Nitrogen Stocks -- Riding the Storm Out

November 16, 2012 09:06 AM

rainyday   Agrium Inc. (AGU) has hit a new four-year high and is quickly becoming a go-to long-play fertilizer stock. The Calgary based fertilizer producer focuses primarily on nitrogen based products and has forded troubled waters with its bottom line intact.

CF Industries (CF) has also kept its head above water on the back of subsidiary, Terra Nitrogen (TNH). Here again, we see how nitrogen demand adds buoyancy to the shares. While P&K nutrients drag some fertilizer producers to the lowside on high margins and low demand, nitrogen is a consistent performer. (Click here to see how other nutrients perform)

The reason for this is that nitrogen fertilizers like UAN and Urea are essential to crop growth. While potassium and phosphates play their role in the nutrient profile, nitrogen will always be in demand as it must be reapplied with each new corn planting. Spring soil tests may spike demand for P&K, but international demand has fallen way off for potash and, to a lesser degree, phosphates.

Look at it this way -- your car will not run without gasoline. If we think of N as the most essential nutrient, or the 'gasoline' of crop growth, P&K are more like the tires and paint. Cars will run with scratches and dings in the paint job -- even low tires cannot stop a determined motorist. But without gasoline, drivers will never even get out of the driveway. P&K do not necessarily have to be recharged every year, but a robust, diverse nutrient profile will always yield the heftiest harvest.

Even in the off season, nitrogen producers like AGU, CF and TNH are consistent performers. Wide margins on soft natural gas keep operating expenses low, and year-over demand is a guarantee. Farm production trends suggest this will continue into the foreseeable future, and nitrogen stocks are expected to continue to do well.

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