While I’m done with my children’s tuition fund, I had a few dollars uninvested left in my retirement portfolio. Agrium (AGU) has been on my watch list for a while and I decided to enter in a position on February 26th. Please note that Agrium is trading on the TSX as AGU.TO and on the NYSE as AGU. All figures in this article is in Canadian dollars to avoid any confusion.
I purchased 13 shares of Agrium (AGU)
Agrium is the largest global retail and distributor of crop inputs. It is also the leader of agricultural nutrients providing farmers with all they need to improve their production. The company shows a less dependent link to potash prices as it counts on other products such as:
Source: Agrium investor presentation May 2015
This is probably the reason why Agrium saw its profit jump by 24% in 2015 while Potash (POT) saw theirs down by 17%…. No wonder Potash cuts its dividend while Agrium’s dividend payment is safe with a payout ratio under 50%.
Investment Thesis
The fact that the ratio of arable land per person is continuously declining puts constant pressure on farmers to become as efficient as possible. The first solution for farmers is to improve their production with additional fertilizer. A second solution is to protect the crops they own and make sure their land is protected from any catastrophe that would affect their production. The consumption of meat in emerging markets will continue to increase in the upcoming year putting additional pressure on farmers to become even more productive. Agrium retail business will continue to overcome the drop in commodity prices for Potash and Nitrogen.
source: ycharts
Another interesting opportunity for Agrium is the fact that the retail agriculture market is highly fragmented. A leader such as Agrium can then easily swallow smaller competitors and ensure continuous growth in the upcoming year. Not to mention the low price of commodities have been hard for many of AGU peers. Being bigger in such markets will lead to improved bargaining power with suppliers and farmers.
