Fertilizer producer Nutrien Ltd. NTR-T has been enjoying an upbeat market over the past couple of years, amid rising demand for crop inputs. Now, Russia’s invasion of Ukraine adds a compelling reason to bet on the stock, but there are a lot of moving parts here.
Saskatoon-based Nutrien, the world’s largest fertilizer producer, jumped more than 4 per cent in early trading on Thursday, even as markets initially sank in response to news of the invasion. The stock rallied further on Friday, touching a record high above $102 in late afternoon trading in Toronto.
U.S. producers Mosaic Co. and Intrepid Potash Inc. also rallied amid a widespread belief that severe sanctions against Russia will further constrain a fertilizer market already struggling to meet global demand.
“This world is very, very scared. There’s a huge emotional reaction right now with what’s going on,” said Josh Linville, the Missouri-based director of fertilizer at StoneX Group, a financial services network.
The long-term bet on fertilizer stocks rests on a relatively simple premise: Commodities such as urea, potash and nitrogen are essential in generating higher crop yields.
However, fertilizer prices can be volatile. They rise and fall with crop prices, especially corn, as farmers invest in crops when times are good and hold off on fertilizing their fields when times are bad.
These ups and downs have been on full display in recent years, challenging investors to stay put.
According to David Widmar, co-founder of Indiana-based Agricultural Economic Insights, a blend of fertilizers cost US$160 per acre of corn in the U.S. Corn Belt during the last runup in fertilizer prices a decade ago.
The price then retreated as corn prices fell, sinking below US$85 an acre just 14 months ago.
Behold today’s price though: It has rebounded to US$240 an acre, or 50 per cent above the previous peak, with U.S. corn prices doubling since mid-2020 amid a tight market for fertilizer.
That’s driving significant profit growth at fertilizer producers, which has underpinned a rally in their share prices over the past two years.
Nutrien’s share price is up more than 145 per cent over this two-year period. In 2021, the company’s full-year EBITDA (or earnings before interest, taxes, depreciation and amortization) from potash sales rose to US$2.7-billion, up 130 per cent from 2020.
Now, widespread revulsion over the attack on Ukraine could lead to severe sanctions against Russia, potentially disrupting its significant fertilizer exports at a time when global supply can’t meet demand.
Russia is the source of 14 per cent of the world’s urea exports and a potential conduit for potash exports from Belarus. As well, if Russia shuts off its natural-gas pipeline to the West, Europe could lose an essential energy input for the region’s nitrogen production.
“These fertilizer producers, globally, are doing everything they can to produce every single tonne that they can,” Mr. Linville said in an interview. As a result, “the margins that these guys are dealing with today are unfathomable.”
Nutrien’s gross margin on potash sales – which compares sales to the cost of producing the commodity – soared to more than US$1.1-billion in the fourth quarter of 2021, up 669 per cent year over year.
The company’s New York-listed shares, by far its most-traded, have outperformed the S&P 500 by about 15 percentage points this year. The strong performance suggests that initial concerns about Nutrien in January, after Mayo Schmidt stepped down as chief executive officer just nine months into the job, has shifted to investor enthusiasm.
The strong market for crop inputs is drowning out the boardroom drama, and rising geopolitical tensions add to the company’s appeal. Based on reported profits over the past 12 months, the stock isn’t even expensive: Its price-to-earnings ratio is about 14.
Nonetheless, latecomers to the fertilizer sector’s rally have to contend with big uncertainties over how the West responds to Russia’s attack on Ukraine. Will sanctions include fertilizer? How many countries will participate? How long will sanctions last? And will fertilizer producers respond by developing new sources?
“There are usually several things that come together, that lead to extreme events like high fertilizer prices – and eventually they do begin to resolve themselves,” Mr. Widmar said in an interview.
“What’s always unknown is the magnitude of how high prices will get and how long they will last,” he added.
Investing in Nutrien has been a good bet over the past two years, as the price of corn recovered and fertilizer prices rebounded. The path forward looks attractive – but far less clear.
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