Growth in Fertilizers

Nick Hodge Founder and President, Outsider Club

Nick Hodge is a leading growth and income specialist, often focused on contrarian opportunities. Here, the editor of Like Minded People discussing the agriculture sector and the long-term potential for leading players in fertilizers, which are used to increase crop yields.

Steve Halpern:  Our guest today is Nick Hodge, one of the smartest advisors around and editor of Like Minded People.  How are you doing today Nick?

Nick Hodge:  I'm well Steven.  Thanks for having me.

Steve Halpern:  Now your newsletter is well-known for providing in-depth analyses of opportunities that are often out of favor or under followed by Wall Street.  Could you tell our listeners a little more about Like Minded People and your underlying investment strategy?

Nick Hodge:  Yes, Steven.  We pride ourselves on being contrarian and have had good success investing with that philosophy over the past few years.  I focus mostly on a small group of sectors including energy, metals, and minerals, and then agricultural things like land, food, and water.  

There is some natural overlap there given that most of those things are resource-based and we also have a pretty strong income bent as well so we like dividend paying companies that also operate in those sectors I just mentioned.

So the goals are really long-term growth from quality companies and contrarian sectors intermixed with income producing investments in those same sectors.

Steve Halpern:  Now you alluded to your long-standing interest in the agriculture sector and that's what we're going to talk about today.  This is an area that's had a few difficult years but you suggested things may be poised for better times ahead.  Could you expand on that?

Nick Hodge:   Agricultural commodities have fallen hard the past few years so corn that cost $8 per bushel in 2012 now costs $3 per bushel.  Soybeans that were $17 a bushel in 2012 are now $10 a bushel.

Wheat that was $9 is now $4 and so on so what happens when those farm crops are fetching low prices is that farmers don't get paid as much and so net farm incomes have fallen some 55% in the past few years.

What that means is farmers don't buy as many farm things like tractors and fertilizers and pesticides that they need to produce more and healthier crops because there is no need to produce more and healthier crops because the prices are low.

But low prices beget higher prices so not only have soft farm commodities fallen since 2012 but corn is actually the cheapest it's been in seven years and wheat is the cheapest it's been in 10 years so we've started to see a bit of consolidation in the sector.  

Similarly, fertilizer prices have fallen, like nitrogen and potash -- with the exception of phosphate -- as farmers have had no incentive to increase crop yields to potash prices for example which is a fertilizer that farmers apply to crops to increase yields has fallen from $900 a ton a couple of years ago to $150 a ton now, I think.

But just like we've seen with other commodities this year, like gold and other hard commodities, I think you'll start to see agriculture start to bottom out over the next year or so.  

Mosaic (MOS) just suspended potash production at its Colonsay mine in Canada earlier this summer and so that's a good sign for an approaching bottom.

Steve Halpern:  Now one factor that portends better times ahead in your view is the large number of deals that have been occurring and in fact just a week ago you issued a buy recommendation for your subscribers for Agrium (AGU) and the stock just has risen very sharply in just the past few days based on some news.  Could you explain what's going on in this situation?

Nick Hodge:  Over the past few months there have been some significant mergers and acquisitions announced in the agricultural space so Bayer (BAYRY) has offered to buy Monsanto (MON); Dow Chemical (DOW) and DuPont (DD) have combined.  

China National Chemical is trying to buy Syngenta (SYT) and Mosaic is trying to buy Vale's (VALE) South American fertilizer assets so in the past few months China has also entered the market to buy fertilizer which it waited a long time to do and China will become, for the first time ever, a net importer of phosphate over the next few years.

As you said, just this week both Agrium and Potash Corp. of Saskatchewan (POT) were halted on news that they're in merger talks.  That would create a $25 billion fertilizer and farm store powerhouse so Potash is the world's biggest fertilizer company by capacity.  

They produce a range of fertilizers from nitrogen and potash to phosphate and Agrium is the largest farm retail company in North America.

So both divulged that they're in preliminary stages for a potential merger although no agreement has been reached yet though when stocks resumed trading both of them were up sharply so I think the deal makes sense for both of them.  

It would give Potash a direct channel to retail sales in the US via Agrium's brick-and-mortar stores and they'd corner something like 60% of the potash market and a third each of the phosphate and nitrogen market in North America.  

They might get a little of push back from the regulators but the market seems to be thinking that the deal is good and yes I did get a little bit lucky recommending Agrium a few weeks ago.  We got in at under $91 per share and the stock hit $100 yesterday on the potential deal.

Steve Halpern:  With that short-term gain in place is it still something that you would recommend for investors taking a long-term view?

Nick Hodge:  I do — and exactly because it's a long-term view. I don't think stocks get overvalued in a day when you're talking about a holding period of three to five years so yes I do still view Agrium as a buy.

Steve Halpern:  Now also within this space, you have what you referred to as your phosphate play which is a company called Arianne Phosphate (Toronto: DAN).  Could you tell us a little about this story?

Nick Hodge:  Yes, it's a good one.  Arianne's Lac a Paul phosphate project in Quebec is widely viewed as the best undeveloped phosphate asset in the world.  

Phosphate is one of the three main types of fertilizer that farmers apply to crops so Arianne's project is fully permitted and it's beginning down the road to construction financing and securing equipment right now.  

It's a massive project with projections showing that it could supply some 3 million tons of phosphate per year for the next four decades and if it goes into production it would make Canada the fourth largest global producer of phosphate overnight.  

As I mentioned a little bit earlier, phosphate prices have largely held up relative to other agricultural commodities and have actually risen eight of the last nine quarters.

Not only that, but Arianne's project hosts a high grade phosphorus pentoxide product and what that means is that it's a premium to other phosphorus and phosphates that are coming on the market so it's projected to fetch a premium.  

The net present value of that project is $2 billion while the stock only trades at a $70 million valuation so I think it's significantly overlooked and undervalued because once it goes into production it would be generating something like $600 million annually in revenue.

Steve Halpern:  Now you're also a fan of a company called CVR Partners (UAN), which is a play on nitrogen.  What's the attraction in this situation?

Nick Hodge:  So nitrogen would be the third fertilizer in addition to potash and phosphorus and CVR Partners is a limited partnership that was formed by CVR Energy (CVI) to own, operate, and grow its nitrogen fertilizer business.  It has a plant in Coffeyville, Kansas that's the only urea ammonium nitrate — that's UAN; that's the product it produces.

It's the only operation in North America that uses a petroleum coke gasification process as part of its manufacturing process whereas other manufacturers use a high cost natural gas process and so that's why it has an advantage and that's why I like it.  

It remained profitable through the recent downturn and it just completed a merger with Rentech Nitrogen Partners (RNF) so that makes the company the second largest producer of UAN in North America and it yields a robust 11.5% to boot.

Steve Halpern:  So these three companies together focus on three different fertilizer areas; phosphate, nitrogen, and potash.  Would you recommend that a long-term investor seeking exposure to this market simply buy a package of all three?

Nick Hodge:  I think so. You can do that by buying the three names we discussed today or you can own a basket of companies that produce fertilizer and other agricultural things in an ETF that give you exposure to many of them at once although with a trade-off of a management fee so there are multiple ways to do it.

Steve Halpern:  Is there a specific ETF an investor should check out or are there a number of them for people to look at?

Nick Hodge:  Yes, there is a Global X ETF (SOIL) that holds a basket of related equities and securities that can give you exposure to the sector.

Steve Halpern:  Again our guest is Nick Hodges, editor of Like Minded People.  Thank you so much for your time today.

Nick Hodge:  Thanks Steve.  Appreciate it.

By Nick Hodge, Editor of Like Minded People