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Why Did Agrium’s Wholesale Segment’s Gross Margin Spike?

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Wholesale segment’s gross margin

Previously in this series, we saw how Agrium’s (AGU) potash shipments lifted the overall Wholesale segment shipments. With that, it is not surprising that it contributed toward the increased gross margin during 4Q15.

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Gross margin spikes

Agrium’s Wholesale segment’s gross margins significantly increased from 14% in 4Q14 to 36% in 4Q15. This was primarily driven by an increase in gross margins in the Potash segment. The Potash segment had an outage in 4Q14 for capacity expansion. Because its operations are back up, the potash shipments also rose, as we saw in the previous part of this series. The cost of production was lower due to a higher production rate, according to the company.

In addition to an increase in potash shipments, cash costs were also lower. The company stated that the cash cost of potash was $64 per ton compared to the previous $96 per ton, which makes it apparent why the gross margins expanded for the company.

Agrium’s Nitrogen segment’s gross margins also increased during the quarter to 21% from 13% in 4Q14. The company stated that the Chinese exports for urea were down by 25% during 2H15. The price of natural gas, a key input cost for nitrogen fertilizers, had also significantly declined during 4Q15, hovering around $1.5 per MMBtu at Henry Hub. We believe that lower natural gas cost, coupled with the decline in Chinese exports, helped the company’s Nitrogen segment.

Outlook

For 2016, Agrium (AGU) stated that it expects the cash costs of potash production to be about 10%–20% lower as the plant ramps up. You may also access Agrium through the VanEck Vectors Agribusiness (MOO) ETF, which invests in 3.8% in the company. MOO also holds 7.7% of its portfolio in Monsanto (MON), 8.9% in Syngenta (SYT), and 4.6% in Potash Corporation (POT).

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