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A High-Yield Agriculture Play

06/18/2008 12:00 am EST


Bryan Perry

Editor, Cash Machine, Premium Income, Quick Income Trader, Instant Income Trader

Bryan Perry, editor of The 25% Cash Machine, finds a big producer of nitrogen fertilizer should profit from growing demand for food-and pays a fat dividend.

Terra Nitrogen Co. L.P. (NYSE: TNH) is a major US producer of nitrogen fertilizer products with its primary facility located in Oklahoma and other terminals in Nebraska and Illinois. In these plants, TNH manufactures the nitrogen products farmers use to grow the crops that feed the world.

TNH has an annual capacity for 2.2 million tons of TerraSol, its proprietary brand of urea ammonium nitrate solutions, the most versatile fertilizer. It also produces ammonia, which is the basic ingredient for most nitrogen fertilizers and many industrial products. The more corn, soybeans and wheat that are planted, the more nitrogen-based fertilizer that's needed.

The demand for nitrogen products has risen steadily, along with population growth, rising standards of living and increased demand for higher-protein food. As long as TNH can manage its natural gas costs (65% of the cost of manufacturing nitrogen and ammonia products), the company will maintain margins.

Supply of nitrogen is constrained by two factors: 1.It is very difficult to get approval for new nitrogen manufacturing facilities. 2.Natural gas prices are rising faster outside the US, which means foreign competitors who previously enjoyed lower natural gas prices no longer can bring in cheaper competitive products.

Farming experts expect there to be strong demand for fall fertilizer programs and, therefore, nitrogen prices to remain seasonally firm. And corn futures continue at levels that encourage farmers to devote much of their acreage to maize next spring. Simply put, more nitrogen-based fertilizer will be needed to keep up with growing world demand.

First-quarter 2008 results for Terra Nitrogen were huge. It posted net income of $81.6 million for the quarter versus $35.3 million for the same period a year ago. It also announced a cash distribution of $4.20 per share.

Be forewarned, though, that during the second quarter and beyond, the general partner, who currently owns 75% of TNH, will be getting a larger percentage of distributable cash flow as an incentive. Note, too, that TNH is a high-yield stock whose dividend will almost never be the same from quarter to quarter. And [the shares] carry a high level of volatility.

A recent US Department of Agriculture report [said] the US corn crop is in worse shape than a year ago. And that's typically a catalyst for corn futures to trade higher. The direction of the current agriculture trend is towards lower inventories of corn, likely loss of yields during the growing season because of hot, dry weather, and higher corn planting in the 2008/09 season because of rotation and higher corn prices.

Buy Terra Nitrogen Co. L.P. (TNH) up to $155 (it closed below $142 Tuesday-Editor), with a current yield of 11.6%. I'm looking for the stock to trade north of $170 in the next year as scheduled increases in corn plantings create strong pressure for higher nitrogen prices.

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