Why Agrium’s Wholesale Gross Margins Are a Cause of Worry



Wholesale gross margins

Agrium’s (AGU) Wholesale segment’s gross margin fell significantly from 32% in 3Q15 to 16% in 3Q16. This fall was primarily driven by a decline in gross margin across all NPK (nitrogen, phosphorus, and potassium) sub-segments. The nitrogen margin fell 27% YoY (year-over-year) from 44%. On a per-ton basis, nitrogen’s margin fell at $79, as compared to $171 in 3Q15, due to declining nutrient prices.

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Other sub-segments

In 3Q16, Wholesale’s potash margin fell from 79% in 3Q15 to just 2% as a percentage of potash sales YoY. On a per-ton basis, the potash margin fell to $3 per ton in 3Q16 from $108 per ton in 3Q15. The significant fall in potash prices hurt the company’s profitability in 3Q16.

Similarly, in 3Q16, the phosphate margin fell from 29% to 13% YoY. On a per-ton basis, the phosphate margin also fell YoY, from $115 per ton to $39 per ton.

What impacted margins?

The current weakness in fertilizer and crop prices (MOO) continue to affect the company’s margins, despite the ongoing strength in demand. The weakness in fertilizer prices has also impacted companies like Potash Corporation of Saskatchewan (POT), Mosaic (MOS), and CF Industries (CF).

These falling margins resulting from weak prices will continue to put pressure on higher cost producers, which may have to further reduce their cost of production or idle their plants. This initiative will likely bring the supply-demand equilibrium to a more sustainable price.

In the next and final part, we’ll discuss the outlook for Agrium for the rest of 2016.


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