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Fertilizer companies are exposed very heavily to natural gas prices. The natural resource can take up more than 65% of nitrogenous fertilizers’ manufacturing costs. Thus, a decrease in natural gas prices is positive for companies manufacturing nitrogenous fertilizers while an increase is negative.
Natural gas price in the United States ended the year 2012 at $3.43 per mmbtu (million metric British thermal units) after reporting $9.52 during December 2005. This decrease of ~$6.00 per mmbtu was mainly driven by an increase in shale gas production that made it possible for firms to extract natural gas from previously unreachable areas. As a result of the production increase, inventory levels in the United States also reached a record high. For more information regarding natural gas inventories, and how they affect prices, please see “Why natural gas inventories affect energy stocks and ETFs.”
Lower natural gas prices have been a key driver for higher fertilizer margins in the past seven years, with relatively strong negative correlations of -0.62 and -0.55 to ammonia and urea. Between 2002 and 2009, the industry’s average margin for ammonia, a nitrogenous fertilizer, averaged $308. In 2012, the margin averaged over $700 per metric tonne.
The gradual increase in margins over the past seven years has contributed to higher enterprise and equity values of these companies. These companies include CF Industries Holdings, Inc. (CF), Agrium, Inc. (AGU) and Terra Nitrogen Company, L.P. (TNH). As natural gas prices are likely to remain low in 2013, these companies should continue to benefit. For those who wish to diversify investments across different firms in this industry, the Global X Fertilizers/Potash ETF (SOIL) is an option. As of December 28th, 2012, CF, TNH and AGU made up ~15.00% of the ETF.
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