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A general view of Nutrien's Cory potash mine is seen near Saskatoon on Aug. 12, 2019.

STRINGER/Reuters

Fertilizer producers have fared relatively well during the pandemic, supported by a resilient agricultural sector, rising exports to China and strong crop prices. So why are their stock prices still languishing below their prepandemic highs?

Toronto-listed Nutrien Ltd. (NTR) is down about 20 per cent from its 52-week high, and that’s after a recent rally. Mosaic Co. (MOS) and CF Industries Holdings Inc. (CF), both of which trade in New York, are down 14 per cent and 40 per cent, respectively, from their highs.

These sorts of returns imply that investors are placing fertilizer stocks in the same bucket as, say, oil producers. That is, they are commodity producers that are facing uncertain demand as the global economy navigates the crushing impact of the COVID-19 pandemic.

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But the recent performance of fertilizer companies, which produce crop nutrients such as potash, phosphates and nitrogen, suggest that the pandemic’s impact is slight.

Nutrien, for example, reported in August a second-quarter profit of US$1.34 a share, down just 9.5 per cent from the second quarter of 2019 and exceeding analysts' expectations (after adjustments).

The company will report its third-quarter results on Nov. 2 amid a number of upbeat developments.

Soybean futures in the United States have rebounded to their highest level in more than two years, driven by record Chinese soybean imports as that country builds its livestock feed supplies to replenish its hog industry.

U.S. corn prices recently touched their highest levels in 14 months, also driven by strong exports (along with smaller crops and concerns about dry growing conditions in South America). And wheat prices have risen to five-year highs.

The Purdue University-CME Group Ag Economy Barometer, a monthly confidence reading for U.S. farmers, rebounded in September to its highest level since the pandemic began – no doubt helped by higher crop prices but also the U.S. Department of Agriculture’s second round of the Coronavirus Food Assistance Program, valued at US$14-billion.

All of this is good news for fertilizer producers: Confident farmers have more money to invest in nutrients to drive bigger crop yields, which explains why fertilizer stocks are well above their recent lows in March.

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But investors hoping for more gains need the good news to last.

Scott Irwin, an agricultural economist at the University of Illinois, says he believes the key question is whether current soybean and corn prices are high enough and will be long lasting enough to affect fertilizer decisions this fall and next spring.

“My own guess is that it will cause an uptick in fertilizer demand and use but not nearly as big as, say, what we saw in the last boom from 2007 to 2013. It takes a sustained period of really high prices and profits to substantially change farmers' use of inputs,” Mr. Irwin said in an e-mail.

Some analysts sound similarly cautious.

Jacob Bout, an analyst at CIBC World Markets, noted last week that the rally in crop futures prices is dependent on – and therefore vulnerable to – Chinese imports, which account for about 50 per cent of the 2020-21 U.S. soybean crop and 23 per cent of the U.S. corn crop.

But share prices are reflecting this uncertainty.

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“China is currently taking its Phase 1 [trade deal with the United States] obligations seriously, understanding the constant threat of new American duties on its exports if it does not, but a [Joe] Biden presidency could change U.S.-China trade relations in unpredictable ways,” Mr. Bout said in a note.

Mosaic shares trade at just 11.8 times estimated 2021 earnings, according to Bank of Nova Scotia. The valuation is below the long-term average. Nutrien trades at 17.1 times next year’s estimated earnings. That’s in line with the long-term average, but the dividend yield is an attractive 4.5 per cent.

That’s not a bad payment as you track soybean prices.

Full disclosure: The author owns shares of NTR.

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