Credit Suisse fertilizer report
13 August 2008
Americas/United States
Equity Research
Fertilizers (Agricultural Sciences / Fertilizer) / OVERWEIGHT
Fertilizer Markets
MONTHLY
Business Conditions - August 2008
Investors accustomed to a tight correlation between fertilizer and energy
pricing have history on their side, but don’t overlook the serious divergence in
demand trends. “Demand destruction” is what the bears keep talking about,
but where is it? In energy markets, not fertilizer markets. Our fertilizer team
across the world sees no meaningful demand destruction in any key market.
We view the weakness in the fertilizer stocks as a major buying opportunity.
Our farm profitability model registered a large decline in theoretical crop
profitability in July, especially in corn. Large farmers presumably sold forward
earlier, when profits were higher. Even with the drop, we estimate profitability
for corn at more than double 2007, and nearly double for soybeans, so higher
fertilizer prices clearly haven’t hurt profitability, and prices can rise
substantially from here, even at $5 corn.
Rising ammonia and declining natural gas prices bode well for nitrogen
producers, as does the prospect for a strong corn crop planting season in
Brazil this fall. Phosphate players are facing higher input costs (sulfur is up
$165/st according to once source), increasing the benefits from integration.
Potash prices will reach $1,000/mt before year end in the US (PCS sales
announced $250/st for North America for dates in Q3).
Exhibit 1: Key Prices and Margins
$ per short ton, unless otherwise stated
July June % Yr Ago %
Product Avg Price Avg Price Chg. Price Chg. July June Yr Ago
U.S. Gulf NH3 558 510 9% 278 101% 150 79 45
Mid Cornbelt NH3 993 762 30% 453 119% 537 283 172
U.S. Gulf Urea 755 674 12% 314 140% 443 346 126
U.S. Gulf UAN 470 423 11% 258 83% 289 232 147
Central Florida DAP 1064 1048 2% 376 183% 670 670 207
U.S. Gulf Export ($/mt) 1194 1183 1% 439 172%
Saskatchewan Potash 544 529 3% 205 165%
Midwest Potash 848 808 5% 220 286%
NYMEX Nat Gas ($/MMBtu) $11.68 $12.39 -6% $6.21 88%
AECO Nat Gas ($/MMBtu) $10.02 $11.10 -10% $5.15 95%
Tampa Sulfur ($/lt) 452 452 0% 61 641%
Est. Margin Per Ton
Source: Green Markets, Company data, Credit Suisse estimates.
Research Analysts
Mark W. Connelly
212 325 5844
mark.w.connelly@credit-suisse.com
Nils-Bertil Wallin
212 538 8127
nils-bertil.wallin@credit-suisse.com
Jin Kim
212 538 1969
jin.kim@credit-suisse.com
13 August 2008
Fertilizer Markets 2
Nitrogen (184.4mm MT global NH3 capacity; Asia/Oceania 50%, FSU 13%, Eur 12%, N Am 9%, ME 6%, Lat Am 6%, Afr 3%)
¦ Ammonia prices in mid-cornbelt are now above $1,000/st for the first time ever! The July average U.S. Gulf Coast
ammonia price increased to $558/st from the June average of $510/st. However, increases in prices were skewed
towards the end of July, moving up $190/st during the last week of July, which suggests that the weather-driven
delays we have been hearing about were substantial. Next up: demand from wheat.
¦ U.S. Gulf Urea prices averaged $755/st in July, up $82/st from the June average. Strong demand overseas
continues to put upward pressure on urea prices. Demand in Asia is still strong, and sources note that India still
needs another 1.5mm mt and Pakistan 0.3mm mt to meet their demands. Chinese supply remains tight. As U.S.
prices are slowly coming to parity with international prices, a window for cheaper imports to enter the U.S. market
could open, but with prices rising globally, we don’t think that is a very likely outcome. We expect Nitrogen prices to
moderate next year once Chinese supply comes back to market.
¦ The average July U.S. Gulf UAN price jumped by $47/st to $470/st from the June average of $423/st.
