2 Stocks Bearing Fruit Amid Lingering Fertilizer Woes

The fertilizer industry is not out of the woods yet and remains buffeted by certain headwinds that continue to weigh on stocks in the space this year. Sustained pressure on crop commodity prices is scuppering a meaningful recovery.

The overall weak fertilizer industry fundamentals have kept investors away this year. Does that mean you should pluck the entire industry out of your portfolio?

If you look beyond the negatives, there are a few bright spots such as improving pricing and demand dynamics for potash, a major crop nutrient, and signs of stability in the farm economy.

The Zacks Fertilizers industry has underperformed the broader market year to date. While the industry has gained roughly 8.2%, the S&P 500 has returned around 11.9%.

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

Crop Commodity Pricing Still a Drag

The prevailing softness in agricultural commodity pricing remains a concern for fertilizer and agricultural chemicals companies as it is hindering fertilizer usage by farmers given the adverse effect of lower crop pricing on growers’ income.

Prices of major crops (such as corn and soybeans) remain at their multi-year lows as markets remain awash with grains. An expected bumper corn and soybean harvest is likely to put a cap on crop prices in 2017.

The U.S. Department of Agriculture’s (USDA) harvest outlook indicates another bumper year of production. The USDA, in its September report, raised its corn and soybean harvest forecasts for the 2017/18 crop year. It now sees corn production to be 14.184 billion bushels, up 32 million from its August forecast.

The USDA also predicts record soybean production of 4.431 billion bushels compared with its August view of 4.381 billion bushels. This is expected to aggravate the grain glut and restrict crop prices.

Has the Farm Economy Hit Bottom?

U.S. farm income is expected to tick up this year after three straight years of decline due to low commodity prices. Per the USDA’s August 2017 forecast, net U.S. farm income is expected to go up 3.1% to $63.4 billion in 2017. This compares to the USDA’s February 2017 forecast of an 8.7% decline to $62.3 billion. The upturn in profits will likely be driven by higher cash receipts from the sale of crop inventories.

However, despite the projected rise, net farm income would still be lower in 2017 than all the other years since 2010 and a far cry from the record $123.8 billion achieved in 2013.

Nevertheless, the USDA’s profit forecast for this year gives signs of stability in the farm economy and suggests that the sector may have finally hit the bottom. Higher anticipated farm income is expected to positively influence farmers’ nutrient-purchasing decisions.

Potash Prices on Recovery Mode

The potash market has stabilized this year from the 2016 lows. Potash prices have recovered after feeling gravity’s pull last year due to subdued demand for the nutrient. Most producers of the nutrient, including Potash Corp. of Saskatchewan Inc. (NYSE:POT) , Agrium Inc. (NYSE:AGU) and The Mosaic Company (NYSE:MOS) witnessed a spike in prices in the second quarter that drove their potash margins.

Potash Corp., a major producer of the nutrient, saw healthy demand for potash in the second quarter and expects consistent customer engagement through the balance of 2017, supported by healthy consumption trends.

With Canpotex contracts for the second half in place, the company sees strong consumption in China driven by higher crop acreage and nutrient affordability. The demand environment also remains healthy in Brazil, another important market.

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. As such, higher demand from major consumers should drive up potash prices in the second half.

Picture Not So Good for Nitrogen & Phosphate

Higher supply has contributed to a softer nitrogen pricing environment. Abundant nitrogen supply driven by new production capacity is expected to weigh on global prices in 2017. Additional nitrogen capacity including a significant increase in North America is expected to come online globally in the back half of the year.

Global capacity expansion continues to exert pressure on urea and other nitrogen fertilizer prices. Elevated supply in the global nitrogen market is hurting prices, causing farmers to delay buying activities. As such, nitrogen margins of fertilizer producers remain thwarted by a weak pricing environment.

Excess capacity (outpacing demand) also continues to hurt prices of phosphate as witnessed in the first two quarters of 2017. Phosphate markets are expected to remain oversupplied in the second half (with incremental capacity from Saudi Arabia and Morocco, as noted by Agrium and Mosaic in their second-quarter earnings calls), thereby putting pressure on prices. Weak prices are expected to continue to affect phosphates margins in third-quarter 2017.

2 Fertilizer Stocks Worth Betting On

Despite some positives, the fertilizer market is yet to rebound and there is continuous negative sentiment among agriculture investors that can create uncertainty in the near term.

Nevertheless, the constant need of farmers to nourish their crops, replenish nutrients in the soil following a harvest and boost yields to feed a growing world support the bullish case for fertilizers.

Below we highlight two fertilizer stocks, armed with a solid Zacks Rank, that are worth considering for investment in the prevailing operating environment.

Sociedad Quimica y Minera de Chile S.A. (NYSE:SQM)

Santiago, Chile-based Sociedad Quimica is a solid choice armed with a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The company has an expected earnings growth of 52.2% for 2017. It also has a long-term expected earnings per share growth rate of 32.5%. The stock has also gained a whopping 100.5% year to date, significantly outperforming the Zacks Fertilizers industry’s gain of 8.2% over the same period.

Annual estimates for Sociedad Quimica have also moved north over the past 60 days, reflecting analysts’ confidence in the stock. Over this period, the Zacks Consensus Estimate for 2017 and 2018 for the company’s earnings has increased by around 11.8% and 24%, respectively.

Intrepid Potash, Inc. (NYSE:IPI)

Headquartered in Denver, CO, Intrepid Potash is another attractive pick with a Zacks Rank #2 (Buy). The company has an expected earnings growth of 73.8% for 2017. It also delivered positive earnings surprise of 50% in the last reported quarter. Moreover, the stock has also gained a solid 96.2% year to date, significantly outperforming the Zacks Fertilizers industry’s gain of 8.2%.

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