Yara International highlighted caution among European farmers over buying fertilizers, taking some of the shine from quarterly results which narrowly beat expectations, despite a drop in urea prices.

The nutrient giant said that, with agricultural commodity prices high, farmers had a "strong" incentive to boost fertilizer applications to boost yields and exploit "improved margins for most arable crops".

"Pre-buying incentives for the new season are significantly stronger than a year ago, with higher grain prices and lower nitrogen fertilizer prices," the Norwegian-based group said.

However, Europe's farmers "remain cautious" despite profitability prospects, Yara said, noting the "negative macroeconomic environment".

Yara chief executive Joergen Haslestad said: "We have seen a cautious behaviour in Europe, and the farmers are sitting a bit on the fence.

"We do believe that they now are now sitting and waiting as they did last year."

Market headwinds

The comments throw up a second question mark for a fertilizer sector which earlier this week witnessed a profit warning by PotashCorp, the top potash group by capacity, blamed on delays to China and India signing new contracts.

Yara also flagged Indian reluctance to buy urea, with purchases "lagging due to a late monsoon", down 3% so far in a season which started in April, while noting that Brazilian urea imports tumbled 10% in the July-to-September quarter thanks to "higher opening stocks" than last year.

Many observers have also flagged port hold-ups and improved working conditions for truck drivers as hampering Brazil's fertilizer trade.

Separately, Gleadell, the UK grain and nutrient merchant, flagged that "UK urea demand remains slow", amid a rain-hampered autumn sowing period.

Capacity doubts

However, Yara, which said international urea prices were, at an average of $383 a tonne, down 21% year on year, flagged supportive factors to the market from setbacks to fresh global manufacturing capacity, "in Egypt and Algeria in particular".

While world capacity was set to rise 2.6% in 2013, ahead of annual growth in demand which averages 2.1%, on Fertecon forecasts, "further capacity delays are evident compared with these estimates", Yara said.

"Projects due for 2012 and 2013 completion remain behind schedule overall."

And while several new plants are being planned for North America, for completion in 2015 and beyond, "most of these projects are at an early stage, with significant uncertainty linked to financing and permitting hurdles".

Market reaction

The comments came as Yara unveiled earnings before interest, tax, depreciation and amortisation (ebitda) for the July-to-September quarter of NOK4.19bn ($745m), flat on the same period a year before.

The figure, on revenues down 1.7% at NOK20.8bn, reflecting the lower urea prices, was marginally above market expectations of a NOK4.15bn result.

"I am particularly pleased with our production growth this quarter, due to both higher regularity in Yara plants and increased capacity in Qatar," Mr Haslestad said.

DNB Markets analysts restated a "buy" rating on Yara shares, with a price target of NOK302, saying that while Yara's sales volumes had fallen short of expectations, its margins were better than had been expected.

The shares stood 1.9% lower at NOK285.70 in afternoon deals in Oslo.