It’s earnings season on Wall Street, which provides the rest of us mere mortals a closer look at the broad macroeconomic trends at play in the fuel and fertilizer industries. Top global and domestic fertilizer companies Nutrien, CF Industries, and Mosaic have all released second quarter earnings results in recent days.
The overarching theme of these reports is that these companies are earning less revenue due to lower fertilizer costs. Low fuel expenses have helped to stop some of the bleeding, but those days are increasingly looking to be short-lived.
More Russian and Belarusian fertilizer supplies have returned to the market this summer. And even though Russia continues to flood the global market with its surplus oil reserves, production cuts and maintenance closures elsewhere in the world are helping to tighten the global energy balance sheet, making fuel more expensive as farmers prepare for fall harvest and application activities.
In Illinois, the basket of NPK and diesel retail offerings have fallen by 35% since reaching highs in late June 2022. For farmers, this means that the window to capitalize on reasonable fuel expenses, low Fall 2023 and Spring 2024 fertilizer costs, and current interest rate levels will only be open for a limited amount of time in the coming months.
Fertilizer companies cut back
Ahead of its second quarter earnings call on Thursday, Nutrien announced Wednesday afternoon that it would be putting an indefinite pause on current projects aimed at expanding its potash empire as well as its widely touted clean ammonia plant in Louisiana.
Despite the widespread push for green fertilizer production thanks in large part to the Inflation Reduction Act’s financial incentives to retrofit existing facilities to become greener, the low revenue and rising construction cost environment faced by the fertilizer industry is generating doubts about the timing and capacity for demand for clean ammonia – a risk no one wants to be saddled with at a moment when revenue streams are dwindling.
The world’s largest fertilizer producer cited low fertilizer prices for the indefinite pause on these big projects, estimating that capital expenditures for the year would be reduced (salvaged?) by a whopping $200 million. Belarus has resumed its potash shipments following Western banking sanctions enacted after Russia’s invasion of Ukraine last year, flooding the global market with fresh potash supplies.
Translation: Nutrien isn’t making enough revenue at current fertilizer price levels to finance these expansion projects.
The limited production capacity, surplus global stocks, and uncertain farmer demand will likely cause Nutrien to pare back its 2023 profit forecasts. After Nutrien made this announcement on Wednesday, its share price fell 2.6%. It now expects its earnings per share price to significantly drop from the prior forecast of $5.50-$7.50/share to $3.85-$5.60/share (ouch).
This isn’t the first sign the fertilizer industry has given the market that surplus stocks, low prices, and questionable usage rates are taking a bit out of fertilizer producers’ bottom lines. In July, Nutrien announced it would scale back production at a Saskatchewan potash mine as prices tumbled amid robust global supplies and sluggish farmer demand.
Following that announcement, the company projected lower fiscal year profits due to the lower prices but also a since-resolved strike by Canadian dock workers that slowed fertilizer export volumes.
Low prices cure record fertilizer revenues farmer profit squeeze
CF Industries cited low revenues as the driving force behind a nearly 55% decline in second quarter earnings per share estimates. But the huge drop in share price was still not as big as analysts had been expecting for CF Industries’ second quarter.
The fertilizer producer’s net sales from its ammonia division fell 53% from the prior year. Granular urea sales dropped 45%, net urea ammonium nitrate sales fell 44%, and ammonium nitrate (liquid UAN) sales tumbled 59% lower during that time.
Lower natural gas costs are helping to somewhat offset the lower prices companies are earning from cheaper fertilizer sales. This dynamic could keep fertilizer prices fairly moderated (relative to 2022 highs) for farmers for at least the remainder of 2023.
“The global nitrogen supply-demand balance will continue to be positive owing to robust demand from agricultural and forward energy curves displaying an elevated cost curve,” CF Industries says in the outlook portion of its earnings release. “Energy price differences between major producers in North America and minor producers in Europe and Asia continue to be significantly higher than historical levels.”