Potash Corp./Saskatchewan (USA) (NYSE:POT) is in flux because of the fallout from the collapse of the Russo-Belarusian potash cartel with a potential 40% drop in potash prices. However, the company anticipates demand for potash could approach the previous record of 56 million tonnes, with North America to lead this “demand resurgence.” Sales volume outpaced the previous year for both the quarter and the first six months. It was a similar story for rival Mosaic, while Agrium is expecting a rise in demand for fertilizers in the current quarter as good weather extends the growing season.
A more offbeat stock to benefit from the renewed interest in fertilizers is Airgas, Inc. (NYSE:ARG). The company distributes bottled gas for the medical, industrial and retail sectors. CEO Peter McCausland talked about the “$100 billion wave of chemical and fertilizer investments that’s coming.” He followed with mention of “big” new starts in the construction pipeline with a “tremendous number of new projects” on the books. In further comments, Airgas, Inc. (NYSE:ARG) anticipates it could expect revenues from each new fertilizer plant built over a period of up to five years; each plant having the potential to add “$1 million or more a year” in revenue .
Risks
The biggest enemy for this sector is weather: it’s unpredictable, and impacts can be severe or mild depending on when and where it hits. Seed manufacturers took the brunt of this year’s late start to the growing season. A repeat of a cool, wet spring next year may deliver better prices for farmers, but it won’t necessarily sell more fertilizer. However, weak demand in one quarter is often compensated by higher demand the next.
Regulatory factors can draw out and/or freeze the development process of new chemical and fertilizer plants, influencing supply. Airgas and fertilizer manufacturers would be more vulnerable to such delays, although Airgas would likely be compensated with higher fertilizer prices from reduced supply. The Dow Chemical Company (NYSE:DOW)’s and Monsanto Company (NYSE:MON)’s developments in GMO crops have run into a more cautious USDA, with further testing of environmental impacts required by the government agency.
Outlook
Fertilizer producers are currently benefiting from the extended growing season from a late spell of good weather. In addition, fertilizer producers have some protection against weak crop prices as inputs are independent of final yields — although acreage planted can vary. Despite this, agricultural prices have steadily improved over the past 10 years and it’s this growth that makes this sector so interesting.
The article How to Build Wealth From Farming originally appeared on Fool.com and is written by Declan Fallon.
Declan Fallon has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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