Agrium expands retail network

Agrium is not building new fertilizer plants, but it is going to continue expanding the retail side of its business.

“It is something we remain committed to and something that has been very lucrative for us,” chief financial officer Steve Douglas told investors attending BMO Capital Markets’ annual Farm to Market conference.

Agrium has spent $2.2 billion on 348 tuck-in acquisitions since 2010. Tuck-ins are small, independent retail outlets.

The numbers do not include the purchase of major chains, such as when Agrium acquired 210 of Viterra’s retail outlets in Western Canada and another 13 in Australia for $300 million in 2013.

Independent retailers are getting out of the business for a variety of reasons, including competitive pressures.

“Life is becoming very short for these mom and pop stores,” said Douglas.

They have to deal with environmental concerns, learn all the latest information about precision agriculture and invest in rolling stock such as trucks and application equipment.

“It just becomes a lot for them,” he said.

Tuck-ins have proven very profitable for Agrium, contributing $200 million to the company’s earnings in the first year after they were acquired over the last six years.

“Absolutely we’re going to remain aggressive on the retail side where it makes sense because we think that’s a key area of growth for us,” said Douglas.

By comparison, the company is putting the brakes on capital expenditures on the manufacturing side of the business now that it has commissioned its new urea plant in Borger, Texas.

Agrium owns 1,500 retail outlets in seven countries with 85 percent of its retail earnings contribution coming from its North American assets.

Douglas said the company’s more than 300 retail outlets in Western Canada have proven to be a good purchase.

Agrium has been able to capture the freight advantage of having retail outlets located so close to the company’s nitrogen, potash and phosphate production facilities in Alberta and Saskatchewan.

“What that meant for us was saving about $30 to $35 per tonne,” he said.

The company is making good margins manufacturing and selling urea in Western Canada and the U.S. Pacific Northwest.

Western Canada is among the lowest cost regions in the world for making urea fertilizer because of Alberta’s plentiful natural gas reserves and the nature of pricing in that province.

Combine that with a significant profit margin for selling the product in northwestern North America and it’s a recipe for making money.

The benchmark price for urea in North America is set at New Orleans and is called the NOLA price. The selling price in the rest of North America is the NOLA price, plus freight.

Urea in northwestern North America sold for an average of $92 per tonne over NOLA from 2010-14 because of the cost to ship imported product from New Orleans by rail.

Douglas said Agrium’s “protected advantage” in the region will remain for the foreseeable future.

That is because 30 percent of U.S. urea production capacity is located on tidewater along the Gulf of Mexico, where it is much more economical to ship product by boat to South America than by rail to northwestern North America.

The retail segment of Agrium’s business contributed $2.6 billion to gross profit in 2016 with 40 percent of that coming from crop protection products, 30 percent from crop nutrients, 16 percent from agronomic services, 10 percent from seed and four percent from other merchandise.

The most profitable products are the company’s Loveland line of off-patent, generic products.

The proprietary products provide 50 to 100 percent higher margins than third party products. However, the company has to be careful that it doesn’t become too aggressive in marketing those products.

“Like any private label brand, we have to make sure we don’t crowd out the rest of our suppliers,” said Douglas.

Agrium’s market share ranges from 30 to 35 percent in most countries where it operates. The exception is the United States, where it controls 19 percent of the crop input business.

The company believes it is under-represented in the U.S. corn belt, where farmer co-operatives have a stranglehold on the crop input business. That is one region where the company plans to augment its tuck-in strategy by building 10 to 30 new retail outlets by 2020 and hiring away the “local all star” employees from the co-ops by offering them more money.

Another target for growth is Brazil, where pastureland is being converted to higher value crops such as sugar cane, which require more nutrients.

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