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Morningstar | Nutrien's Cost-Advantaged Fertilizer Production Should Grow Profits as Unit Production Costs Fall

Nutrien, the world’s largest crop nutrient company, was formed in early 2018 as a result of the merger between Potash Corp. of Saskatchewan and Agrium. The company is the largest agricultural retailer in North America and Australia with more than 1,400 locations. Its retail centers sell fertilizers, crop chemicals, and seeds directly to farmers. In the highly fragmented farm retail industry, Nutrien is pursuing an acquisition strategy to expand its retail store base, which should improve bargaining power with suppliers. The company also benefits from selling proprietary and private-label products at its newly acquired stores. We expect this segment, which accounted for roughly two thirds of pro forma gross profit in 2016, to generate relatively steady cash flows.In addition to its retail operations, Nutrien produces all three primary crop nutrients. With over 20% market share, Nutrien is the world’s largest producer of potash by capacity. Its Canadian mines mostly sit on the lower half of the cost curve and have generated profits even when prices are below the marginal cost of production.Nutrien’s nitrogen fertilizer business includes both high- and low-cost assets, much of it depending on the cost of natural gas. Roughly a third of production uses natural gas from Trinidad, which is cost disadvantaged relative to North American competitors. However, another third uses low-cost U.S. natural gas. The remaining third of nitrogen is produced in Alberta and has historically benefited from cost-advantaged natural gas as well as low transportation costs serving Alberta and neighboring regions.By contrast, Nutrien currently sits on the high end of the phosphate fertilizer cost curve. This is largely because the legacy Agrium operations lack phosphate rock resources and, instead, buy the input from industry giant OCP in Morocco. When the OCP supply contract expired in 2018, those operations began to source phosphate rock from legacy PotashCorp assets. We expect this to slightly lower the firm’s position on the cost curve but we note that Nutrien's phosphate operations will continue to sit on the high end of the global cost curve.