Despite all of the volatility caused by Europe and the U.S. economic roller coaster, 2011 ended with the S&P 500 barely in the black. While it's no surprise to many investors that sectors like housing and finance were affected, fertilizer stocks were huge laggards in 2011 despite strong industry fundamentals. Those same fundamentals are likely to boost fertilizer company shares in 2012.
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A Huge Disappointment
Despite a significant increase in earnings, shares in Potash Corp (NYSE:POT), the world's largest fertilizer company have been a huge disappointment to investors. The company earned $1.8 billion in 2010. For the first three quarters in 2011, net income has exceeded $2.4 billion. Yet, in 2011 shares were down about 20%. The same conundrum affected all the major fertilizer companies including Mosaic (NYSE:MOS) which was down over 30% in 2011 despite improving fundamentals. In 2011, Mosaic's largest shareholder, privately held Cargill, sold its majority interest in Mosaic. The addition of the public float likely placed downward pressure on the stock in 2011. CF Industries (NYSE:CF) one of the largest producers of nitrogen was up about 6.5% in 2011, a very acceptable return in light of the overall market performance. But, in 2010 CF earned approximately $350 million in net income. For the first nine months of 2011, CF has earned over $1 billion in net profit.
Setting the Stage
Such stellar profit growth in 2011 is setting the stage for excellent performance for fertilizer stocks in 2012. The underlying fundamentals remain favorable. Demand for agricultural commodities - corn, wheat and soybeans - remains strong as China's vast population will put a strain on grains. China's increasing meat consumption exponentially increases grain demand as it takes approximately six pounds of grains to produce one pound of meat. In addition to fertilizer companies, seed company Monsanto (NYSE:MON) could have a favorable 2012. Monsanto's disease and drought resistant seeds enable farmers to grow crops in the most difficult growing conditions. Regions like India and Africa, where water is scarce and temperatures can get high, benefit from Monsanto's seeds. Monsanto's shares ended the year relatively unchanged. (For related reading, see 2011 Look Back At Agriculture.)
The Bottom Line
Over the long-term, few industries offer the attractive returns available from fertilizer. Fertilizer, unlike oil, is without commercial substitutes. And fertilizers provide the world with its most fundamental need: food. Good economy or bad, the world will need more food, and, thus, more fertilizer.
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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.