Fertilizer Industry Gaining Stability: 3 Stocks To Buy Now

The fertilizer industry is showing signs of stability of late, taking succor from improved pricing and demand dynamics for certain major crop nutrients and a firming farm economy.

While still-weak agricultural commodity prices remain a roadblock, strong usage in major consumer markets is driving demand for primary crop nutrients. Needless to say, the ever-growing world population and the concomitant need to beef up food supply to feed more mouths remains a prime catalyst for fertilizer demand growth.

The Zacks Fertilizers industry has outperformed the broader market over the past three months. While the industry has gained roughly 12.1%, the S&P 500 has returned around 6.3%.

Let’s do a quick health check of the fertilizer industry by delving deeper into certain key factors.

Potash Market Showing Strength

The potash market has stabilized this year from the 2016 lows. Potash prices have recovered this year after feeling gravity’s pull in 2016, supported by improving demand and tighter supply conditions. Most producers of this major nutrient, including Potash Corp. of Saskatchewan Inc. POT and Agrium Inc. AGU witnessed a spike in prices in the third quarter that drove their potash margins.

Demand for potash also has been strong in key markets. Potash Corp., a major producer of the nutrient, saw healthy demand for potash in the third quarter and expects consistent customer engagement through the balance of 2017, supported by healthy consumption trends with contracts with both China and India in place. The company envisions 2017 to be a record year for potash demand and expects global demand in the band of 62 million to 65 million tons.

Potash Corp. sees strong consumption in China driven by a shift to more potassium-intensive crops like vegetables and fruits. The demand environment also remains healthy in Brazil, another important market, driven by higher crop acreage and application rates. Strong affordability and the need to replenish nutrients are also expected to support fertilizer demand in North America.

Moreover, the government of India’s move to cut the Goods and Services Tax (GST) rate on fertilizers from 12% to 5% is a welcome news for famers in that country. It also augurs well for potash demand in India, one of the world’s top buyers of the nutrient.

According to Agrium, potash market is expected to remain tight through the rest of 2017. As such, higher demand from major consumers coupled with tight supply should further drive up potash prices.

A Rebound in Nitrogen

Another positive is the recent rebound in the nitrogen space. The nitrogen market is seeing improving demand and pricing fundamentals. According to CF Industries Holdings, Inc. CF, a major producer, the third quarter witnessed a rapid increase in the global price of urea from second quarter, which was driven by considerably lower Chinese exports and strong global demand (especially in India and Brazil). The company expects consistent global nitrogen demand growth moving ahead.

Moreover, Agrium, in its third-quarter call, said that nitrogen prices have witnessed sharp increase (of more than 50%) since the lows seen in July, buoyed by low level of Chinese urea production and solid import demand from India. Higher domestic coal prices coupled with increased focus on reducing pollution has led to a reduction in Chinese urea production.

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