CibCEQUITY RESEARCH
October 19, 2022 Earnings Revision
Fall 2022 Agriculture, Fertilizer And
Chemical Outlook
NTR, MOS, MEOH, CHE.UN, AFN
Our Conclusion
Historically during a recessionary environment, chemical stocks have
underperformed the market (typical early-cycle performers), while fertilizer companies’ share price performance has largely been in line. We are expecting a different outcome in the case of a 2023 recession, as we expect elevated farm income to drive ag-input demand, and considering ag/fertilizer stock valuation levels are at decades lows. Our top two picks are AFN and NTR.
Key Points
Global Grain Fundamentals Remain Robust: We expect elevated farm
income levels to persist for the next two years, supported by low stock-to-use ratios (U.S. ending stocks at tightest levels since 2012/13 for corn and 2007/08 for wheat), Ukraine grain production negatively impacted by the war (~35%-40% Y/Y smaller harvest in 2022) and the La Nia could persist through the winter and possibly next spring. Further, our analysis going back to the 1900s indicates that grain demand/production is inelastic to economic cycles and crop prices tend to hold in well during periods of economic uncertainty.
Positive On Nitrogen, Some Further Downside To Potash/Phosphate
Likely: Our analysis concludes that global fertilizer demand has not shown meaningful declines during past economic shocks, particularly for nitrogen. That said, given the ongoing Russia/Ukraine war, we expect volatility to continue. We see nitrogen price strength continuing, given elevated European gas prices, but do see some further near-term downside (though still well above historical levels) to potash (waiting for demand to emerge later this quarter) and phosphate prices.
Impact Of Rising Rates?: NTR, MOS and MEOH have excellent balance
sheets, with 2022E leverage ratios at or below 2x and comfortable interest coverage ratios. All three companies have over 75% of the debt structure tied to fixed-rate debt. There is a greater risk to AFN and CHE.UN’s estimates given that ~50% of the debt structure for both companies are variable, and interest coverage ratios are relatively lower.
Surging US$ A Mixed Bag For Agriculture / Fertilizer / Chemical Firms:
We see the strong US$ as a slight positive for MEOH and AFN, but mixed for NTR, MOS and CHE.UN. The weaker C$ is a benefit for Canadian potash operations but the stronger US$ will have a negative impact when translating NTR’s non-U.S. Retail results (but ~70% of NTR’s Retail is U.S.-based) and MOS’s Fertilizantes (Brazil) results from local to the US$ reporting currency.
Q3/22 Expectations: Our estimates are essentially in line with Q3/22
consensus for all companies, except NTR (-8%) and MOS (-4%).