Why Agrium’s wholesale margins are good but could be better
Intrepid Potash (IPI) only produces potash, Mosaic (MOS) only produces potash and phosphate, and CF Industries (CF) only produces phosphate and nitrogen. Agrium’s (AGU) wholesale business, similar to Potash Corp.’s (POT), produces all three types of fertilizers. Agrium and PotashCorp are the only two companies in the VanEck Vectors Agribusiness ETF (MOO) to offer all three types of fertilizers. Together, these companies account for over 11.7% of the ETF.
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With total 2013 gross profit of $1.1 billion, the Wholesale segment generated 58.6% of Agrium’s 2013 EBITDA. By far, Nitrogen is the largest segment within wholesale, followed by Potash and then Phosphate. While the company does supply some of its production to its retail business, most wholesale sales—83.2% in 2013—sell to third parties.
Agrium has potash, phosphate, and nitrogen production facilities in North America. It also has many distribution facilities all around Europe and 26% participation in a Nitrogen facility in Egypt plus 50% participation in a Nitrogen producing company in Argentina.
Good margins, but could be better
Since PotashCorp also produces all three types of fertilizers, it serves you well for comparison purposes. In 2013, Agrium has wholesale gross margins of 34.3% compared to PotashCorp’s 38.2%
Looking into the numbers, we find that PotashCorp sells all three types of fertilizers at higher margins. While the difference in Nitrogen margins was of only 1.1% in 2013, PotashCorp margins for Potash and Phosphate were 5.2% and 4.5% higher, respectively.
Fertilizer prices drive wholesale prices
Historically, Nitrogen has been the company’s most influential segment. Since 2007, Nitrogen has averaged 57.9% of Agrium Wholesale’s gross profit, followed by Potash (28.7%), and finally Phosphate (13.5%).
Growth in the fertilizer wholesale business is highly driven by industry fundamentals. Price has been the primary driver of earnings over the last few years. After the financial crisis, Agrium started a fast recovery in its wholesale business. But over the past two years, wholesale profits have been decreasing. This was mainly due to lower fertilizer prices, which many analysts believe will stay at present values.
While prices keep dropping, Agrium Wholesale will keep bringing the share price for Agrium down—even though this might be partly offset by growth in Retail.
In the next parts of this series, we’ll look at each of these fertilizers separately.