Growth in Fertilizers

Focus: COMMODITIES

Nick Hodge Image 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.