Agro Perspectiva

Chinese Fertilizer Stocks Poised to Grow

03.06.2010 11:17 "Agro Perspectiva" (Kyiv) — While Monsanto Company’s (NYSE:MON) earnings disappointed U.S. investors last week, Chinese fertilizer companies like Yongye International, Inc. (NASDAQ:YONG), Origin Agritech Ltd. (NASDAQ:SEED) and Agria Corporation (NYSE:GRO) are projected to see strong growth in demand as China’s economy continues to expand. On a macroeconomic level, China’s growing population and per capita income has led to increasing demand for grains and meat. The country even managed to grow its exports by 22.1% to $10.2 billion during the first quarter of this year. As a result, demand for fertilizers to grow crops has also been rising, as more and more farmers seek out more efficient growing solutions. The use of bioengineered seeds, which are created to improve crop yield or to realize other more specific benefits, is expected to double in China over the next five years, according to Rodman & Renshaw’s Lewis Fan. As the largest producer, this is good news for Origin Agritech Ltd. (SEED, Free Analysis), which has already seen its shares soar 18% during Friday’s session. Meanwhile, government efforts to encourage the use of organic fertilizers could help niche competitors like Yongye International Inc. (YONG, Free Analysis). The firm has already seen its share price double over the past year along with its revenues, while it is forecasting 50% revenue growth through 2012 with a target of $165 million this year alone. China also remains one of the largest producers of fertilizer components, making it easy to vertically integrate its operations. For example, one-third of the world’s nitrogen supply companies from China, according to the International Fertilizer Association. Meanwhile, companies like Yongye International have already begun to vertically integrate. According to Yongye International’s CFO, cited in a BusinessWeek article, the company has very aggressive expansion plans to triple manufacturing capacity this year. And while its products are already higher margin than its competitors, the firm also plans to purchase a lignite coal mine that will help it source raw materials for its nutrients business. Finally, companies in the U.S. looking to expand abroad may also seek out acquisitions in one of the world’s fastest growing markets. While Origin Agritech and Agria Corporation (GRO, Free Analysis) are lost money last year, companies like Yongye International are quickly ramping up their top and bottom line results, and may offer a strategic investment at a great value. In the end, the growing demand for agricultural products in China has led to an increase in fertilizer prices as farmers look for higher crop yields. This trend is expected to continue through 2012 and could result in higher prices for many fertilizer stocks as well as potential M&A activity with larger international fertilizer producers looking to enter the market.