THE US has been experiencing a drought extending across its Southern and Midwestern states, negatively affecting crop yields for farmers. Crops such as soybeans, wheat, rice and corn have felt the heated wrath of the drought, resulting in an increase in the price of these crops, and food on a whole. The drought, coupled with an increasing world population, further extends the demand on the limited supply of these cash crops. Based on UN reports, the world's population is expected to grow by 2.6 billion over the next 38 years; from 6.97 billion today to about 9.2 billion in 2050.
With growing demand for grains coming from regions such as China, Russia and South America, how can farmers capitalise on this demand and the higher prices being offered for their crops? Fertilisers would be one of the best answers to this question. Farmers can use the ammonia and nitrate rich products to help to mitigate the shortfall of nutrients in the soil stemming from the dry conditions, and increase crop output at the same time.
When we talk about fertilisers, corn requires special mention as it is one of those crops that require a lot of nutrients. A strong market for corn thus directly translates into higher need for fertilisers. With this in mind, the savvy investor can capitalise on this and invest in both companies that focus on fertiliser production and those with diversified operations which include fertilisers production. Companies such as CF Industries Holdings, Terra Nitrogen Company LP, CVR Energy and BHP Billiton all have an interest in fertilisers.
Terra Nitrogen is a producer of nitrogen fertiliser products, and its main products are anhydrous ammonia and urea ammonium nitrate solutions. The company has recorded stable growth in profits for the year and its share price has increased by 14.2 per cent yearto- date. Moreover, it has appreciated 29.17 per cent since the beginning of the US drought. Terra has a Price to Earnings (P/E) Ratio of 13.6 and also offers a regular dividend. Its current dividend yield is 7.7 per cent based on its August 27, 2012 close price of US$215.28.
A company which offers diversity as it operates in the energy and fertilisers industries is CVR Energy. It is an independent petroleum refiner and marketer of high value transportation fuels in the United States. Through its majority-owned subsidiaries, CVR acts as an independent producer and marketer of nitrogen fertiliser products in North America. In the first six months of 2012 the company posted a 20.32 per cent increase in operating income generated from its nitrogen fertiliser segment to 67.5 million. For its second quarter of 2012, the energy company reported a 23.9 per cent increase in Net Profit to US$154.7 million. For the year, CVR has continued to post strong earnings reports and has gained approximately 19 per cent since the beginning of the drought and has a P/E ratio of 8.28 (as at August 27, 2012).
Even though fertilisers can increase output, 20 per cent to 40 per cent of the world's potential crop production is already lost annually because of the effects of weeds, pests and diseases, according to the Food and Agriculture Organisation of the United Nations. This makes pesticide companies an interesting mix to help to increase the output of a portfolio, as farmers worldwide turn to these products to assist in maximising their crop yields.
Bayer CropScience, a subsidiary of Bayer AG, holds global leadership positions in crop protection and nonagricultural pest control with annual sales of approximately EUR 6.8B. The company's share price has jumped 19.52 per cent year-to-date and has a P/E ratio of 19.88. Bayer also offers a 2.76 per cent dividend yield. (All figures are as at August 27, 2012)
Despite the rains that the Tropical Storm Isaac brought to the US, the agricultural market will continuously face increasing demand as the world's population grows. Food is a necessity for life and with a fixed amount of land to produce crops and related byproducts, farmers will always have to look for a means to up their crop yield. This could potentially lead to increased earnings for companies involved in the production of fertilisers and pesticides, as the demand for crops will translate into demand for their products.
Emile Wallace-Waddell is a Research Administrator at Stocks and Securities Ltd and can be contacted via ewallacewaddell@ sslinvest.com