Exhibit 2: Ammonia Prices and Margins
$/short ton
Exhibit 3: Urea & UAN Prices and Margins
$/short ton
-200
-100
0
100
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1100
Jan-03
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-200
-100
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1100
Cornbelt Price
U.S. Gulf Price
U.S. Gulf Margin Cornbelt Margin
-200
-100
0
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800
Jan-03
Apr-03
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0
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800
U.S. Gulf Urea Price
U.S. Gulf Urea Margin
Cornbelt UAN Price
Exhibit 4: Natural Gas Costs
$/MMBtu
Exhibit 5: Nitrogen Earnings Leverage
$10/short ton change in cash margin; volume estimate in short tons
-2
0
2
4
6
8
10
12
14
16
Jan-03
Apr-03
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-2
0
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Henry Hub
Henry Hub - AECO Spread
Volume Net Income EPS
Company 2008E (000) ($mm) Impact
Yara International* 1 9,000 123.5 NKr2.30
Terra Industries 6 ,834 44.4 $0.42
CF Industries 6 ,694 43.5 $0.76
PotashCorp 6,551 42.6 $0.13
Agrium 4,824 31.4 $0.23
Terra Nitrogen 2,650 17.2 $0.91
*Norwegian Krone
*Includes share of Kemira GrowHow, Tringen, Qafco, Rossosh and Burrup
Exhibit 6: Historical and Projected Prices & Operating Rates
Product 2006A 2007A 2008E 2009E 2010E Product 2006A 2007A 2008E 2009E 2010E
U.S. Gulf NH3 $302 $307 $556 $566 $551 N.America NH3 82% 84% 85% 84% 83%
Mid Cornbelt NH3 382 466 7 38 7 48 733 Global NH3 84% 86% 86% 86% 84%
U.S. Gulf Urea 229 343 5 19 5 29 514
U.S Gulf UAN 159 257 3 66 3 76 361
Prices ($/st) Operating Rates
Source: Fertecon; Credit Suisse estimates, company data
13 August 2008
Fertilizer Markets 3
Phosphate (43.5mm MT global P2O5 capacity; Asia/Oceania 30%, N Am 23%, Africa 17%, FSU 14%, Eur 7%, ME 5%, Lat Am 4%)
¦ While DAP prices inched up slightly in July to $1,064/st (up 1.6% mom), MAP prices remained relatively flat at
$1,098/st (up 0.2% mom) versus the June averages. Rising costs are an increasing concern for non-integrated
phosphate producers. In addition to rising sulfur prices, phosphate rock prices moved up sharply – North African
phosphate rock prices rose to $450/mt, or 63.6% mom, from $275/mt in June. That is clearly bad news for nonintegrated
producers, but will tend to keep prices moving up.
¦ The average U.S. Gulf DAP export price was slightly higher at $1,194/mt in July from the June average of $1,183.
India came back to the market making tenders and DAP exports were made to Latin America with Brazil being an
important buyer. Exports to Argentina were still slow due to the farmers strike. According to the source, forward
sales were especially active in the domestic market.
¦ Sulfur prices for the third quarter are being settled up at approx. $165/lt. As such, we expect there could be another
significant jump in phosphate prices and potentially an increase of the price gap between MAP and DAP. The
increase in sulfur prices could push domestic phosphate prices to parity with international prices; however, with
rising phosphate rock prices, we expect the integrated producers like Mosaic to benefit from the situation.
Exhibit 7: Domestic DAP Price and Margin
$/short ton; integrated producers
Exhibit 8: Export DAP Price
0
100
200
300
400
500
600
700
800
900
1000
1100
Jan-03
Apr-03
Jul-03
Oct-03
Jan-04
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Oct-07
Jan-08
Apr-08
Jul-08
0
100
200
300
400
500
600
700
800
900
1000
1100
Central Florida DAP Price
Central Florida DAP Margin
0
100
200
300
400
500
600
700
800
900
1000
1100
1200
1300
Jan-03
Apr-03
Jul-03
Oct-03
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Apr-05
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Apr-08
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0
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700
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900
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1100
1200
1300
U.S. Gulf Export ($/mt)
U.S. Gulf Export ($/st)
Exhibit 9: Sulfur Prices
Tampa, $/long ton; Vancouver, $/mt
Exhibit 10: Phosphate Earnings Leverage
$10/short ton change in cash margin; volume estimate in short tons
0
100
200
300
400
500
600
700
800
Jan-03
Apr-03
Jul-03
Oct-03
Jan-04
Apr-04
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Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
0
100
200
300
400
500
600
700
800
Vancouver Sulfur
Tampa Sulfur
Volume Net Income EPS
Company 2008E (000) ($mm) Impact
Mosaic 9,796 63.7 $0.14
PotashCorp 4,715 30.6 $0.09
CF Industries 2 ,078 13.5 $0.24
IncitecPivot* 1 ,100 8.4 A$0.17
Agrium 1,094 7.1 $0.05
Fosfertil** 760 4.9 R$0.24
*Australian Dollar, **Brazilian Real
Exhibit 11: Historical and Projected Prices & Operating Rates
Product 2006A 2007A 2008E 2009E 2010E Product 2006A 2007A 2008E 2009E 2010E
Central Florida DAP $225 $364 $952 $957 $942 N.America P2O5 93% 99% 100% 98% 96%
U.S. Gulf Export ($/mt) 2 61 419 1 ,081 $1,086 $1,071 Global P2O5 80% 83% 84% 83% 83%
Central Florida MAP 224 362 9 70 $975 $960
Prices ($/st) Operating Rates
Source: Fertecon; Credit Suisse estimates, company data
13 August 2008
Fertilizer Markets 4
Potash (39.8mm MT global K2O capacity; N Am 40%, FSU 29%, Eur 14%, ME 8%, Asia 7%, Lat Am 3%)
¦ The July average price for U.S. Midwest potash jumped to $848/st, rising 4.9% from the June average of $808/st.
