Fitch Ratings published a special report entitled ‘Agricultural Suppliers Harvesting Ag Boom Benefits’ outlining the advantageous position of North American agrichemical issuers. Several years of robust U.S. farm economics in combination with incentives to plant more corn have allowed North American agrichemical suppliers to benefit. Demand is very robust for fertilizer, seeds and productivity in light of historically high planted acres.
Furthermore, North American nitrogen fertilizer producers are benefiting from the shale gas boom. Natural gas, which is the primary feedstock and largest cost component for nitrogen fertilizer, is abundant and cheap. Diammonium and monoammonium phosphate producers are also benefiting, especially if they are backward integrated ammonia producers using natural gas.
Agrichemical companies have generated substantial free cash flow in recent years and accumulated cash balances. As a result, share buyback programs have either started and/or increased. With nowhere for accumulating cash to go, companies have turned to increasing dividends and share buyback programs, as alternate uses for funds including acquisitions are sparse. Share buyback programs are generally easier for companies to reduce or stop than dividends, but agrichemical producers have cut dividends when under significant earnings pressure.
Record sums of cash have been earmarked for additional production, brownfield and greenfield expansions, and research. There is some concern that supply could outrun demand. Lofty fertilizer prices in the recent past coupled with inclement weather has resulted in some demand destruction. This in turn has pushed fertilizer prices lower and lowered returns on new investment and given pause to some capital expansion plans.
The European potash cartel breakup could pressure prices. Potash production volumes and sales could ramp up next year which would pressure prices with Uralkali announcing its decision to leave its marketing arrangement with Belaruskali. Total potash production capacity is limited and freight costs provide geographic advantage, so even high-cost potash producers are expected to remain profitable but less so. Current ratings incorporate expectations for lower potash prices than last year’s highs.
Financial risk within the industry is expected to remain low as long as strong macro agronomics prevail. The full report ‘Agricultural Suppliers Harvesting Ag Boom Benefits’ is available on the Fitch Ratings’ Website.