After a couple of years of declining fertilizer prices, 2010 appears to be headed in the right direction as fertilizer prices look to rebound. As such, the outlook for fertilizer stocks could be very bright after a couple of years of a terrible pricing environment. The long-term fundamentals of agriculture - and fertilizer in particular - look very promising. Our planet continues to slowly lose its availability of arable land, thus requiring the continual need to produce more food per usable acre. (Fertilizer companies offer great post-recession investment opportunities. To find out more, check out Profiting In A Post-Recession Economy.)
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An Undeniable Reality
Fertilizer is an absolute necessity in plant growth. It's widely accepted that the money invested in fertilizer more than pays for itself in terms of the additional crop yield attained. Fertilizer must also be reapplied regularly with each planting because nutrients in the soil are used up by the plants that are grown. For the past two years or so, farmers have put off fertilizer purchases and have instead been using their existing inventory as well as depleting the nutrients in the soil. 2010 looks like a year of replenishment.
The biggest beneficiaries of any boon in fertilizer prices will be the major players. Mosaic (NYSE: MOS) is one of the best picks due to its pristine low debt balance sheet. When DAP, an ingredient in fertilizer, prices were over $1,000 per metric ton in 2008, the company earned over $3.1 billion in profit. Since then, DAP prices have fallen below $300 per metric ton as farmers have put off buying fertilizer, so profit margins should increase going into the future. There is the expectation of new purchases in 2010, leading to more revenues. Shares in Mosaic, which fetched nearly $160 in 2008 now trade for $60 and look very favorable in the long-run.
Canadian fertilizer company Agrium (NYSE: AGU) is also a good selection for next year and beyond. It trades for a forward P/E of 23, similar to that of Mosaic. For nearly a year, Agrium has been trying to acquire rival fertilizer company CF Industries (NYSE: CF) in order to add a significant nitrogen component to its business. Agrium has raised its stock and cash offer several times over the year, another sign that industry insiders see the long-term advantages of fertilizer. At the same time, CF has been trying to expand by attempting to buy smaller rival Terra Industries (NYSE: TRA). Interestingly, Terra feels that CF's bid price is too low - just like how CF feels Agrium's price is too low. (To learn how your portfolio can benefit from merger activities, read Mergers & Acquisitions: An Avenue For Profitable Trades.)
Wonderful Outlook Anyway You Slice It
Whatever the outcome, fertilizer prices have been slashed for nearly two years, and farmers are running out of inventories. There is an expectation that fertilizer prices will be heading upward in 2010. If that happens, expect shares in fertilizer companies to follow suit. For a more diversified bet on the sector, the Market Vectors Agribusiness ETF (NYSE: MOO) holds many quality companies within this space.
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