It’s true that you won’t find many dinner conversations where fertilizer is a topic of interest. It’s not likely to evoke strong opinions or elicit much more than a shrug from many investors. That’s unfortunate, because fertilizer stocks can play a big role in stabilizing your investment portfolio.
After soaring to prominence during the 2000s commodity market boom, fertilizer stocks have slipped quietly under Wall Street’s radar in recent years. But while the companies that produce the inputs needed to ensure a steady food supply are currently unloved, they offer some attractive opportunities for investors with longer time frames looking to hedge against a softening U.S. currency. Here we’ll examine three such companies which could benefit from a weakening greenback.
Fertilizer producers admittedly aren’t among the sexiest segments of the market. But they produce a product which is vital to ensure our high standard of living. For without modern farm chemicals, high-production agriculture would be impossible and our grocery bills would be considerably higher. While farmers are among America’s unsung heroes, agrichemical producers are equally underappreciated.
To understand what drives the fertilizer industry, it’s first important to know what the main fertilizers are used for. For those of you who don’t garden, the three macronutrients essential for healthy plant growth are: nitrogen (N), phosphate (P) and potash/potassium (K). Sulfur (S) is needed in smaller amounts than the other three, but is often used as a soil amendment. Fertilizer producers often specialize in just one of these three nutrients, or sometimes all three.
Nitrogen fertilizer is made through a combination of natural gas and air, while phosphate and potash are typically mined from the earth, although some commonly used fertilizers—such as monoammonium phosphate (MAP) and diammonium phosphate (DAP)—combine nitrogen with phosphate rock.
It’s also useful to know that nitrogen is the most widely used nutrient, especially in corn and grain crop production, while phosphates and potassium are mostly used in legumes, fruits and vegetables. The following pie graph breaks down fertilizer usage by grains sector.
Fertilizer companies ultimately profit from buoyant N-P-K prices, and rising nutrient prices are determined by three key variables, including: 1. rising crop prices (and thus rising fertilizer demand), 2. input costs (e.g. natural gas prices) and 3. currency factors.
The currency factor is particularly worth mentioning. In fact, some of the strongest bull markets in fertilizer stocks have occurred when the U.S. dollar was falling in a sustained fashion over a period of several months-to-years.
This year’s falling dollar is a prime reason why fertilizer stocks are strengthening, for dollar weakness typically translates into commodity price strength. COVID-related shutdowns have resulted in reduced economic output, and with government committed to increased spending—and central banks embarking on an unprecedented loose money policy—there’s an excellent chance that the dollar’s value will continue to erode in the months ahead.
The graph below compares the U.S. dollar index (DXY) with the Invesco DB Commodity Index Tracking Fund (DBC), illustrating the inverse correlation between the dollar and commodity prices. Indeed, a weak dollar is one of the most powerful stimulants for higher crop nutrient prices.
With this in mind, let’s take a look at three stocks which should be able to benefit from continued dollar weakness.
3 Fertilizer Stocks to Consider
CF Industries (CF)
The first is CF Industries (CF), which manufactures nitrogen fertilizers including ammonia, urea and urea ammonium nitrate (UAN) solutions. Nitrogen fertilizer prices have been low, which has hampered the company’s revenues. However, though many analysts expect this price weakness to persist, a global increase in government farm subsidies (in response to COVID-related shutdowns) and increased nitrogen demand anticipated from greater planted corn and grain acreage across North America should benefit the firm in the coming months.
Aside from corn (by far the biggest consumer of nitrogen fertilizer), other nitrogen-intensive crops, such as rice, command higher premiums than corn and should help drive increased demand. Sugar futures prices are also on the rise, so sugarcane and sugar beet production should also contribute to rising nitrogen use.
Elsewhere, strong demand in India and Brazil is supporting the global nitrogen market as urea sales have increased significantly. CF’s management believes this will help contribute to the bottom line in the coming quarters. In terms of its input costs, CF expects to remain on the low end of the global cost curve due to its access to low-cost, plentiful North American natural gas. This in turn should help the firm generate substantial free cash flow in both the short-term and the long-term.
From a technical perspective, meanwhile, as long as the share price can remain above 30, I view the stock as an attractive turnaround candidate.
Mosaic (MOS)
Mosaic Co. (MOS) specializes in the production of phosphate and potash fertilizers and is one of the strongest performers among the major U.S. crop nutrient companies. DAP and MAP fertilizer prices are on the rebound, which should help boost the company’s profits going forward. Recently, Mosaic featured per-share earnings of 11 cents, beating analyst estimates of a loss of 4 cents per share (a 375% surprise!). What’s more, analysts expect EPS to grow 69% for full-year 2020 and 269% in 2021. If you’re looking for a longer-term turnaround play, MOS is a worthy candidate. It should benefit from continued U.S. currency weakness while also taking advantage of increasing global phosphate demand.
Intrepid Potash (IPI)
Denver-based Intrepid Potash (IPI) is the United States’ largest producer of potassium chloride (muriate of potash, or MOP), which is extremely water soluble. Global demand for such environmentally-friendly fertilizers is increasing as growers in several major countries must now comply with government-mandated sustainable farming guidelines.
Although COVID-related headwinds plagued the company in the second quarter, the company announced a strong finish to the spring application season, as well as good 2020 evaporation rates at its potash production facilities. The firm is also focused on sound balance sheet management by retiring debt and increasing its cash holdings. What’s more, analysts expect to see a return to revenue growth in 2021 and 2022. And if the U.S. dollar continues to weaken as anticipated, IPI should get an extra boost from higher farm commodity prices.
This stock carries more risks than the other two mentioned here, however, so it’s not for the faint of heart. From a technical perspective (especially given the recent above-normal trading volume signatures), I’d view a decisive breakout above the 15 level as a sign that informed buyers have taken command of the stock’s near-term trend.
In conclusion, if the dollar resumes its COVID-driven deterioration as I expect, higher crop and fertilizer prices are likely to result. And while the stocks mentioned here aren’t of the high-growth variety and may take time to play out, they should nonetheless be able to benefit from a weaker domestic currency.