The summer of 2012 will long be remembered for the worst drought in more than 50 years and conceivably the worst since the Dust Bowl. More than 80% of U.S. grain crops have been affected by this year's drought and the economic effect will be felt next year with harvests coming in at record-lows, driving grain prices to skyrocket.
In response to higher grain prices, farmers are likely to increase the amount of acreage planted, which in turn boosts demand for seed, farm equipment and fertilizer. Monsanto (NYSE: MON) and Dupont (NYSE: DD) should experience huge sales of their new drought-resistant seed lines and Deere Co. (NYSE: DE) could enjoy strong demand for new combines and tractors.
If you're an income investor, then the most appealing agriculture investment may be in the fertilizer industry, since fertilizer stocks tend to sport really nice, high yields of up to 10% in some cases.
The three fertilizer master-limited partnerships (MLPs) below, for instance, yield as much as 10% and are poised to deliver double-digit or even triple-digit income growth this year.
1. CVR Partners LP (NYSE: UAN)
CVR Partners is a fairly new MLP that went public last year when CVR Energy spun off the fertilizer side of its business. The company is the only fertilizer producer in North America that uses petroleum coke (a by-product of crude oil refining) to make fertilizer. CVR Partners secures its coke supplies from a nearby CVR Energy refinery. This reliable feedstock supply gives CVR Partners a big cost advantage, because petroleum coke is much cheaper than natural gas, positioning the limited partnership as a low-cost fertilizer producer.
The company produces urea ammonium nitrate (UAN), which is the main fertilizer ingredient used to grow corn. In the first six months of 2012, CVR Partners produced 335,000 tons of UAN, while operating its plant at 99% capacity.
Following its investments, UAN expects a 50% increase in production capacity for next year. Reflecting increased sales volume and higher fertilizer prices, CVR Partners' cash available for distribution soared 176% during the first six months of 2012 to about $52 million from the same period a year earlier.
In June, UAN paid a quarterly distribution of 60 cents a unit, with a target of full-year distribution to be between $1.65 and $1.85 a unit. In addition, management is providing guidance for 30% growth in cash available for distributions in 2013. At the mid-point guidance for the 2012 distribution at $1.75, CVR Partner units yield almost 7%.
2. Terra Nitrogen (NYSE: TNH)
This MLP is a leading U.S. producer of nitrogen fertilizer. The company produces 1.9 million tons of nitrogen fertilizer annually, as well as 1.1 million tons of ammonia, a key fertilizer ingredient. Terra Nitrogen's production volume rose 8% during the first six months of 2012, which contributed to a 12% year-over-year improvement in earnings of more than 10% from $249.8 million last year.
Terra Nitrogen has been a steady grower, posting 22% average earnings growth in the past five years. It is financially strong with zero debt, profit margins exceeding 38% and a 203% return on equity. Margins are exceptional, because Terra Nitrogen's raw material costs are falling. The company's main feedstock expense is natural gas, and this year alone prices have plummeted 27%.
Terra Nitrogen paid distributions totaling $13.91 a unit in 2011 and has already paid $8.53 per unit during the first six months of 2012. This suggests a forward annualized distribution rate of $17.06, giving units a forward yield of 8%.
3. Rentech Nitrogen Partners LP (NYSE: RNF)
Rentech Nitrogen is a pure-play nitrogen fertilizer company that was formed last year by Rentech (NYSE: RTK). The company's principal asset is a nitrogen fertilizer plant located in the heart of the U.S. Midwestern Corn Belt region, which is also this country's largest market for nitrogen fertilizer. Rentech Nitrogen's production facility uses natural gas as its primary feedstock.
During the first six months of 2012, Rentech Nitrogen increased EBITDA by 34% year-over-year to $66.8 million, and it anticipates full-year EBITDA to exceed $130 million. Rentech Nitrogen operated its plant at 100% capacity during the second quarter of the year and has an expansion project underway that will increase annual production by 23%. It's spending $100 million on this project, which is scheduled for completion by year-end 2013.
The company has $44 million in cash with only $21 million in total debt, and produces 34% profit margins. Rentech Nitrogen paid a higher-than-anticipated distribution of $1.17 a unit during this year's second quarter and expects to pay cash distributions exceeding $3.30 per unit for the year. Assuming management's full-year distribution guidance is accurate, then Rentech Nitrogen units yield close to 10%.
Risks to Consider: Distributions from all three companies vary with earnings and may fall if earnings decline. Also, because CVR Partners and Rentech Nitrogen began trading only recently, there is no historical trend data to analyze. But high-growth rates and expansion projects for these companies in 2012 have proven the partnerships' ability to grow the business.
Billionaire investor Carl Icahn recently acquired 80% of CVR Energy, the main supplier of CVR Partners, and is seeking a buyer for the company's refinery. While feedstock supplies for CVR Partners are guaranteed under long-term contracts through 2027, a sale of the refinery could present longer-term supply risks.
Action to Take --> My top pick overall is Terra Nitrogen, simply because this MLP has a proven track record of steady growth and zero debt. CVR Partners and Rentech Nitrogen are recent IPOs and therefore, a bit more speculative. For investors who don't mind the added risk, CVR Partners has a little more competitive advantage as a low-cost producer.