Farmers Feed Fertilizer Maker's Top Line

LAST WEEK IN a write-up of tractor maker Deere (DE) I noted that the price of corn has more than doubled since 2004. Yet on Monday the Department of Agriculture reported that America's farmers are expected to plant 8% less corn this year. That sounds counterintuitive; higher prices, any economics teacher will tell you, are supposed to act as an incentive to produce more.

But other crop prices are inflated, too, and corn is costly to grow. A bushel of corn sells for about $5.65 and a bushel of soybeans around $12. Yet it takes 1.5 to 2.0 pounds of fertilizer nutrients to grow a bushel of corn, vs. 1.0 to 1.5 pounds for a bushel of soybeans, according to the Fertilizer Institute. Those nutrients, like nitrogen, phosphorus and potassium, have soared 130% in price since 2000. Industry experts cite five reasons for the run-up: surging demand for protein-rich foods in emerging markets; increased transportation costs; a subsidized corn-for-fuel effort in America; high prices for natural gas (a fertilizer feedstock); and a weak dollar, which raises the cost of imported fertilizer.

All this has done marvelous things for Calgary-based Agrium (AGU), a major fertilizer producer. This column called its stock a bargain at $15 and change in December 2003. It's about $62 now. The stock lost nearly 4% Monday on news of farmers forsaking corn for soy, since corn uses 43% of America's fertilizer. Soy planting is expected to increase 18% this year. Aside from the cost advantages, soy is said to be an excellent third-year rotation crop for corn farmers, since it replenishes nitrogen in soil.

Last year sales for Agrium surged 26% to $5.27 billion. Adjusted profit soared 161% to $441 million. The stellar year earned the company a spot in our Accelerating Sales Growth screen. It looks for companies whose sales have increased by at least 20% a year over the past three years, and by faster rates over the past year and past quarter. See the screen recipe for details on all the criteria and use SmartMoney's stock screener anytime to run the search for Yourself. It recently produced eight survivors from a starting database of 8,000.

Agrium has offered $2.65 billion for UAG, the largest retailer of stuff needed to run farms in the U.S. and Canada. Canada's competition regulators approved the deal in January. U.S. Federal Trade Commission approval is pending. Agrium says it's confident the deal will close this summer. That seems reflected in Wall Street's forecasts. Sales and profits this year are expected to increase 70% and 69%, respectively.

The growth puts shares at just 11.7 times this year's earnings forecast, well below the S&P 500 index median of 14.3. Remarkably, the stock carries a far more modest price/earnings ratio than when we highlighted it in 2003. Back then it sold for 19 times the current-year forecast. The low P/E suggests that investors believe the earnings on which the ratio is based are temporarily swollen by abnormally high fertilizer prices. Industry groups contend that prices aren't all that abnormal relative to other crop resources. The Fertilizer Institute notes that while fertilizer started the year 141% above its early 1990s price, the price of seed, farm machines and labor increased between 78% and 111% during that period, while fuel shot up 195%.