We believe Nutrien shares are undervalued compared to our fair value estimate of USD 70 (CAD 96). Since reaching an all-time high in 2022, the stock has experienced a decline and now trades at a significant discount to our valuation. For income-focused investors, Nutrien currently offers a 3.6% dividend yield. We attribute the market's reaction to tariff-related uncertainties that may impact profits. However, we anticipate that US farmers will continue to invest in essential crop inputs, such as seeds, crop chemicals, and fertilizers. We expect potash prices to increase, and a reduction in overhead costs within the retail segment will contribute to profit growth in 2025.
Nutrien's competitive advantage stems from its cost-effective potash and nitrogen production. As the largest potash producer globally by capacity, potash represents the firm's most significant profit source. Its Canadian mines benefit from favorable geological conditions, resulting in lower mining and processing costs compared to competitors. We project an increase in potash prices in 2025.
The onset of the Russia-Ukraine conflict in 2022 caused potash prices to spike to record levels due to restricted exports from Russia and Belarus, which together account for 40% of global potash exports. In response to these high prices, potash demand declined significantly. However, the supply shock was temporary, as Russia and Belarus quickly restored exports through shifts in global trade. Supply rebounded more rapidly than demand, causing prices to drop to cyclically low levels. We expect demand to fully recover in 2024, with further growth anticipated in 2025. Additionally, both Belarus and Russia are planning to reduce potash production this year to support higher prices. Even if the US, EU, and Russia reach an agreement allowing Russia to sell potash to these regions, we foresee minimal impact on the supply and demand dynamics. Higher prices are likely to benefit Nutrien.
Lastly, we anticipate a recovery in retail profits. Nutrien is the largest farm retailer in the US. As more farmers adopt online farm management tools, Nutrien intends to decrease its US store count, which will help lower overhead expenses. This strategy is expected to enhance profits in 2025.
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