Key Takeaways for Nutrien Stock:
- Canadian income investors benefit from Nutrien’s advantageous access to potash and nitrogen, increasingly important minerals as farmers seek to counter the effects of climate change.
- Potash prices have fallen far from pandemic highs, but we expect farmers around the world to be looking to increase yield as arable land fails to keep up with food demand.
- Nutrien stock investors should monitor risks related to oversupply, weather, and genetically modified crops affecting fertilizer demand. The company is, however, diversified with a leading presence in agricultural retail in North America.
Andrew Willis: How many stocks can generate over 40% earnings (EBITDA) on products sold at cyclically low prices?
Canadian fertilizer giant Nutrien can, where a rising demand for food intersects with agricultural ingenuity. With a product that increases water retention, which is useful in draughts, improves crop yields, and affects the flavour and nutrition of plants, Nutrien has the precious ingredient for the future of food: potash.
These minerals and salts found in abundance in Canada may not be making headlines, as potash prices sit around 70% below their highs of April 2022. However, Seth Goldstein, an equities strategist for Morningstar Research Services, says he expects strong demand from farmers who need to boost their crop yields, which will help push up potash prices.
Nutrien Stock Stands Out With a Low-Cost Fertilizer Source
Even while long-term trends may show rising demand for potash, oversupply is a possibility for investors to consider. However, the availability of the material in Canada also translates to lower mining and processing costs versus peers and a narrow moat for the business. Nutrien also has a cost advantage in nitrogen, but we don’t believe its retail businesses, which we expect to make up around 40% of the company’s midcycle profit, warrants a moat in the fragmented retail segment.
That retail segment, however, may prove particularly useful to the company as it sells proprietary seeds to farmers so they can get ahead of genetically modified crops that while not organic, may use less fertilizer.
For Morningstar, I’m Andrew Willis.
Nutrien Stock Bulls Say
- Declining arable land per person will force growers to be more productive and should drive growth in a variety of crop inputs.
- Potash application rates in China and India lag scientifically recommended levels. With these two countries working to secure food supply, increasing potash application is a relatively pain-free way to raise crop yields and food production, which will result in higher demand growth for potash.
- Fertilizer prices will rise as demand will outpace supply in the coming years.
Nutrien Stock Bears Say
- Volatile pricing and demand for crop nutrients have characterized Nutrien's business during the past few years, highlighting the cyclical nature of the company's cash flows.
- Long-term oversupply threatens to reduce the marginal cost of production in potash and lower long-term prices. This includes BHP's Jansen greenfield project and brownfield expansions from existing producers.
- Fertilizer prices have fallen below midcycle levels, which will weigh on Nutrien's profits.
The author or authors do not own shares in any securities mentioned in this article.
