'Extended cycle' for tight nutrient supplies: Agrium Situation expected to last 4 to 6 years, perhaps longer
Gina Teel Calgary Herald
Thursday, May 08, 2008. Amid a scenario of soaring fertilizer prices and gung-ho food production, Agrium Inc. said it expects the current tight supply of crop nutrients to last for four to six years, if not longer.
In theory, that's how long it could take before new facilities can be built to produce the nitrogen, phosphate and potash needed to catch up with global demand, Mike Wilson, Agrium's president and chief executive, said Wednesday.
"In practice, you usually wake up and there's a surprise, but we keep looking over our shoulder and we don't see that, so we think it's going to be an extended cycle," he told shareholders at Agrium's annual general meeting in Calgary.
Wilson said he doesn't expect global demand to fall off, but it will be a supply-driven change.
Commodity prices have skyrocketed in recent months as a growing population and rising incomes in Asia translate into better diets, which drives the need for more food and feed grains.
Improving crop yields is the only way to get around the high-cost, high-food inflation environment, Wilson said.
That's where Agrium, North America's third-largest fertilizer producer, comes in. Wilson said Agrium has the seed, chemical crop protection and nutrients to help the world address some of its hunger issues.
With the demand cycle in full throttle, Agrium, Canada's third-largest potash producer, also has plans to expand its potash business.
On Wednesday, Wilson said Agrium's board had just approved additional capital to accelerate the company's look-forward on greenfield facilities for potash.
Agrium has two options on that front in Saskatchewan, he said. The company can take its Vanscoy potash mine from two million tonnes to 2.9 million tonnes, over two stages commencing in 2012. The cost there would be around $500 million (all figures U.S.)
A greenfield potash project, also in Saskatchewan, of two million tonnes would come in around $2.5 billion, he said.
Also Wednesday, Agrium's $2.65-billion deal to buy UAP Holding Co., a major U.S. agri-retailer, closed.
The UAP deal creates North America's largest retailer of crop inputs and services. Last year, UAP's net earnings were $82 million.
The deal will boost Agrium's retail unit and transform its portfolio from nutrient-heavy to about 45 per cent nutrient, 45 per cent crop protection and chemicals and 10 per cent seed.
"It's a big acquisition for us," Wilson told reporters, noting Agrium will likely take a year to digest the UAP acquisition before looking at other big acquisitions, "unless something fell in our lap."
"We obviously look at small things all the time, and on the other front we're always entertaining opportunities," Wilson said.
The UAP deal is just the latest in a series of acquisitions Agrium's made as it works to stabilize its business base.
Agrium recently bought a 70 per cent stake in Common Market Fertilizers of Brussels for about $66 million US.
The deal -- expected to close in June -- marks Agrium's first foray into Europe, which will be a key end-market for product from Agrium's $1.2-billion nitrogen facility in Damietta, Egypt.
Construction in Damietta is currently shut down at the request of the local government, while Agrium manages community concerns, but Wilson said he expects the issues to be resolved soon.
All of these ventures will help Agrium ride out the next bottom of the cycle in nutrients -- which is a long ways out, he said.
"The secret in commodities is to continue to build that stable base, and as you cycle, and the cycle is a long ways out, you've got to be able to counter cyclic investing, and we're going to be very strong financially at the bottom of the next cycle," he said.
Shareholder Doug Fatum has held Agrium shares for about five years.
He said he's pleased with the performance thus far.
"As the charts read today, it shows proof of extremely good management and so forth, and I'm looking forward to the future," he said.
Agrium last week issued record earnings guidance for the remainder of the first half of 2008 of $3.15 to $3.45 earnings per share -- or $1.92 to $2.22 earnings per share for the second quarter.
Agrium shares closed down 21 cents to $86.54 on the TSX Wednesday.
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