AGRIUM AND POTASH CORP. FACE EARNINGS DOWNDRAFT

Agricultural commodities are expected to suffer from oversupply and weak demand again in 2016, prompting a reduction in earnings

estimates for both Agrium Inc. and Potash Corp. of Saskatchewan Inc.

The lower outlook comes from Daniel Greenspan at Macquarie Capital Markets, who trimmed his EPS forecasts for both companies by 10 to 13 per cent in 2016 and 2017. The analyst also cut his price target on Agrium to US$ 95 from US$ 105, and for Potash Corp. to US$17 from US$21.

Macquarie anticipates that the poor economic health of farmers across the globe will lead to limited consumption of nitrogen fertilizers and a sharp pullback for potash.

“Out commodity analysts believe that inventories have continued to build up in destination markets, and without an appropriate supply reaction, the net result will be a sustained period of downward pressure on pricing across all fertilizer markets,” Greenspan said in a report. “Demand is simply not capable of absorbing volumes already available in the market.”

He noted that permanent supply cuts have been virtually non-existent in 2015 and there is no sign of a change of course next year.

On the demand side of the equation, Greenspan cited factors such as El Niño- related weather issues, which have produced lower fertilizer application rates.

He also noted signs of weakening demand in China. Although there has been a yearover- year gain of nine per cent in imports there, that just suggests there will be more inventories at the end of the year.

“This in turn will provide Chinese buyers with strong negotiating power during the 2016 contract talks,” Greenspan said. “The odds are now heavily in favour of Chinese buyers.”

Nonetheless, the analyst continues to prefer Agrium over Potash Corp, particularly because the former has a retail business that provides an important source of growth.

He also noted that during a recent meeting with Agrium management, the company said it plans to make more than 40 tuck-in acquisitions this year that could add approximately $350 million in annual sales and roughly $35 million in EBITDA.