Fertilizer Companies On The Rise

Tight corn supplies might get farmers spending on fertilizer again.

Now not even dirt is safe from the financial crisis.

In an effort to cut costs amid tight credit conditions and weak commodity prices, farmers haven't been laying crop nutrients on as thick--much to the dismay of fertilizer companies. But with price incentives on the horizon with expectations for strained corn supplies, fertilizer companies are enjoying an enriched outlook as farmers scramble to boost yields on the most nutrient-demanding crop

"Corn is by far the most fertilizer intensive of the major row crops, and rising planted acreage translates directly into stronger demand for each of the primary fertilizer nutrients," said J.P. Morgan analyst Jeffrey Zekauskas.

Mosaic ( MOS - news - people ) shares gained 97 cents, or 1.9%, to $51.30, Agrium ( AGU - news - people )'s stock added $1.26, or 2.7%, to $48.18 and CF Industries Holdings ( CF - news - people ) added $2.07, or 2.7%. to $79.75 during Friday's trading session.

According to Morgan Stanley analyst Vincent Andrews, cutting back on fertilizer doesn't actually eliminate costs, it merely delays them since the longer nutrients are restricted, the more fertilizer is needed to reverse soil depletion. That could mean a surge in fertilizer sales as farmers quickly stock up on the supplies needed to produce a bountiful corn harvest.

Farmers are likely waiting for nutrient prices to come down, but, as Andrews points out, that may not make much sense as corn prices rise.

"We believe that current retail potash prices are $39 per acre for corn application. Assuming that prices decline by 50% between now and next fall or spring, farmers could save $20 per acre by deferring application. However, at $4 corn, should farmers' yield decline by 5 bushels, there would be no net savings," Andrews said, adding that farmers risk prices not falling as much as hoped.

On Tuesday, the USDA revised down its estimates of corn stocks by 100 million bushels to 1.6 billion bushels, putting year-over-year supplies lower even as demand is expected to increase by 3.5% from a year ago. (See "Supply Squeeze Seen On U.S. Crops.") Corn production estimates could be even lower if stringent fertilizer applications lower yields even more than expected. Weather could also further weaken yields.