Retail business outlook
As discussed in an earlier in this series, ValueAct Capital added a stake in Agrium last month. It thinks the company’s retail business is a “stable gem.” The fund’s CEO, Jeffrey Ubben, said in an emailed response to Bloomberg that it believes Agrium will benefit from a potential rebound in corn, soybean, and wheat prices.
In this part of the series, we’ll focus on Agrium’s outlook for the retail segment. The segment saw “challenging agricultural market conditions” during 3Q14.
A report on the Market Realist website in July noted that Agrium’s retail segment slowed down, but remains stable. Since 2006, Retail’s gross profit has been growing at a compound annual growth rate (or CAGR) of 26.8%. However, over 2012 and 2013, the year-over-year (or YoY) growth rate decreased to 8.4% and 5.5%, respectively.
Nutrient demand lower due to record crop yields and fall in crop prices
Agrium’s management said on the latest earnings call that a record crop yield in the U.S. and worldwide led to a significant drop in crop prices.
A crop production report released by the U.S. Department of Agriculture (or USDA) in October forecast record soybean and corn production. The record is a result of the nearly perfect growing conditions. At 14.5 billion bushels, 2014 corn production is forecast to be the highest production on record for the U.S.
Agrium’s management added that they expect the total North American crop nutrient demand in the fall season to decline ~1%–3% in the 2014–2015 fertilizer year. They said that if volumes are delayed more and are shifted to the spring, this could lead to “another tight logistic situation” in the spring season.
Management said that nutrient application rates are expected to remain unchanged due to a significant nutrient removal from the soil. The nutrient removal is a result of record yields.
However, there could be a slight decline in phosphorus (or P) and potassium (or K) application rates. These trends could also impact Agrium’s main peers like PotashCorp (POT), CF Industries (CF), and Mosaic (MOS). These companies are part of the VanEck Vectors Agribusiness ETF (MOO).
EBITDA expected to be in line for the second half of 2014
Agrium said in an update in October that Retail earnings before interest, tax, depreciation, and amortization (or EBITDA) in the second half of 2014 is expected to be in-line with EBITDA for the same period last year.
The company anticipates that its “broad geographic exposure, diversified portfolio of inputs for a wide variety of crops, and continued proprietary product growth will largely offset the impact of lower grain prices and lower crop protection product sales.” It also noted that Viterra Retail usually sees operational losses in the second half of the year.
In the next part of the series, we’ll discuss Retail’s growth catalysts.