This factor, combined with the tightening world market and higher crop prices, should set the stage for a strong 2010 fall season."

Things are running very nicely, but the question is, will they last? There is plenty of product globally, which ultimately makes it very difficult to price well and to improve margins. Charles Neivert, Dahlman Rose & Co.

Agrium's optimism follows similar sentiment expressed by the CEO of Potash , Bill Doyle, last week after the company beat the Street's expectations and increased its profit outlook for the year.

"With the worst of the global recession behind us, the inevitable need for increased food production and proper fertilizer use is being re-established," Mr. Doyle said last week.

Two-thirds of the analysts who follow Potash Corp. and more than three-quarters who track Agrium are bullish on the stocks. But some of the more skeptical question whether it's realistic to expect further increases in the price of potash after the commodity's bounce-back from recessionary lows.

"Things are running very nicely, but the question is, will they last? There is plenty of product globally, which ultimately makes it very difficult to price well and to improve margins," says Charles Neivert, managing director of Dahlman Rose & Co. LLC in New York. He has a "hold" recommendation on each stock and his firm neither owns shares in, nor advises, Agrium or Potash Corp.

There is new capacity coming online for potash and every other fertilizer product, and potash prices will be particularly vulnerable, he says.

Agrium is the third-largest maker of fertilizer in North America. It specializes in nitrogen, phosphate and potash. It also sells nutrients, seeds and pesticides directly to farmers, as well as new technologies such as controlled-release fertilizers, giving it a more diverse revenue base than Potash Corp. and other rivals.

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This breadth also means the company lacks the leverage it needs in any single category to control pricing, Mr. Neivert says. One specific challenge for Agrium, he adds, will be integrating new acquisitions into its retail operations. Last month, the company completed the purchase in Argentina of two dozen retail farm centres and a manufacturing site from DuPont Crop Protection. Earlier in the year it bought 33 retail outlets from other operators in Alberta and Saskatchewan.

Agrium inline chart

"The shares are priced appropriately," Mr. Neivert says. "Profit might not grow as quickly as investors might like."

While pricing has stabilized for potash and other chemicals, he says Agrium's margins may face pressure from declining prices for herbicides and seeds.

Mr. Neivert's broad outlook conflicts with the companies' own forecasts. Last week, Potash Corp. executives told analysts that supply and inventories looked set to tighten in the third quarter and that prices could rise in the fourth quarter. It pointed to poor weather conditions in many parts of the world together with demand for increased grain production as price drivers.

John Redstone, of Desjardins Securities Inc., agrees. He has a "buy" rating on Agrium and Potash Corp. He has set a price target of $70 on Agrium and $127.35 on Potash Corp.

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"We expect a much stronger potash market in 2011. Sales volumes should improve, inventories are expected to be drawn down and restocking throughout the entire system is expected to take place - driving up prices to our 2011 estimate of $600 (U.S.) per tonne," he wrote in a report on Potash Corp. published July 30.

"We expect nitrogen and phosphate markets to tighten through 2011 and drive prices higher."

Potash Corp. inline chart

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