The Fertile Play In Fertilizer

By Aaron Levitt | December 13, 2012 AAA

It's been tough going for the various makers of critical agricultural nutrients over the second half of the year. At the beginning of the year, fertilizer producers were riding high as global growth continued to rise and food demand increased. Potash prices soared and the companies were big growth stories. However, as potash and phosphate prices have weakened, fertilizers makers seem to be out of favor with investors. Share prices have fallen and earnings have dipped. While growth has certainly slowed in recent months, the long-term promise of the sector is still there. The current market and sector malaise offers a great opportunity for investors to load up on the sector.

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China and India Weigh in
The story in the potash, phosphate and nitrogen sector over the last six months or so has been the lack of demand stemming from the world's key drivers - China and India. Despite their robust and growing populations, the recent weakness in the global economy has taken the bite out of fertilizer demand in the two nations. Both are the leading users of potash as the two BRIC countries try to feed their people.
China and India have bought little potash from North American producers Potash Corp (NYSE:POT), Agrium (NYSE:AGU) and Mosaic (NYSE:MOS) through their Canpotex joint venture in the second half of the year as supply contracts expired. China has postponed purchases due to large domestic supplies, while weakness in India's currency (the rupee) as well as recent cuts to government subsidies has curbed buying.

That has caused other big buyers to postpone their purchases of fertilizer as they expect prices for crop nutrients to decline even further. Needless to say, the recent lack of demand from the two nations has hurt earnings from a plethora of fertilizer producers.

Yet, there's hope on the horizon. The new year promises to hold more global demand for fertilizer. Potash Corp. estimates that its global shipments of potash will rebound in 2013 to between 57 million and 58 million tons. That's an approximate 14% increase versus 2012 numbers. Likewise, the firm estimates that 2014 will see a similar increase as food shortages and wonky weather will increase overall demand for plant nutrients. This echoes similar statements from other analysts.

Pushing the line out further, the growth in potash, nitrogen and phosphate demand is almost assured. Asia and Latin America currently account for almost two-thirds of global fertilizer use. As populations in these emerging markets grow, more food will be required. Demand for the backbone of agriculture will undoubtedly grow.

SEE: A Primer For Investing In Agriculture

Betting on Dirt
For investors, betting on this first vital step in the food chain could be the best way to play agriculture. Broad-based agriculture funds like the iShares MSCI Global Agriculture Producers ETF (ARCA:VEGI) do have some exposure to fertilizer companies. However, the Global X Fertilizers/Potash ETF (ARCA:SOIL) offers a direct way to play the sector. The exchange traded fund tracks 23 different fertilizer giants including the Canpotex members along with CF Industries (NYSE:CF) and charges just 0.69% in expenses. Overall, the fund makes a great single ticker bet on the need for more fertilizer and growing food production.

Investors looking for big dividends may want to consider the fertilizer plays as well. There are several that are structured as master limited partnerships (MLPs) and throw off some serious distribution payments. More importantly, many of these plays are heavy into nitrogen - the one sector of the fertilizer market that hasn't seen big price declines. Rentech Nitrogen Partners (NYSE:RNF), CVR Partners (NYSE:UAN) and sector stalwart Terra Nitrogen (NYSE:TNH) yield 8.7, 7.6 and 7.7%, respectively. All in all, the nitrogen MLPs offer a great way to profit while the broad fertilizer sector works out its China and India issues.

SEE: A Guide To MLP ETFs (And ETNs)

The Bottom Line
As world populations continue to grow, the need for more food will grow as well. For investors, adding the backbone of the agriculture sector to a portfolio is a prudent move and now could be a great time to do just that. The previously mentioned fertilizer stocks, along with Intrepid Potash (NYSE:IPI), make ideal additions to play the sector.

At the time of writing, Aaron Levitt did not own any shares in any company mentioned in this article.

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