Agrium posts record profit but drought clouds upside

North America’s biggest retail supplier of farm products and services, Agrium Inc , reported record high second-quarter profit on strong demand for crop inputs, but analysts said the severe U.S. drought presents downside risks.

National Bank Financial cut Agrium’s rating to "underperform" from "sector perform" on Friday, following a downgrade on Thursday by Dahlman Rose and Co. Agrium reported its second-quarter results late on Thursday.

"Management is optimistic about prospects given the rally in grain prices, though there is risk that nutrient demand could be muted near term if the U.S. drought persists into the fall," National Bank analyst Robert Winslow said in a note to clients.

"With much more apparent downside risk than upside for grains, we argue the next few quarters of fertilizer demand/pricing will be as good as it gets this cycle."

Agrium shares were up 0.7 per cent to $94.85 in New York on Friday morning and slightly higher at C$94.76 in Toronto, as investors digested a slew of company news, including its earnings, analyst downgrades, and a share buy-back.

The stock has gained about 40 per cent this year, following skyrocketing corn prices.

Dahlman Rose analyst Charles Neivert said he is turning cautious and downgraded both Agrium and rival Potash Corp of Saskatchewan Inc to "hold" from "buy" on Thursday.

"The upside in the 2013/2014 crop has largely played out and drought conditions introduce a multitude of downside risks which outweigh the rewards in our view," he wrote to clients.

The drought in the U.S. Midwest has scorched developing corn and soybean crops, causing grain prices to skyrocket, often pulling up fertilizer stocks with them.

There could be a slight reduction this autumn in use of potash and phosphate nutrients, both of which Agrium produces, in the most parched areas of the United States, said Agrium chief executive Mike Wilson, but he said the drought will solidify demand overall for crop inputs in the 2012 second half.

"Our fundamentals look great, not just for the next few months, but the next few years," he told analysts.

Calgary, Alberta-based Agrium reported its quarterly results late Thursday night, following news that U.S. fertilizer producer CF Industries Holdings Inc had struck a deal with Glencore International Plc to buy Viterra Inc’s minority stake in Canada’s largest nitrogen fertilizer plant, Canadian Fertilizers Ltd.

The deal gives CF full control of the Medicine Hat, Alberta, plant and replaces a previous deal in which Glencore planned to sell the stake to Agrium, which had raised competition concerns among Canadian farmers.

Wilson said Agrium’s decision to back off plans to keep an interest in the fertilizer plant is not related to a review by Canada’s Competition Bureau of its purchase of Viterra assets, which include 232 Canadian farm retail stores.

"There was always some risk with the Competition Bureau, but in essence … it’s a good sale for us."

Agrium’s net earnings for the second quarter rose 20 per cent to $860 million, or $5.44 per share, from $718 million, or $4.54 per share, a year ago. Revenue rose 10 per cent to $6.83 billion.

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