CF Industries: Time to Take Some Profits

I decided to buy an agricultural stock so I ran through my financial modelling filter and wala, CF Industries appear to fulfil most of my criteria. Monsanto and Archer Daniels came close too. But CF Industries was the cheapest of them all. After holding them for 4 months, I finally took some handsome profit but retained half of my holdings.

 

CF Industries: Time to Take Some Profits

by: Chris Damas May 27, 2011 | about: AGU, CF

It has been a great one-week run for the stock of fertilizer producer CF Industries Holdings (CF). The company is trading at $155.91, up almost $6 after hitting a high of $156.34, and smashing the 2011 high of $153.83 set on February 10. CF closed at $139.06 last Friday, so it’s up 12.1% in five days.

It could go higher, but I think the risk is there for a pullback until mid-next week, when we get a better fix on the weather going into early June. Our target price for CF is $186 by harvest time in October.

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We continue to like the dominant retail agriculture vendor in the corn belt, Agrium (AGU), and think it is undervalued after underperforming CF over the past couple of months. Agrium is somewhat more difficult to analyse than CF, as the company has international operations in South America, Australia, Europe and Egypt. Our 2011 price target remains $100.

But for now, we are out of CF and AGU for the long Memorial Day weekend, taking profits this morning.

Here is the current action on North American fertilizer stocks.

• AGU at $86.04 up $1.47
• CF at $155.91 up $5.72
• Mosaic (MOS) at $70.49 up $1.34
• Potash (POT) up $56.36 up $1.18

Volumes are low due to the impending Memorial Day holiday and an early close on the bond market.

A lot is riding on Midwest farmers’ ability to get corn seed into the ground before a key date: June 5. That's the final planting date for full insurance coverage in key corn-producing states that are lagging the planting pace due to incessant wet weather. These include Indiana, Michigan and Ohio.

It’s also the date for corn farmers to determine if they want to opt for “prevented planting” on their crop insurance contracts. This option would afford lower payments per acre, but also remove the need to buy fertilizer.

Corn farmers also have the option of shifting to faster-growing corn seed hybrids to allow them to plant later but avoid the risk of early fall frost killing the plant, or leaving them with a high moisture crop that requires drying.

Agrium benefits no matter what crop the farmer puts in the ground -- part of its appeal -- as it sells seed and crop protection (chemicals) as well as nutrients and advanced, slow-release urea, amongst other products.

CF stock is trading off the Dec. 11 new crop corn futures, which hit a high of $6.8475/bushel yesterday and is currently 6.78 ¼, up 2 cents.

But sometimes I think it’s irrational to do so, given the corn price is going higher because of the threat of less being planted, and therefore less fertilizer could possibly be required. Remember, the later-season alternative to corn is usually soybeans, and beans can fix nitrogen naturally, requiring no chemical nitrogen fertilizer.

The forecast for Ohio and Indiana, two states with significant wetness problems impeding corn planting, is sunny, but not until next week. Currently, a storm system is over Iowa (fully planted), but this threatens to shower the Eastern Corn Belt over the weekend. So Ohio and Indiana may not show much real progress. Remember, more than a sunny day may be needed to dry out the fields sufficiently to allow farmers to get their equipment into the fields. Getting stuck in the mud, and having the soil compacted, are real risks.

The USDA crop progress report showing planting data as of Sunday May 29 will not be out until Tuesday at 4pm. The data is collected on Monday mornings through a vast network of agricultural extension agents on a county by county basis. This week, the data will be reported a day late, but it will still be for the Sunday. Four days is a long time to find out whether the corn crop has been planted sufficiently to warrant the latest price rise in CF, AGU and other corn-belt dependent equities.

In the meantime, anything can happen over a long weekend – the Greek credit crisis goes nuclear, Gaddafi gets killed, or Yemen blows up even more. Any of these events could create a run on the dollar and knock down fertilizer stocks.

Here’s a map of the level of wetness in the North, and dryness in the South in the US as of May 21.

The states of Indiana, Ohio and North Dakota -- the main corn-producing states suffering from wet weather-delayed planting -- totaled 11.4 million acres or 13% of corn planted in 2010. Indiana was already half planted as of last Sunday, but North Dakota is muddy and probably stuck at 49% with only 7% emerged, compared to the 33% average for the last five years. It has been cold in the northern states as well as wet.

Ohio is the key battleground state for incremental corn planting. Last Sunday, Ohio was only 11% planted versus 80% on average for the third week of May. According to CF CEO Steve Wilson, Ohio farmers are planting “furiously.” If he is right, then the planting season should come through okay, and CF will sell a lot of nitrogen on those acres. However, the nitrogen sales might come in the form of UAN applied with irrigation in the third quarter, as farmers have no time to inject Anhydrous Ammonia in Q2, which is a lucrative product for CF.

Farmers are riding out the wet weather, hoping not to have to execute their prevented planting options come Sunday, June 5. Unfortunately, we won’t find out how many opted not to plant corn until the June 6 USDA report. That’s a risk I am not willing to bet on right now.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CF, AGU over the next 72 hours.