Boom Not Over For Fertilizer Sector Melinda Peer, 07.24.08, 11:50 PM ET
Bunge
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Potash Corp
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Terra Nitrogen Co.
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Profits more than doubled for a crop of agribusiness companies that reported Thursday, but investors seemed unsure whether hefty guidance hikes were too good to be true.
The bullish outlooks seem to belie the idea that the world is headed for a sharp slowdown. While conditions in the United States and Europe seem weak, a lot of farmer are making bad bets if they are ordering fertilizers for crops that won't be wanted.
During Thursday’s conference call, Potash Chief Executive Bill Doyle said he didn’t see dwindling demand for potash, despite a fall in corn prices on the belief that Midwestern floods didn’t destroy as many crops as initially feared (see " Corn's Comeback, Thanks To Mother Nature").
“We have the opposite problem, which is we have so much demand it is exceeding current supply,” he said, adding that the trend is expected to continue through 2009. The company aims to boost capacity to 18.0 million metric tons, up from the 10.2 metric tons expected this year.
Commodity prices have soared in the past year as the world's population grows and becomes wealthier, enabling emerging middle-class consumers in developing markets to spend more on food. These consumers aren't only buying more food but also spending on higher quality nutrition like meat, which drives up grain demand by way of animal feed. According to Potash Corp. of Saskatchewan (nyse: POT - news - people ), corn prices surged more than 60.0% and soybean prices nearly doubled during the second quarter.
As a result, farmers are scrambling to boost crop yields and piling on the fertilizer, which restores nutrients that sapped out of the soil during the previous planting season. But Potash said global crop yields will need to reach record highs not only to meet growing demand but also to replace depleted grain stockpiles, which are down to less than two months of supply.
"That presents farmers with a significant challenge--one that becomes greater as population covers a larger portion of the world's agricultural spaces, leaving less land for food production," the company said.
Bunge (nyse: BG - news - people ), which manufactures oilseed products in addition to animal feed and fertilizer, boosted year-end earnings guidance by more than 60.0% on Thursday.
"While growth in demand for some agricultural products may soften slightly due to the sustained period of high prices, agribusiness margins should be solid. Edible oils should improve from its performance in this quarter," said Chief Financial Officer Jacqualyn Fouse, adding fundamentals in the company's fertilizer business are projected to remain strong. Bunge boosted full-year earnings guidance to between $11.60 and $11.90 from $7.10 to $7.40. Analysts had been expecting earnings of $9.16 a share.
Bunge said earnings more than quadrupled in the second quarter, soaring to $751.0 million, or $5.45 a share, from $168.0 million, or $1.30 a share, a year ago. The second quarter included $128.0 million in tax credits from a favorable tax ruling in Brazil. Earnings, adjusted to exclude non-recurring items, came in at $4.73 a share.
The results beat analysts' expectations for $2.27 a share; second-quarter sales of $14.4 billion, up 73.1% from last year, also surpassed the $13.3 billion in sales projected by analysts. Its shares closed Thursday down $2.25, or 2.3%, at $97.07.
Potash Corp. of Saskatchewan said higher prices for potash, nitrogen and phosphate helped profits more than triple, to $905.1 million, or $2.82 a share, from $285.7 million, or 88 cents a share, a year ago. Sales jumped 93.7%, to $2.6 billion, from $1.4 billion, in 2007's second quarter.
Analysts had predicted earnings of $2.61 a share and sales of $2.6 billion. The fertilizer-and-animal-feed company boosted year-end earnings guidance to between $12 and $13 a share, from $9.50 to $10.50, and it said third-quarter earnings will be between $3.25 and $3.75 a share. Its stock closed down 3.1%, or $6.26, at $194.43.
Terra Nitrogen (nyse: TNH - news - people ), a major U.S. producer of nitrogen fertilizer products, said second-quarter net income more than doubled, to $130.2 million, or $4.01 a share, from $57.1 million, or $3.02 a share, in the prior year. Sales surged 44.7%, to $256.7 million, from $177.4 million.
The company attributed the strong earnings to higher selling prices for nitrogen and soaring ammonia sales volumes, despite lower sales for some products as a result of flooding in the Midwest, which reduced U.S. corn planting by 6.0%. Its stock added 1.9%, or $ 2.10, to close at $ 110.14.
Anglo-Swiss agribusiness leader Syngenta (nyse: SYT - news - people ) also beat expectations with its half-year results on Thursday, and raised its earnings outlook right into 2009. Analysts said the company had until then been conservative with its forecasts. (See "Syngenta: A Place To Plant Investment")
