Phosphate Producers Poised to Benefit from Tight Grain Market

By Leia Toovey- Exclusive to Potash Investing News

The recent earnings season was record-setting for many fertilizer producers, and despite a shaky global economy analysts expect that high-profits will continue into the foreseeable future.  High-earnings are a result of record sales volumes, and recovering fertilizer prices. The price of fertilizers closely tracks the price of grains because as grains prices rise, so does the incentive for farmers to apply fertilizer to maximize yields. Grain prices have skyrocketed in the past year, with wheat prices jumping 11 percent, corn prices 69 percent, and soybeans 31 percent. When comparing fertilizers, phosphates and potash typically have a longer term impact on yields, and therefore are benefiting from the rapid rise in grains prices.

While phosphate prices have advanced about 11 percent in the past year, they are not keeping pace with the increase in grains prices. This, according to many analysts, provides ample reason for a more rapid ascent in phosphate prices. Analysts are already predicting that demand for fertilizers may experience so much growth that shortages become a problem. Shortages of potash and phosphate and increasing soil erosion are “the real long-term problems we face,” Jeremy Grantham, chief investment strategist at Grantham, Mayo, Van Otterloo & Co., wrote in a report last month.

Phosphate producers are increasing output, however, this is not expected to offer downside pressure on prices as the new capacity is not expected to meet rising demand. “New supply for phosphate fertilizers from Northern Africa and the Middle East is expected to be absorbed without pushing prices for the next 12 months,” according to  Horst Hueniken, Managing Director at Stifel Nicolaus & Co. Inc. The quality levels of many crops are below their five-year average level. Should this pattern continue as the growing season wears on, it could spell lower crop volumes this year, but higher volumes next year, driven by even more planted acres in 2012. The industry’s cyclical upswing is not over,” Hueniken said.

Company news

CF Industries Holdings Inc.’s (NYSE:CF) second-quarter earnings soared on double-digit phosphate and nitrogen sales growth. CF reported a profit of $487.4 million, or $6.75 a share, up from $105.1 million, or $1.54 a share, a year earlier. The latest quarter included $14.2 million loss on derivatives while the prior-year results included $113.7 million of acquisition-related costs and a $15.1 million gain on derivatives. Total revenue rose 38 percent to $1.8 billion. Analysts polled by Thomson Reuters expected a per-share profit of $5.95 on revenue of $1.77 billion. Phosphate sales rose 60 percent as volume jumped 17.

There was a dark horse in the recent earnings season. Phosphate Holdings, Inc. (PINK:PHOS) reported a second quarter 2011 loss of $1.8 million, due to operating issues While the loss was substantial, the company has narrowed its losses compared to recent quarters. In the same time period last year, the phosphate producer lost $4.9 million. Total net sales for the second quarter of 2011 were $80.5 million, a 30 percent increase from total net sales of $62.1 million for the second quarter of 2010. The average sales price per short ton of DAP during the second quarter of 2011 was $542.54, compared to the prior-year period average sales price of $400.26. During the second quarter, the company sold 146,213 tonnes of DAP, compared with 152,434 tonnes of DAP sold in the second quarter of 2010. Commenting on the results, Robert E. Jones, Chief Executive Officer, said, “Operating issues were the dominant theme of our second quarter of 2011. We simply failed to achieve the production levels of sulfuric acid and DAP necessary for a positive quarter. The primary factors negatively impacting our production included phosphate rock shortages due to logistical issues in Morocco which idled our phosphoric acid and DAP plants for nine days; damaged heat exchangers which limited instantaneous rates to approximately 1,000 to 1,200 tons per day in both sulfuric acid plants; and a scheduled maintenance turnaround of one of our sulfuric acid plants which required 19 days.”