3 fertilizer stocks to keep an eye on in a challenging industry

Elevated costs of key raw materials partly due to the Russia-Ukraine war have also put pressure on the margins of companies in this space.   However, favorable global agricultural fundamentals and healthy farm economics augur well for the industry. Fertilizer players such as CF Industries Holdings, Inc. CF, Yara International ASA YARIY and ICL Group Ltd ICL are worth a look, notwithstanding the near-term headwinds.

About the Industry

The Zacks Fertilizers industry comprises producers, distributors and marketers of crop nutrients for the global agriculture industry. Companies in this space offer nutrients such as phosphates (including diammonium phosphate, monoammonium phosphate and phosphoric acid), potash and nitrogen (including urea, ammonia and urea ammonium nitrate) fertilizers. They also provide other nitrogen products to help farmers maximize crop yield. Crop nutrients are essential to drive agricultural productivity and boost the natural fertility of the soil. Demand for these nutrients is being supported by the need to increase the production of grains to address rising food consumption globally. Moreover, the constant need of growers to nourish their crops, replenish nutrients in the soil following a harvest and boost yields to feed a growing global population drives the consumption of fertilizers.

What's Shaping the Future of the Fertilizers Industry?

Softer Fertilizer Prices to Weigh on Margins: Fertilizer prices surged to historic high levels in the first half of 2022, riding on the impacts of the war in Ukraine that led grain prices to record levels and export curtailments in China to meet domestic demand. Disruptions due to the sanctions in Belarus also contributed to the spike. However, prices of phosphate and potash declined in the back half of the year from their peak levels due to the weakening of demand. Escalating costs led to growers reducing fertilizer applications or switching to less fertilizer-intensive crops, leading to softer demand. Global nitrogen prices have declined since the beginning of 2023. Higher global supply, driven by increased global operating rates due to lower global energy costs, has resulted in a decline in prices. While fertilizer prices have stabilized somewhat, weaker year-over-year prices are likely to dent the profitability of companies in this space over the near term.Elevated Input Costs a Concern: Increased prices of major raw materials pose a headwind to the companies in this space. Prices of both sulfur and ammonia — key inputs for the production of phosphate — have moderated somewhat lately yet remain elevated. Plant shutdowns and maintenance have led to a tight supply of these raw materials, which, coupled with strong demand, have pushed up their prices. As such, fertilizer makers are likely to face short-term margin pressure associated with higher input costs.

Agricultural Fundamentals Remain Favorable: Fundamentals in the broader agriculture space remain positive, given the sustained rise in food demand globally. While prices of corn, soybean and wheat have declined from the multi-year highs reached in 2022, they remain elevated and supportive. Farmer economics also remain attractive in most global growing regions on strong crop demand. Expectations of high levels of planted corn and soybean acres globally also suggest a pickup in fertilizer demand.

Zacks Industry Rank Reflects Downbeat Prospects

The Zacks Fertilizers industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #176, which places it in the bottom 30% of more than 250 Zacks industries.The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates a bleak near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.