Bountiful Times For Fertilizer Sector

Skyrocketing prices have incited rice riots and hoarding, but fertilizer companies aren't complaining. The scarcity has farmers scrambling to increase their crop yield, making for fruitful times for fertilizer producers.

Fertilizer companies like Potash (nyse: POT - news - people ), Bunge (nyse: BG - news - people ),Terra Nitrogen (nyse: TNH - news - people ) and CF Industries (nyse: CF - news - people ), which posted skyrocketing first-quarter results Thursday, are reaping the benefits, raising prices and production.

Potash's first-quarter net earnings nearly tripled to $566.0 million, or $1.74 a share, plowing through analysts' estimates for earnings of $1.52 a share. Sales rose 58.3% to $1.9 billion from $1.2 billion, surpassing the $1.7 billion in sales expected by analysts polled by Thomson Financial.

The fertilizer and feed products company raised its second-quarter earnings forecast to between $2.20 and $2.50 a share, compared with analysts' estimate for earnings of $2.30 a share. For 2008, Potash now projects earnings between $9.50 and $10.50 a share from prior guidance of between $6.25 and $7.25 a share. Analysts had predicted full-year earnings of $8.80 a share.

"The pressure to increase global food production continued to drive demand for potash, phosphate and nitrogen and pushed prices for all three nutrients to new heights. As a result, each segment contributed record gross margin and raised total gross margin for the quarter to $856.0 million, up from $369.7 million in the last year's first quarter," the company said.

Potash said it invested $4.5 billion in projects at its Saskatchewan and New Brunswick facilities to raise operational capacity to a total of 15.7 million tons by the end of 2012.

Bunge's sales increased 70% and net income shot up to $289.0 million in the quarter from $14.0 million a year ago, more than twice as much as Wall Street had been expecting. The food and fertilizer company increased its 2008 earnings guidance by $150.0 million to between $7.10 and $7.40 a share. Analysts had been expecting earnings of $6.85 a share.

Terra Nitrogen's first-quarter net earnings more than doubled to $81.6 million and sales rose 36.1% to $174.5 million on strong U.S. demand for nitrogen.

Reporting after Thursday's closing bell, CF Industries said net earnings nearly tripled, driven by higher prices for nitrogen and phosphate. Profit rose to $158.8 million, or $2.77 a share, from $57.2 million, or $1.02 a share. Sales increased 41.3% to $667.3 million.

"The U.S. entered the spring season with low grain inventories and strong demand for corn, soybeans and wheat. That is expected to keep prices for crops at record or near-record levels throughout the season," said Chairman Stephen Wilson, who expects continued demand to drive second-quarter results as well.

Despite the strong results, Bunge was the only one of the four to close up Thursday, gaining 87 cents, or 0.7%, to $120.56. Potash shares lost $10.22, or 5.0%, closing at $193.90, Terra Nitrogen shed $2.68, or 1.8% to $145.52 and CF Industries' shares were down $10.48, or 7.1%, closing at $137.61.

Analysts suggested that investors may have overbought fertilizer shares and are now looking to bail.

The rising global demand for food is largely a result of increased wealth in developing countries. Populations are growing, and more can now afford to consume a greater quantity and quality of food--namely, meat, which has increased the demand for cereal-based animal feed. Increased biofuel production has also pressured commodity prices.

So far, the voracious demand for fertilizer has allowed companies to raise prices to offset higher raw material costs but, according to Bunge Chairman Alberto Weisser, a high-price environment isn't without its challenges.

"It creates demands on working capital and leads to inflationary pressures that can influence national policy decisions. And though farmers are generally benefiting from higher crop prices, their profitability depends on the relationship between these prices and those of agricultural inputs, such as fertilizer, which are rising," he said.