The big fertilizer play flying under the radar

What do natural gas (UNG, quote) and corn (CORN, quote) have in common? If you said fertilizer, you are correct. Natural gas is the key ingredient in producing Anhydrous ammonia, a nitrogen based plant fertilizer.

Image courtesy of Thirteenofclubs:

Anydrous amonia fertilizer tanks

Even with natural gas hitting 2012 highs, it’s still at record lows post the 2008 financial crisis. So why is the cost of Anhydrous ammonia remaining near the high of last year? Because of the other part of the equation – that’s right – corn.

The demand for corn and the fact that farmers are ahead of schedule at the midpoint of planting has brought pressure on the fertilizer companies to produce more. In three words – supply and demand.

With natural gas trading around $2.482, and if the fertilizer companies actually pass through the savings, farmers should be looking at purchasing Anhydrous ammonia at about $296 a ton. Currently the demand is driving price per ton to $700, just $100 off last year’s high of $800.

At current prices of Anhydrous ammonia, coupled with the current low natural gas prices, the producers of Anhydrous ammonia are looking at a double, if not a triple expansion in margin.

The question is – has the market priced this in? The options markets are not showing any upside in call activity, and only a few analysts are starting to connect the dots.

CF Industries Holdings Inc (CF, quote)  reported $5.54 in earnings on May 3, crushing estimates of $4.94.  The stock hit a 52 week high on the news and dropped like a rock on the recent global turmoil. 

Agrium Inc (AGU, quote) reported earnings on May 9 of $1.32, beating expectations by $0.32 with the stock running higher in the face of the overall market downturn.

Norwegian based Yara International ASA (YARIYquote) will report earning on May 11, and there is no reason to expect anything less than its counter parts – but in the face of the current turmoil price may be muted.  

The world needs to eat and farms need the best yield to stay in business. This could very well be a gift of seeing how well these companies are doing and yet getting them on sale.

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