Canada-based Nutrien Ltd. (TSE:NTR) (NYSE:NTR) and Ag Growth International Inc. (TSX:AFN) can see their financials coming under pressure as the Justin Trudeau-run government has proposed farmers to decrease the utilization of fertilizers.
The Canadian government is targeting a 30% reduction in greenhouse gas emissions from fertilizers by 2030 from 2020 levels, as stated by a Wall Street Journal report. This proposal falls under the government’s larger plan to reduce emissions by 45% by 2030. According to the government, nearly 10% of total emissions can be attributed to the Canadian agriculture sector.
Within the space, fertilizer can be held responsible for a fifth of the greenhouse gas emissions as it releases nitrous oxide. Also, according to the report, there was a 54% rise in utilization of nitrous oxide by Canadian farmers between 2005 and 2019, along with a 71% jump in fertilizer usage.
In case farmers fail to meet the government’s latest proposal, they could be denied access to grants of around C$1.5 billion, the report stated. These aids are provided to support farmers for buying greener farming equipment, shifting to greener cultivation methods, and making advancements in technologies that can assist in reducing farming emissions.
However, the government’s proposal has clearly not gone down well with the farmers, as they believe lowering fertilizer applications can decrease crop yields amid the ongoing global food crisis, which has been triggered by Russia’s invasion of Ukraine.
Notably, Canada is the fifth largest exporter of agricultural commodities in the world, with wheat, corn, barley, canola, durum, dry peas, soybean and oats being the top crops of the country. It also holds a dominant position as the manufacturer of potash fertilizer.
Against this backdrop, let’s take a deeper look at two Canadian agriculture stocks that are in the line of fire from the government’s latest move.
Nutrien Ltd. (TSE:NTR) (NYSE:NTR)
Canada-based Nutrien Ltd. is a leading provider of crop inputs and services. The company produces and distributes roughly 27 million tonnes of potash, nitrogen, and phosphate products across the globe to agricultural, industrial, and feed manufacturers.
Nutrien is already grappling with supply challenges across global energy, agriculture, and fertilizer markets, which it expects to remain for the rest of 2022. However, the company had a good run in the first six months of this year, largely on the back of strong market fundamentals, impressive operating performance, and solid global production assets.
If imposed, the proposal can hurt Nutrien’s financials as it is witnessing steady operations and sales growth in Canada. In the recently reported quarter, the company stated that it expects to witness increased demand for crop nutritional products, fungicides, and insecticides in the third quarter of 2022 from Western Canada on the back of improving growing conditions.
Turning to Wall Street, analysts seems to be highly optimistic about NTR stock, which commands a Strong Buy rating based on 10 Buys, one Hold and one Sell. Nutrien’s average price target of C$136.63 implies 16.4% upside potential. Shares of the company have grown about 29.3% year-to-date.
Similarly, financial bloggers are 100% Bullish on NTR stock, compared to the sector average of 67%.
Ag Growth International Inc. (TSX:AFN)
AFN is a leading provider of farm and commercial solutions and systems for storage, conditioning, handling, structures, processing, and controls in seed, fertilizer, grain, feed, and food.
The latest proposal, if results in a decrease in crop yields, can adversely impact the company’s financial performance. The company’s Farm and Commercial segments saw improving performance in the second quarter of 2022. While Farm sales rose 11% year-over-year, sales from the Commercial segment witnessed a whopping 112% increase. Management expects to continue witnessing improving conditions in the Western Canada business for the rest of the year.
On TipRanks, analysts have a Strong Buy consensus rating on the stock, which is based on five Buys. AFN’s average price forecast of C$54.60 implies 34.3% upside potential. Shares of the company have climbed about 22.8% year-to-date.
Financial bloggers are 100% Bullish on AFN against the sector average of 67%.
Final Thoughts
Considering the important role that Canada plays in the agricultural commodity supplies, any reduction in the crop yield will not only adversely impact the export levels of the sector and its contribution in the country’s GDP but also exacerbate food prices. Further, the financials of major agriculture industry players like Nutrien and Ag Growth International Inc. could get impacted.
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