CF Industries Holdings, Inc. (CF), Terra Nitrogen Company, L.P. (TNH), Mosaic Co (MOS): Does It Smell in Here, or Is It Just Me?

Corn

Now that we understand the bottom-line explanation for the industry’s increased margins, we need to understand its explosive top-line growth. In essence, the price of corn is near its all-time highs because of the boom in the demand for biofuels, which has caused farmers to produce more, almost irrespective of the costs associated with doing so. But, there is one thing to be cautious of with the whole corn biofuel trend moving forward, and that is the cost of substitutes. Unfortunately for fertilizer lovers, soybeans, which don’t require nitrogen-enriched fertilizer, can be substituted for corn in the event that corn prices rise too much. But is this likely to happen anytime soon?

According to this data I collected, the opposite has happened. While the price of corn has increased, the price of soybeans has increased somewhat more, indicating that, absent alternatives for corn like other cellulosic biofuels such as algae, corn prices may still have room to run before being hit by a fundamental downturn.

Summary

No matter how you slice it, data points to a world with at least slightly lower profit margins for fertilizer companies due to a very easy-to-see shoring up of excess natural gas supplies. However, the picture pertaining to corn leaves one wondering what will transpire over the next few years. Like I said, absent affordable corn substitutes, as well as technological leaps, it would appear that the top line of fertilizer companies may grow further, meaning that a healthy industry giant like CF Industries Holdings, Inc. (NYSE:CF) could make for an amazing investment for Fools like us!

The article Does It Smell in Here, or Is It Just Me? originally appeared on Fool.com and is written by Daniel Jones.

Daniel Jones has no position in any stocks mentioned and will not buy shares in any of them for at least 30 days. The Motley Fool owns shares of CF Industries Holdings. 

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