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Agrium curbs profit hopes, as seed sales hurt by farm cutbacks

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Seed sales have proved more vulnerable to low crop prices than demand for other inputs, Agrium said, as the farm retail-to-fertilizer group cut hopes, again, for full-year profits, despite a better-than-expected quarterly result.

The Canada-based group – which, with more than 1,250 outlets worldwide, claims to be the globe's biggest farm retailer – reported a 6.6% drop to $1.26bn in gross profits in the division for the April-to-June quarter, on sales down 3.7% at $6.16bn.

The downturn reflected a cocktail of setbacks, including "unfavourable weather conditions", with too much rain in the US Midwest hampering fieldwork, while excessive dryness set back hopes for Canadian growers.

Agrium also flagged "competitive pricing pressure [in crop inputs] as a result of lower crop prices and reduced US corn acreage, which impacted our crop nutrients and seed sales and margins".

'Trading down by growers'

However, within the retail division, it was the seeds results which suffered worst, recording a 16.3% drop in gross profits to $164m on sales down 5.4% at $982m, bigger declines than seen in fertilizers and agrichemicals.

"The lower crop price environment this spring had the largest impact on the seed business," Agrium said, citing market rivalry and the willingness of farmers to opt for cheaper varieties.

"Seed sales and margins were negatively impacted by competitive pressures between suppliers, and some trading down by growers in terms of seed genetics."

The group also noted "significant unseeded soybean acreage in the US due to the wet weather later this spring" – a theme which has come sharply into the market's focus, with the US Department of Agriculture on Wednesday expected to downgrade its forecast for domestic soybean plantings.

US demand holds up

Agrium said that in fertilizer retailing, profits had fallen by a more modest 10.1%, on sales down 3.7%, with a small rise in US takings, "despite lower corn and total seeded acreage", offsetting much of the decline in demand in the drought-hit Prairies.

"Virtually all of the reduction [in retail fertilizer sales] was due to lower demand in Canada related to drought conditions and lower crop prices," the group said.

Excessive dryness, besides writing off some crops, renders redundant applications of fertilizer, which require moisture for absorption by plants.

Meanwhile, profits from agrichemicals held steady, on sales down a modest 1.4%, buoyed by increasing revenues in North America.

"The increase was a result of higher herbicide and insecticide sales in our US operations despite the wet conditions during June across the US Corn Belt."

'Increased disease pressure'

The group forecast continued firm demand for crop sprays in wetter regions, saying that "in areas with excess moisture, the wet conditions tend to lead to increased disease pressure, supporting fungicide demand".

The late June-early July grain market rally had also improved prospects, as it "offered growers higher priced selling opportunities and improved grower sentiment".

However, the group nonetheless cut to $1.0bn-1.05bn, from $1.15bn-1.22bn, its forecast for earnings before interest, tax, depreciation and amortisation (ebitda) at its farm retail division over 2015, citing the lingering pressure from Canada's dryness.

"In drought areas, growers have in some cases sought to reduce crop nutrient and crop protection applications on struggling crops," Agrium said.

Guidance downgrade

The group earnings forecast for 2015 was reduced to $7.00-7.50 per share, after being trimmed in May to $7.00-8.25 per share from $7.00-8.50 per share.

The downgrade came despite Agrium's underlying earnings in the April-to-June quarter, at $4.90 per share, exceeding market expectations of a $4.78-per-share result.

In the wholesale fertilizer market, the group said that prices have generally weakened, driven by the seasonal slow-down in demand.

In the urea market, "the expectation of a return of increased Chinese supply to the export market, combined with new exportable supply in Algeria, Saudi Arabia and the US, in the second half of the year, have pressured global prices".

In potash, the group highlighted "robust" orders from China and India, but a 21% drop in Brazilian demand, although this market is expected "to improve" in the July-to-September period.

Agrium shares stood 2.6% lower at Can$130.86 in lunchtime deals in Toronto.

By Agrimoney.com

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