Fertilizer Stocks Boosted by Global Demand, Ethanol Subsidies

Wednesday December 12, 9:35 am ET By the tickerspy.com Staff

Global factors have come together to boost the fortunes of fertilizer producers this year. Millions of acres in the U.S. have been turned over to corn production thanks to subsidies promoting ethanol. In Asia, growing affluence has led to an increase in demand for meat, which in turn has driven demand for grain to feed livestock

The combination of factors has led the price of food to hit historic highs. This week, The Economist said that its food price index "is now at its highest since it began in 1845, having risen by one-third in the past year." While this has made the going tough for many food companies and restaurants as the price of ingredients has risen, it has been a boon for fertilizer companies, as farmers have been tasked with upping their yields in order to meet demand.

Potash (NYSE: POT - News), a Canadian firm specializing in potash, a form of potassium carbonate, as well as nitrogen and phosphate, all of which have agricultural applications, is the biggest company in the sector. Thanks to a limited amount of production globally, potash is the company's most profitable product. Potash's potash comes from its mines in Canada, and the cost of replicating these massive mines represents a serious barrier to entry. Potash producer Mosaic (NYSE: MOS - News) is the industry's other giant.

High oil prices, which keep demand for biofuels high, have been another recent catalyst for fertilizer firms, while Canadian producer Agrium's (NYSE: AGU - News) $2.16 billion offer for agricultural-products distributor UAP Holding (Nasdaq: UAPH - News) earlier this month has helped confirm the positive sentiment toward the sector.

Several institutional investors are locked into the bullish market for fertilizer firms. Hedge fund Dawson Herman Capital Management, which "has traditionally invested in the growth sectors of the U.S. economy," according to its website, has substantial exposure to the sector. Its top-three (and four of its top seven) U.S-listed equity holdings are fertilizer producers. During Q3, the firm added shares in Terra Industries (NYSE: TRA - News), a firm that produces nitrogen and methanol products for agricultural and industrial markets, and CF Industries (NYSE: CF - News), which operates in two segments, nitrogen fertilizers and phosphate fertilizers. The firm also slightly trimmed its stakes in Potash and Mosaic.

Dawson also held shares of companies in other sectors, with its largest equity holding outside the fertilizer industry being a 719.7k stake in global engineering and construction firm Foster Wheeler (Nasdaq: FWLT - News). A list of the other companies Dawson is investing in is available at tickerspy.com.

Another hedge fund, Peconic Partners, which "focuses on combining a top-down view of the markets with risk management and strong fundamental stock selection," according to its website, is also a big holder of fertilizer producers' shares. Its top-two holdings are Mosaic and CF, but it also has large stakes in Potash and Agrium. Outside of the fertilizer sector, Peconic's largest stake is in McDermott International (NYSE: MDR - News), an engineering and construction firm serving the oil and gas industry. A list of the other companies Peconic is investing in is available at tickerspy.com.

Potash proved to be the most popular fertilizer company among Pro investors in Q3. Among the 26 investment firms holding stakes in the company, the largest was a 19.2 million-share stake held by investment advisor Capital Guardian Trust. Meanwhile, Potash is also the favorite fertilizer stock among tickerspy members, though Terra Nitrogen (NYSE: TNH - News), an incredibly volatile master limited partnership (MLP) with a focus on nitrogen fertilizer products, is popular as well.