The United States is a net importer
The United States is one of the largest producers of agricultural products in the world, but it’s not a key producer of nitrogen fertilizers because its cost to produce these products has historically been higher than the rest of the world’s due to expensive natural gas prices. While this is changing (since hydraulic fracturing and horizontal drilling have made it economical for energy companies to extract natural gas from areas previous deemed unprofitable and driven down natural gas prices), the United States isn’t expected to become a net exporter any time soon.
Domestic producers are at an advantage
As long as the United States remains a net importer, domestic producers will benefit—particularly those who are closer to the Corn Belt or the Northwestern part of the United States, as they get to enjoy a transportation advantage over the foreign supplies that come from the southern states. Their flexibility to accommodate changes in demand and their transportation advantage allow producers such as CF Industries, Potash Corp., Terra Nitrogen Company, and CVR Partners to sell at higher netback prices.
CVR Partners, for example, which has a facility in Kansas, recently said in its earnings call that the company typically enjoys a premium of ~$15 per ton of UAN price premium over prices listed in New Orleans. Terra Nitrogen Company, which has a plant in Oklahoma, also gets to enjoy higher selling prices.
Agrium primarily manufactures from four facilities in Canada, which it sells to Western Canada as well as the Northwest and Northern Plains regions of the United States. Nitrogen fertilizers produced through its Texas facility sell by pipeline to the U.S. Corn Belt.
CF Industries has a large fertilizer production facility in Louisiana, but it has a few assets around Mississippi, Oklahoma, and Canada as well. While Potash Corp. has a few plants in the United States, its primary nitrogen fertilizer facility is based in Trinidad. So—relative to CF, Agrium, Terra Nitrogen, and CVR Partners—Potash Corp. is at a disadvantage.
Investors should note that netback prices and earnings affect a company’s value, but that transportation costs generally don’t change significantly over time.
Interested in POT? Receive notifications on the latest research and sign up for a Market Realist account in one simple step: