Fertilizer maker may see green

March 02, 2003|By JAY HANCOCK

AS A COMPANY, Agrium Inc. will probably always stink. It makes fertilizer.

As a stock in the former bull market, Agrium wasn't much more fragrant. It didn't have "dot-com" in its name. It was in Canada. It sold low-tech products to struggling farmers.

It was the kind of firm investors came to hate.

The 1990s stock bubble was based on an infatuation with technology and so-called "intellectual property," the copyrights and patents that let Disney and Microsoft spin money out of vaporous ideas. Bricks, mortar, phosphate and most other things that could be pried from the earth and loaded on trucks were abjured.

Agrium trafficked in nitrogen, which, as the most plentiful element in the atmosphere, was not making magazine covers as an exclusive investment concept. In the late 1990s Agrium stock went from $10 to $14, back to $10 and then to $8.

Last year, Charles M. Ober, manager of T. Rowe Price Associates' New Era Fund, bought 1.475 million Agrium shares when the stock was hovering between $8 and $10. At year end, the company made up nearly 2 percent of New Era's portfolio, which is concentrated in natural resources.

One reason to bet on Agrium was hope for a general economic turnaround.

Like chemical producers, paper makers, steel smelters and other cyclical firms, purveyors of fertilizer often see profits rise when business activity heats up. Loading up on Agrium after a miserable 2001 (the company lost $80 million) was a classic cycle play, an opportunity to buy cheap in a slump.

But some analysts see the next leg of the economic cycle as more than just another chance to make 10 percent or 20 percent on industrial building blocks and then bail out in expectation of a new plummet.

They believe economic forces may have converged to produce the biggest bull market in tangible goods since the 1970s.

Swiss investment adviser Marc Faber, for example, told the Financial Times a couple of weeks ago that the stage is set for "an explosive rise" in commodity prices.

The case for commodities and other basic industrial goods starts on the dark side of the 1990s boom. Besides pumping billions into losing tech propositions, the mania drained capital from other parts of the economy. The opposite face of the tech bubble was an investment crater in basic materials.

Years of falling commodity prices also helped repel money from the bottom of the industrial food chain, and the result, here in 2003, is what many people believe to be an impending shortage of production capacity and inventory for basic items ranging from corn to nickel.

Take ammonia-based fertilizer. Half the factories in North America have shut down, "and what happened in ammonia is a microcosm for many basic industries," says Lewis Johnson, a natural resources analyst at T. Rowe Price. "These industries have been challenged economically because in many cases the prices for the products they make have been declining for almost two decades."

When the economy revives, Johnson believes, the remaining producers of basic materials may be poised to make some money that goes beyond the usual post-recession pop.

Monetary backwash from the tech implosion could also help these companies. Alan Greenspan and other central bankers have flooded the planet with money to try to keep their countries from sinking into recession or depression. Sooner or later, many believe, this spurt will revive not only the world economy but another, more troublesome, patient: inflation.

And that could put companies such as Agrium on a sweet spot. Fewer rivals, growing demand and revived inflation might allow the firms to execute their biggest price increases in years.

Indeed, they already seem to be doing so.

The Commodity Research Bureau's spot-price index, which includes salt-of-the-economy staples such as burlap, rubber, tallow, hide, copper scrap and sugar, has risen by more than 30 percent in the past year.

Rising commodity prices have helped lift the currencies of natural-resource-rich Canada and Australia to two-year highs against the U.S. dollar.

Rising prices don't automatically turn into profits; one company's product is another's component. Fertilizer prices are up, but so are prices of fertilizer-ingredient natural gas, which kept Agrium's earnings from going up as much as they otherwise might have.

Still, Agrium stock rose from close to $8 last year to $11.65 in January before sinking back below $11, making it the biggest contributor to the New Era Fund's second-half results. Is it just a cyclical crest for Agrium and the other economic building blocks? Or something else?

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