Fertilizer stocks may not be the most glamorous option for your portfolio, but they can be an excellent way to hedge against a weakening U.S. dollar. Here are three that are making a big move.
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 mostly 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 companies that are starting to 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 under-appreciated.
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 macro nutrients 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.
Today’s falling dollar is a prime reason why fertilizer stocks are strengthening, for dollar weakness typically translates into commodity price strength.
With this in mind, let’s take a look at three fertilizer stocks which should be able to benefit from continued dollar weakness.
3 Fertilizer Stocks to Consider
Fertilizer Stock #1: 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 this year, 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 40, I view the stock as an attractive play even after dipping the last couple months.
Fertilizer Stock #2: 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. Analysts expect EPS to grow a whopping 436% 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.
Fertilizer Stock #3: 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.
COVID-related headwinds plagued the company in 2020, but the firm is 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 (25%) this year. And if the U.S. dollar continues to weaken as anticipated, IPI should get an extra boost from higher farm commodity prices.
As a small-cap stock, IPI carries more risks than the other two mentioned here, but the chart looks good.
In conclusion, if the dollar resumes its COVID-driven deterioration, higher crop and fertilizer prices are likely to result. And the fertilizer stocks mentioned should continue to benefit from a weaker domestic currency.
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What else would you like to know about up and coming fertilizer stocks? Leave a question below in the comments.
*This post has been updated from an original version, published in 2020.