Agrium Inc. (USA) (AGU): Food for Thought

A recent statement by Mr. Mike Wilson, president and chief executive officer of Agrium Inc. (USA) (NYSE:AGU), had me thinking of the potential that exists concerning investments in the agricultural chemicals industry in the basic materials sector.

In February, he said:

The unrelenting global demand for food has continued to pressure global grain supplies, leading to continued strength in crop prices. We believe there is a compelling economic incentive for growers across the world to plant record acreage in 2013 and to optimize their use of crop inputs.

The essence of this comment is the “unrelenting global demand for food.” Reuters‘ Nina Chestney, senior environmental markets correspondent in London, reported in a January article:

Even by 2030, the world will need at least 50% more food, 45% more energy and 30% more water, according to U.N. estimates, at a time when a changing environment is creating new limits to supply.

Putting the two comments together, there’s clearly an opportunity for astute agribusiness companies to make somewhat of an impact concerning global food supplies. I’ve been looking at Agrium Inc. (USA) (NYSE:AGU), and the support it can offer the world in terms of helping ease the food crisis is clear. What the stock can offer investors willing to bet on this market sector is equally clear.

Agrium Inc. (USA) (NYSE:AGU) provides crop inputs and services. The company is a major retail supplier of agricultural products and services, a leading international wholesale producer and marketer of all three major agricultural nutrients (nitrogen, phosphate and potash), and a supplier of specialty fertilizers. It had record results for the fourth quarter of 2012 and additionally matched the record annual earnings that were achieved in 2011. There are three reasons you should consider Agrium Inc. (USA) (NYSE:AGU) as an investment.

1. The sales potential of its retail business unit

For the 2012 fourth quarter, retail sales grew by 8% to $2 billion in comparison to the fourth quarter of the prior year.

Here’s the potential of this unit; think of the farmer who wants to optimize the potential of his or her crops. Farmers are at the mercy of the weather, market prices for their crops, infestation, energy prices, and more.

One way to protect crop investments is to buy crop protection and crop nutrient products. Guess who’s providing these and seeing its retail division grow because of increased sales of these products?

2. The gross profit potential of its retail business unit

The retail segment’s gross profit grew $57 million in the fourth quarter. Crop protection products increased 40% for the quarter versus the comparable 2011 period. Gross profits of $509 million represented the highest fourth-quarter results ever for this segment.

3. Agrium’s full-year retail EBITDA (earnings before interest, taxes, depreciation and amortization)

Why is this important? It’s important because, as an investor, you want to know how much money an enterprise is actually making before it starts factoring in the necessary deductions for the above-listed items. Therefore, you know what a company’s income is before the deductions are made from that number. However, not all expenses are factored into EBITDA. Consequently, it’s important as an investor to consider a company’s cash flow, as well.

Nonetheless, Agrium Inc. (USA) (NYSE:AGU)’s 2012 EBITDA was $951 million. This represents an increase of 24% in comparison to 2011’s record results of $769 million.

In a letter to shareholders dated March 4, Agrium conveyed that the company’s performance has made it possible for its board of directors to raise the dividend in tandem with the increase in earnings and cash flow. Agrium has raised its dividend 18 times since 2010.

Another company experiencing growth in the agricultural chemicals industry is Monsanto Company (NYSE:MON). In recent weeks, the company reported that its seeds and genomics segment sales for the fiscal second quarter of 2013 were $4.3 billion. This represents an increase of $422 million over the same period in 2012. For the first six months of the current fiscal year, this segment’s sales are up $643 million over the comparable prior-year period.

Moreover, Monsanto Company (NYSE:MON)’s agricultural productivity segment net sales in the second quarter increased $302 million over the same period in 2012. Monsanto is also experiencing growth from the sales of crop protection products, as well as lawn-and-garden herbicide products.

Investors should note the company’s strong net sales performance for the second quarter. Net sales increased $724 million, or 15%, to $5.5 billion in comparison to the year ago same quarter. Net sales increased $1.2 billion, or 17%, for the first six months of 2013.

Are their caveats to consider as an agribusiness investor? There are, and product demand is one thing investors must evaluate. Consider the global demand for potash; lower demand here has hurt agribusiness stalwart Potash Corp./Saskatchewan (USA) (NYSE:POT). Limited worldwide potash buying resulted in lower prices in the 2012 fourth quarter. Mr. Bill Doyle, Potash Corp./Saskatchewan (USA) (NYSE:POT) president and CEO, stated in a press release on Jan. 31:

Our fourth-quarter results were adversely affected by weaker performance in all three nutrients as global fertilizer markets paused in the absence of significant immediate needs and amid lack of direction, particularly in phosphate and potash.

However, concerning the company, Jake Mann in his Motley Fool Blog Network posting of March 25 noted:

“The world population continues to grow, which increases the demand for agricultural products; … many macro investors are bullish on farmland, agriculture, and related investments. Potash … is one company often used as an example of a potential beneficiary of this thesis.

I tend to agree that PotashCorp is a potential beneficiary of this demand. The company noted in its Q1 2013 market analysis report that potash shipments to the North American market for the first half of the 2012-2013 fertilizer year, a period that extends from July to December, were a little higher than the historical average. A strong fall application season and low distributor inventories at the beginning of the fertilizer year drove this demand.

Important for investors to note is that PotashCorp expects that demand will remain strong for the rest of the fertilizer year because of “favorable crop economics, prospects for high planted area in 2013 and limited distributor inventory carried into the year” (PotashCorp Q1 2013 Market Analysis Report – March 20).

Furthermore, PotashCorp gave its outlook at the end of January for the potash market. It expects demand to gain momentum this year. PotashCorp foresees worldwide potash shipments for 2013 of between 55 million and 57 million tonnes. This would be a strong increase over the approximately 51 million tonnes shipped last year.

I like the above-mentioned stocks because these companies have the resources and expertise to take advantage of the expected continued rise in worldwide demand for agricultural products. As they help farmers provide for this demand, these companies (and their shareholders) should reap the benefits of their initiatives.

A global food crisis is at the doorstep, if not already through the door. Agribusiness companies have their role to play. They can help feed the world, and the accounts of their investors.

The article Food for Thought originally appeared on Fool.com and is written by Michael Ugulini.