Fertilizer Profits in the Pipeline?

Both Terra Nitrogen (NYSE: TRA) and spurned suitor CF Industries (NYSE: CF) told pretty much the same story when it came to fourth-quarter results.

Nitrogen (and in CF's case, phosphate) product prices were super strong compared to the prior year, even after accounting for the crash late in the quarter. Buyers, both nervous about macro conditions and anticipating further price weakness, went on strike, sending volumes plummeting. Terra's North American ammonia sales volumes dropped 30%, while CF's phosphate exports somewhat masked a 46% domestic sales plunge.

Along with other fertilizer firms such as Mosaic (NYSE: MOS), Agrium (NYSE: AGU), and PotashCorp (NYSE: POT), the two companies were quick to idle capacity in response to the demand drop-off. Terra idled two facilities in December, and CF entered 2009 operating its phosphate segment at only 40% of capacity.

I think the major difference here is the tone struck by the two firms with regard to the outlook for spring. There are several big questions looming regarding the overstuffed supply chain, the pricing standoff, and the size of the corn crop, to take but three.

Terra sounded quite optimistic on several counts. The firm argued for improving fundamentals, supported by a better supply/demand balance in nitrogen and lower input (i.e., natural gas) costs. The past month's pick-up in order activity was cited to support this sunny view. Terra is also restarting one of the idled facilities.

CF was more circumspect. The firm wouldn't come right out and say that orders are up, though they admitted as much in a roundabout way when pressed by one questioner on the conference call. CF is perhaps more cautious because of its phosphate segment, which faces "more near-term uncertainty" on account of its huge inventory overhang. Still, CF asserted that the big questions mentioned above are really just a matter of timing, rather than levels of demand.