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Morningstar | Higher Prices and Catch-Up Volumes Highlight Our 2Q Earnings Takeaways for the Agriculture Space

After unfavorable weather weighed on first-quarter results for many of the ag companies we cover, volumes rebounded for nearly all companies in the second quarter. Through the first half of 2018, demand for nearly all crop input categories is roughly even with the first half of 2017. In crop chemicals, the shortened planting season resulted in greater demand for in-season herbicides and insecticides. We now expect crop chemicals volumes to be nearly flat in 2018 compared with 2017.

In fertilizer, prices of nitrogen, phosphate, and potash rose sequentially during the second quarter due to reduced supply. In nitrogen, increased anthracite coal prices in China have reduced production, supporting prices. We expect this dynamic to continue throughout the year and we've raised our 2018 urea price forecast to $240 per metric ton from $230. Phosphate prices have also been supported by lower production in both China and North America. We already factored the lower production in our first-quarter update and we're maintaining our 2018 average price forecast of $380 per metric ton. In potash, lower production from K+S and a delay from EuroChem's greenfield potash mine will support prices into 2019. We raised our 2019 potash price forecast to $300 per metric ton from $270.

From a valuation standpoint, potash producers are the most undervalued group in our ag coverage. This is largely due to our higher near-term potash price forecast and our outlook that both Nutrien and Mosaic will be able to reduce potash unit production costs, which should boost profits. Nutrien and Mosaic trade at price-to-fair value ratios of 0.86 and 0.87, respectively. While we also view Compass Minerals and SQM as undervalued trading at price-to-fair value ratios of 0.78 and 0.79, respectively, ag is a smaller portion of profits for both companies. We view Compass as undervalued due to our outlook for the deicing salt business, and we view SQM as undervalued due to our lithium outlook.

Archer-Daniels Midland reported a sold second quarter as higher soy crush margins drove oilseeds segment profit growth and favorable grain merchandising conditions boosted originations segment profits. In the near term, we expect ADM will continue to take advantage of both of these tailwinds as we see higher soy crush margins and favorable grain merchandising conditions stemming from changing global trade patterns continuing into 2019. At current prices, we view ADM as slightly overvalued trading around 6% above our $48 per share fair value estimate.

While Bunge saw higher Agribusiness profits due to the increase soy crush spread, the company's forward hedging of soy crush profits weighed on second-quarter results. However, as the lower priced forward contracts roll off and are replaced with hedges that lock in a higher soy crush spread the company should generate higher profits in the second half of 2018 and early 2019. With the stock trading around 14% below our $75 per share fair value estimate, we see some upside in Bunge.

CF Industries' second-quarter results saw a bounce back in nitrogen volumes after the weather-related delays impacted first-quarter results. As one of the lowest cost nitrogen producers globally, CF is well positioned to take advantage of higher nitrogen prices in both the near term and long term. However, we think higher nitrogen prices are already incorporated into CF's valuation, and we view the stock as modestly overvalued, trading at roughly 12.5% above our $45 per share fair value estimate.

Best-Idea Compass Minerals reported solid fertilizer results as higher volumes drove EBITDA growth. Although we increased our near-term potash price forecast, we think the move will have less effect on sulfate of potash, or SOP, prices as the spread between standard potash and SOP remains elevated. As a result, Compass Minerals' Plant Nutrition North America segment, which primarily sells SOP, should not see the same degree of price increase as standard potash producers such as Nutrien and Mosaic. Regardless, we view Compass Minerals as undervalued as higher deicing salt prices and lower salt unit production costs should lift profits for the salt segment, which generates the majority of companywide profits. At current prices, we think Compass offers attractive risk-adjusted upside, given our $83 per share fair value estimate.

DowDuPont's second-quarter agriculture results were solid as seeds and crop chemicals volumes bounced back during the quarter. Due to selling higher priced products, we think the 2018 ag results should now be roughly in line with 2017. During the earnings release, management provided guidance on the timing of the de-merger into three separate companies, which should occur during the second quarter of 2019. At current prices, we view DowDuPont as slightly overvalued, trading around 9% above our $65 per share fair value estimate.

FMC reported solid second-quarter agricultural solutions segment results with revenue growth coming primarily from the acquired Rynaxypyr and Cyazypyr crop chemical products, which generate roughly one third of total segment sales. While we continue to expect crop chemicals applications in North America to be slightly down in 2018 due to the late start to the planting season, FMC's continued growth in these two major products should more than offset declines in its other products. At current prices, we view FMC as slightly overvalued, trading at roughly 7% above our $81 per share fair value estimate.

K+S continues to be plagued by potash production issues, both at its older German mines and at its new Bethune mine in Saskatchewan. The Bethune production issues are temporary challenges related to ramping up a new greenfield mine and should subside. However, K+S is dealing with geological issues in some of its German mines that we expect to persist. As a result, we lowered our long-term German potash production assumptions to 7 million metric tons from 7.5 million. At current prices, we view K+S as slightly overvalued, trading around 7% above our EUR 18 per share fair value estimate.

Mosaic reported solid second-quarter results driven by higher fertilizer prices. The company is on track to begin production at its new low-cost K3 potash mine by the end of 2018. As potash production increases at the K3 mine and decreases at the older K1 and K2 mines, we expect lower unit production costs over the next several years. Much of the cost savings will come from lower brine inflow expenses as the K3 mine will not have this additional cost. This potash production shift that will improve Mosaic's position on the cost curve is the basis of our positive moat trend rating for the company. Amid higher potash prices and lower unit costs, Mosaic is well positioned to grow potash profits over the next several years. At current prices, we view Mosaic as undervalued, trading at nearly 13% below our $35 per share fair value estimate.

Nutrien's fertilizer business benefited from higher prices during the second quarter. The company is on track to lower potash unit production costs as it shifts production to lower cost mines following the merger between PotashCorp and Agrium that created Nutrien. With lower unit production costs and higher potash prices, Nutrien is well positioned to grow potash profits. In nitrogen Nutrien is also positioned to grow profits from higher prices and lower costs. In the near-term, the company will benefit from natural gas transportation constraints in Canada that have led natural gas prices to fall faster than prices in the U.S. Nutrien sources roughly one third of its natural gas from Canada. At current prices, we view Nutrien as undervalued, trading at nearly 14% below our $65 per share fair value estimate.

SQM reported decent ag results as specialty plant nutrition segment profit growth was offset by a decline in potash segment profits. However, much of the decline was due to lower potash volumes as SQM shifts production to lithium from potash, a move that we think will position the company for long-term profit growth. We view SQM as undervalued as we think the market is undervaluing SQM's future lithium earnings growth. At current prices, we think SQM offers attractive risk-adjusted upside, given our $55 per share fair value estimate.