Sector Overlook: Fertilizers & Agricultural Chemicals

S&P’s outlook for fertilizers and agricultural chemicals diversified industry :

We have a neutral fundamental 12-month outlook on the fertilizers & agricultural chemicals sub-industry, which consists of makers of agricultural fertilizers, pesticides, seeds, and lawn and garden products. The U.S. farm economy and crop markets are generally mature, with cultivation of corn the largest use for agricultural chemicals. Following a large increase in corn acreage two years ago, in response to the government’s ethanol mandate, plantings appear to be stabilizing. Industry forecasters are looking for about 90 million acres of corn to be planted next season. Still, the new President made favorable comments on the campaign trail regarding biofuels, and will likely support further development of ethanol as a fuel. Much of the growth in global nutrient use has come from developing countries in Asia and Latin America, as these regions’ rising populations and income levels boost the need for grain production. We expect fertilizer and seed companies to shift additional focus to these markets in coming years.

Spot market prices for certain fertilizers reached decade highs in June 2008, on a combination of strong farmer demand and supply constraints. This was reflected in the strong earnings reports from producers during the calendar third quarter, although almost all of the gain came through pricing rather than volume. At the time, producers began noting that fertilizer purchases were slower than normal. They speculated that farmers were withholding purchases due in part to the delayed U.S. harvest, as well as anticipation of lower prices in coming weeks. We think reduced activity on the part of grain and fertilizer traders is contributing as well. At the end of December, the price for certain phosphate fertilizers had fallen below $500 per tonne, down over 50% in six months. In early January, a leading phosphate producer reported it was making another round of production cuts (the first was announced in October) due to what it termed a “full distribution pipeline.”

Stocks List: Fertilizers & Agricultural Chemicals

The S&P Fertilizers & Agricultural Chemicals Index increased 8.0% during the first month of 2009, versus an 8.6% decline in the S&P 1500 composite Index. This follows a decrease of 40.1% in the S&P Fertilizers & Agricultural Chemicals Index during 2008. Despite steep share price declines, no component companies carry buy recommendations.

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