Two weeks ago, the U.S. Department of Agriculture (USDA) published its world agricultural supply and demand estimates and record volumes of all types of crops are projected for 2014.
This growing supply of crops is great news for Agrium Inc. (TSX: AGU)(NYSE: AGU).
Let me explain…
1. Nutrients and crop protection
Unlike fellow Canadian company Potash Corp./Saskatchewan Inc. (TSX: POT)(NYSE: POT), Agrium is exposed to not only the fertilizer business, but also crop protection. This allows the company to deliver a more diversified stream of income and weather unplanned disruptions like the Uralkali-Belaruskali broken potash cartel back in the summer of 2013.
Having a company that is exposed to more than one sector is great for long-term investors since it allows us to sleep better at night knowing that our company’s diversification allows it to better manage events out of its control.
Agrium is also more exposed to nitrogen fertilizer than potash at the moment, though future mining projects should increase its potash production. Nitrogen production is deeply connected to natural gas, and with prices nearing an 11-year low, Agrium should be able to turn a good profit from this division.
On the crop protection side of the business, the acquisition of Viterra Inc.’s 210 retail outlets will allow the company to increase its retail presence in Canada and expose farmers to the benefits of its product line. Given the finite amount of land that farmers have, being able to diminish production losses due to bad seeding is essential.
2. Growing worldwide population
The world’s population has never been so high and it’s going to continue climbing. The United Nations estimates that the world’s population will increase by 3 billion by 2045, which means we need to roughly double the world’s current food production.
Add to that the growing middle class in emerging markets that will require a diet closer to what we have in the developed world and you can easily guess that the underlying economics of Agrium’s business are extremely healthy for the long term.
3. Healthy dividend
Not only are you getting exposure to a sector in full expansion, but Agrium will also pay you 3.2% to hold on to its stock. This is a great addition for income investors considering that the 10-year government bond is currently yielding 2%.
Granted on paper there is more risk in holding Agrium shares over a 10-year note from the Canadian government, but the company hasn’t missed a payment in the past 10 years.
Management seems confident in the future of the business, having increased the dividend by 90% in the last five years.
