Two Reasons CF Looks Headed for Big Profits

A Rare Bump for a Buyer…

What do a Wall Street analyst and a corn farmer have in common? They both know that fertilizer prices have fallen off a cliff.

Last year, a big increase in the demand for nitrogen-based fertilizers led the price of fertilizer and the value of the companies that make it to triple-digit gains.

But when the commodities market cooled, fertilizers were no exception. Since then, the prices of fertilizer – and the companies that produce them – have dropped straight back to Earth.

That’s why CF Industries’ (NYSE: CF) recent announcement made such big news. Amid collapsing share prices and notoriously tight credit for mergers and acquisitions, CF Industries announced Friday an offer to buy out smaller-player Terra Industries (NYSE: TRA).

Terra Industries popped 27% on the news, and CF Industries rose 2.73%. Normally, a buyer taking on a pile of debt to finance a deal that may or may not work out will see a little bit of a decline.

But two things are at play here:

1) The market thinks this is a good fit.

CF Industries expects to save $100 million over two years by combining forces. That’s nothing to sneeze at for a company that would have combined revenues just over $6 billion. This puts CF in position to maintain a much more competitive position over bigger players like Potash Corp. (NYSE: POT) and Terra Nitrogen (NYSE: TNH).

2) The future for fertilizer will be like the past.

Unfortunately, food production is going to be a major global problem for the next few decades. It will quite possibly be the biggest problem our species will ever face. And one of the only ways currently available to increase production is to load up on powerful nitrogen fertilizers. And since supply is finite, long-term prices have only one way to go.

Fortunately for CF Industries and other fertilizer companies, this spells profits. And for CF, the purchase of Terra Industries has likely improved their position to compete in that niche