Saskatchewan prices increased more modestly, by 2.8%, to $544/st from the June average of $529/st. Demand
remains strong and prices continue to rise. In July, PCS sales announced that it will raise its North American potash
postings across the board by $250/st FOB, effective Sept. 1 through Nov. 30.
¦ The sinkhole in Russia continues to get sporadic headlines, but Credit Suisse’s fertilizer analysts in Russia believe
that any disruption would be measured in weeks, rather than months, given the strategic significance of the rail line
to the Russian government (potash isn’t the only important commodity riding on those rails).
¦ Freight rates declined again in July, with the Baltic Dry index falling 9.3% mom on top of the 9.5% decline in June.
Crude oil prices are now slightly above $120/barrel, a significant drop from the high of $145/barrel. If this trend were
to reverse, it could put strain on the netbacks of Canpotex exporters.
Exhibit 12: Domestic Potash Prices
$/short ton
Exhibit 13: International Potash Prices (Canpotex)
$/short ton (cfr); China cfr estimate based on current freight rates
0
100
200
300
400
500
600
700
800
900
Jan-03
Apr-03
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Jan-08
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Jul-08
0
100
200
300
400
500
600
700
800
900
Saskatchewan Potash (fob)
Midwest Potash (cfr)
0
100
200
300
400
500
600
700
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
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0
100
200
300
400
500
600
700
China
India
Brazil
S.E. Asia
* to convert to metric tonnes, multiply by 1.1023
Exhibit 14: Ocean Freight Rates
Baltic Dry Index
Exhibit 15: Potash Earnings Leverage
$10/short ton change in cash margin; volume estimate in short tons
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
11000
Jan-03
Apr-03
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Apr-06
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Apr-08
Jul-08
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
11000
Baltic Dry Index
Volume Net Income EPS
Company 2008E (000) ($mm) Impact
PotashCorp 11,026 71.7 $0.22
Mosaic 9,963 64.8 $0.15
K+S AG 7,165 46.6 €€ 0.76
Silvinit** 6,173 40.1 Rbl125.47
Uralkali** 5 ,842 38.0 Rbl0.44
Israel Chemicals* 3 ,968 25.8 NIS0.07
Agrium 2,246 14.6 $0.11
Arab Potash*** 2 ,161 14.0 JOD0.12
* Israeli Shekel, **Russian Ruble, ***Jordanian Dinar
Exhibit 16: Historical and Projected Prices & Operating Rates
Product 2006A 2007A 2008E 2009E 2010E Product 2006A 2007A 2008E 2009E 2010E
Saskatchewan $186 $212 $790 $955 $980 N.America Potash 68% 83% 87% 87% 88%
Midwest 205 257 8 31 1 ,000 1 ,025 Global Potash 84% 93% 94% 95% 95%
China yr. end (fob) 170 175 6 50
India yr. end (cfr) 2 20 270 6 25
Brazil yr. end (cfr) 1 85 410 7 50
SE Asia yr. end (cfr) 220 425 7 25
Prices ($/st, Domestic; $/mt, International) Operating Rates
Source: Fertecon; Credit Suisse estimates, company data
13 August 2008
Fertilizer Markets 5
Demand
¦ Corn crop future prices pulled back from its recent high of $7.15/bu. in June to prices slightly above $5.00/bu.
during July. The July average price was $6.08/bu. vs. the June average of $6.51/bu. Soybean prices increased by
3.4% mom (+93.0% yoy) to $14.63/bu., while wheat prices declined by 6.0% mom (but +9.2% yoy) to $5.83/bu.
