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October 2012 Archive for Inputs Insights

RSS By: Davis Michaelsen, Pro Farmer

Inputs Monitor Editor Davis Michaelsen adds his perspective into the happenings of the inputs markets.

Much Ado About Natural Gas

Oct 23, 2012

Someone asked me the other day, "why does the Monitor spend so much time reporting on natural gas?" There are a number of reasons why growers and retailers want to stay current on natural gas pricing action. Natural gas is quickly becoming the go-to resource in the United States. Natural gas is pressed into service as the parent product of the most popular fertilizers worldwide, the number one source of America's wintertime home heat and as a clean burning automotive fuel.

Hydraulic fracturing or 'fracking' has allowed domestic supplies of crude oil and natural gas to suppress the prices of gasoline, home heat and fertilizer by making it easier and safer to collect resources from under the soil.

Fracking -

This practice is not new. The possibilities of fracturing shale to release crude oil and natural gas were first considered at the Civil War battle of Fredericksburg in December of 1862. After the war, Col. Edward Roberts introduced his 'Roberts Torpedo' which was little more than a steel cylindrical vessel packed with gunpowder. When lowered into the shale and detonated, the resulting subterranean blast fractured the surrounding rock, allowing oil and natural gas to flow freely. At that point, harvesting the fluids was as easy as running a pump and suctioning off the precious liquids.

Techniques have since been refined. After gunpowder, nitroglycerin was used to provide the firepower, but nitro proved much too volatile for regular use. Plant explosions in 1979 and 1989 punctuated the need for a new blast element. The last use of nitroglycerin for fracturing was May 5, 1990.

The first time hydraulic fracturing was attempted was in an Oklahoma oilfield by a team of production experts on March 17, 1949. Company workers from Halliburton and Stanolind Companies used similar methods later that day in Texas, and modern hydraulic fracturing was born (read more fracking history from the American Oil and Gas Historical Society here).

Fertilizer -

Nitrogen-based fertilizers begin with reacting natural gas-based hydrogen gas and atmospheric nitrogen. From that point, nitrogen-containing fertilizer products like Urea, the world's most popular fertilizer, and ammonia can be produced. If the price of collecting natural gas weren't so low thanks to fracking, fertilizer prices would be much higher and potentially reliant on foreign sources.

Home Heat -

According to EIA reports, residential heating oil is nearly thirty cents higher this year than the same time last year. Residential propane, however, is forty-three cents lower than last year at this time. This is where the savings can really be seen. The U.S. might get lucky this winter as many experts have forecast balmy temperatures. If demand for home heat rises, pressure on natural gas in domestic storage may push nattie to the high side, but with so much natural gas being fracked, any dip in supply will quickly be remedied.

Propane Autogas -

Propane autogas has a ways to go in getting the attention of the general public, but In fact, estimates have up to 15 million vehicles using propane autogas worldwide putting it third behind gasoline and diesel fuel. The cleaner burning fuel is slowly gaining traction in the United States. Autogas is lighter than gasoline, costs 30-40% less than gasoline, diminishes our reliance on foreign oil, and promises to keep motorists rolling with a fuel that may actually prove to be better for automotive engine parts than gasoline or diesel fuel. Users today include Pittsburgh’s Yellow Cab, West Coast Sears delivery fleets, Rousch Racing, the Sandy Hills Georgia Police Department and others.

Currently, there are only 2500 Propane Autogas fueling stations in the U.S., but with a little popular support, the new fuel could catch on like wildfire. (click here to read more about propane autogas)

Natural gas can be difficult to figure. The technicals on the front-month contract include dramatic jumps to both the high and low sides, but little of that action immediately figures into retail product pricing. As the U.S. moves forward, the pursuit of affordable, sustainable energy in the face of increasing world tumult finds a champion in natural gas.

Domestic natural gas comes with a litany of benefits for the American public. The advent of hydraulic fracking has suppressed prices in key consumer markets and with a robust domestic supply, it's time for America to get comfortable with natural gas.

As of now...

Front-month November natural gas moved higher today -- up $0.07 to end the day today, October 23, at $3.52.



Agrium Unmoved - JANA Undeterred

Oct 04, 2012

Calgary, Alberta based Agrium (AGU) is among the World's largest producers of nitrogen-based fertilizers like urea and ammonia, and is also the biggest retail seller of fertilizer, crop chemicals and seed in the United States.

JANA Partners Llc., an investment firm from New York City, holds about a 5% stake in Agrium Inc. Since early summer when JANA bought in, it has argued for structural and operational improvements -- including a proposed split of Agrium's wholesale and retail divisions -- that they expect would add value for shareholders. But Agrium has publicly refused more than once.

One needs look no further than Agrium's definition of sustainability to understand why it is resistant to the suggested restructuring. It defines sustainability as, "The enduring well-being of interacting economic, environmental and social systems." The key word shows up midway through the definition..."interacting". Agrium's arms are long, supplying fertilizer to customers around the Globe while tending to the needs of the individual farmer at the retail level.

"We can't comment on what kind of stake any shareholder may or may not hold in Agrium," said Agrium spokesman Richard Downey in an email comment to Reuters. "What we can say is that Agrium's integrated strategy is producing record results and sustainable value for shareholders and that we do not plan to spin off our retail business."

What is written between the lines of all of Agrium's mission related statements is the strong belief that integrated diversity yields security.

JANA Holdings also demonstrates a penchant toward diversity in its portfolio which holds stock in Apple (AAPL), Expedia (EXPE), Phillips 66 (PSX) and others including Canadian based fertilizer giant Agrium. I spoke to a partner at JANA who affirmed Agruim's commitment to producers but noted that a golden opportunity for value creation is not being realized here and, "at the end of the day, it's up to the shareholders to make the call. We've been in similar situations where companies resisted our calls for change but by making our case to shareholders we were able to prevail and we don't view this situation any differently."

It must be noted here that a number of inputs related companies have seen drought inspired upticks during the summer of 2012. Fertilizer pricing was expected to follow corn and soybeans upward, and it has to a point, but fertilizer stocks are bucking the trend.

Agrium boasts the largest working inventory of any of the fertilizer giants and this inventory is thought by some to help insulate AGU against market forces. JANA disagrees noting that AGU's shares have performed no better than most uninsulated peers over the last cyclical dowturn and failed to produce on the subsequent upturn. By cutting the excessive inventory, JANA believes AGU could reduce its reliance on volatile commodities and stabilize retail earnings, enhancing its value.

In a telephone interview, an industry expert told me, "Agrium shares have out-performed its peer group over the last five, three and one-year and year-to-date. But outperformance could have been even better if the two entities, retail - 40% of EPS - and wholesale - 60% of EPS - were separated. Long-only relative-term investors might prefer the better stability of the retail side while absolute-return hedge fund investors may prefer the optionality of the wholesale side."

Extraordinarily soft natural gas prices are widening margins for nitrate producers like AGU. Dry soil conditions have growers throughout the Midwest praying for rain just so they can get an accurate soil test, let alone, apply nutria...many will likely opt to wait until spring. On top of that, China has yet to book its 2012 Potash, and India reports it will purchase no DAP or potash until after the end of this fiscal year.

The only certainty in a drought year is uncertainty. With a record of outperformance and a solid sustainability position, Agrium should weather the drought storm as well as or better than its peers. JANA has made a 700 million dollar bet on the restructuring and has every confidence that shareholders will take advantage of this value creation opportunity. But companies like Agrium are not likely panic or look to siphon quick profits. Agrium has made it clear that JANA's restructuring proposal is not the right move for the company or its customers. JANA may find in the end that Agrium is as difficult to move as the soil itself.






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