Substantial drop in crop prices (except for soybean) and higher costs led to a decline in theoretical profitability for
all three crops. However, we think real farm profitability is still robust as most large farmers have already sold their
crops forward by now. If harvests come in weak, as we expect, corn prices will remain strong.
¦ The ethanol crush spread bounced back in July due to slightly higher distillers grains co-products and ethanol
prices. There was no change to the ethanol mandate (we hadn’t expected one), and ethanol prices continue to
increase. However, our energy team notes that there are three risks to current ethanol market balance and prices:
1) the fast return to market of cancelled or mothballed ethanol plants as ethanol economics improve; 2) the rollback
of the federal ethanol mandate (RFS) post the election; and 3) a further surge in the price of corn.
Exhibit 17: Representative Crop Spot Prices
$/bushel
Exhibit 18: Crop Implied Futures Curve
$/bushel
0
2
4
6
8
10
12
14
16
Jan-03
Apr-03
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Oct-03
Jan-04
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Jan-06
Apr-06
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Wheat
Soybeans
Corn
Aug-08
Oct-08
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Aug-09
Oct-09
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Apr-10
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Dec-10
0
2
4
6
8
10
12
14
16
Wheat
Soybeans
Corn
Exhibit 19: Crop Profitability
$ per acre returns; 2008 based on futures prices
Exhibit 20: Ethanol Profitability
-200
-100
0
100
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700
2005 2006 2007E 2008E
Corn Soybeans Wheat
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Jan-03
Apr-03
Jul-03
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Apr-04
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Jan-06
Apr-06
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Jan-07
Apr-07
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Apr-08
Jul-08
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Ethanol Crush Spread ($/gal)
Corn ($/bushel)
Ethanol ($/gal)
Exhibit 21: Application Rates and Demand
Crop N P K N P K N P K
Corn 132 47 55 39% 38% 39% 4,690 1,696 1,901
Soybeans 4 14 25 1% 10% 17% 109 400 755
Wheat 62 23 6 14% 14% 4% 1,430 538 138
Cotton 75 31 42 4% 5% 6% 571 232 310
lbs/acre % of U.S. Consumption (000 nutrient tons)
Source: USDA; Credit Suisse estimates, company data; application rates and consumption % based on 5-yr trailing averages
13 August 2008
Fertilizer Markets 6
Company Profiles
Exhibit 22: Agrium: 2008E Revenues Exhibit 23: Agrium: 2008E Gross Profit
Advanced
Technologies
3%
Nitrogen
24%
Product purch.for
resale
4%
Potash
8%
Phosphate
Retail 9%
52%
Advanced
Technologies
2% Nitrogen
33%
Product purch. for
resale
1% Potash
18%
Phosphate
10%
Retail
36%
Exhibit 24: CF Industries: 2008E Revenues Exhibit 25: CF Industries: 2008E Gross Profit
Phosphate
31%
Nitrogen
69%
Nitrogen
63%
Phosphate
37%
Exhibit 26: Mosaic Co: FY09E Revenues
Exhibit 27: Mosaic Co: FY09E Gross Profit
Potash
30%
Offshore
16%
Phosphates
54%
Phosphates
47%
Offshore
3%
Potash
50%
Exhibit 28: PotashCorp: 2008E Revenue Exhibit 29: PotashCorp: 2008E Gross Profit
Nitrogen
28%
Phosphates
28%
Potash
44%
Potash
64%
Phosphates
16%
Nitrogen
20%
13 August 2008
Fertilizer Markets 7
Companies Mentioned (Price as of 12 Aug 08)
Agrium Inc. (AGU, $77.08, NEUTRAL [V], TP $128.00)
CF Industries (CF, $126.53, OUTPERFORM [V], TP $180.00)
Incitec Pivot Limited (IPL.AX, A$129.00, OUTPERFORM [V], TP A$215.00, OVERWEIGHT)
K + S (SDFG.DE, Eu69.00, OUTPERFORM [V], TP Eu102.00, OVERWEIGHT)
Mosaic Co (MOS, $97.04, OUTPERFORM [V], TP $195.00)
Potash Corporation of Saskatchewan (POT, $168.39, NEUTRAL, TP $280.00)
Silvinit (SILV.RTS, $1460.00, NEUTRAL [V], TP $2506.00)
Terra Nitrogen Co. L.P. (TNH, $97.40)
Uralkali (URKAq.L, $47.70, OUTPERFORM [V], TP $85.00)
Yara International ASA (YAR NO, NKr296.00)
Disclosure Appendix
Important Global Disclosures
I, Mark W. Connelly, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and
securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in
this report.
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13 August 2008
Fertilizer Markets 8
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