The recent sharp drop in commodities has put the slippages on the red bull run that we saw in the first half of this year. The signal from the US Fed that the rate hike could come sooner than expected sent the US dollar higher and commodities falling due to the inverse relationship between the two. The downward flow of commodities intensified further following signs of tightening monetary policy by the Chinese government.

Analysts say the pullback was late after increased industrial demand following the economic reopening sent commodities soaring in the first half of the year. The S&P GSCI Index, the benchmark index for investments in commodities, has gained 27% for the year to date, far outpacing the gains of almost 11% for the S&P 500 Index and slightly over 17% for the S & P / TSX Composite Index, as of June 18.

Investors looking to increase their exposure to commodities may want to keep the following major players on their scanners and expect an attractive entry point and significant margin of safety.

Nutrien Ltd.

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NTR

Current yield:

3.17%

P / E forward:

19.27

Price

$ 72.49

Just value:

$ 78

Value

Quite valued

Pit

Narrow

Moat trend

Stable

Star rating

***

Data as of June 21, 2021

Saskatchewan’s Nutrien Company (NTR) is the world’s largest fertilizer producer. It produces nutrients for crops – nitrogen, potash and phosphate. Although a world leader in potash, with around 20% market share, the company is also the largest agricultural retailer in North America and Australia, selling fertilizers, crop chemicals and seeds directly to farmers. through physical stores and online platforms.

Nutrien is expanding its retail store base through an acquisition strategy, which should strengthen its negotiating power with suppliers. “The company benefits from the sale of exclusive and private label products in its newly acquired stores,” a Morningstar stock report said.

On the flip side, the commodity heavyweight is also strengthening its online retail platform, “which is expected to drive sales growth as a greater proportion of agricultural retail sales move into line “, indicates the report.

“We expect the retail segment, which is expected to account for around 60% of gross margin under mid-cycle conditions, to generate relatively stable cash flow,” said Seth Goldstein, equity analyst at Morningstar, who assesses the fair value of the stock at $ 78.

Nutrien’s digital retail offerings incorporate an app that helps farmers plan their crop production. “Since a farmer’s field data is contained in the app, digital retail offers traces of change costs, as farmers are unlikely to change as the app will become an integral part of their business, ”says Goldstein.

However, he cautions that while the app may increase the likelihood that farmers will continue to purchase Nutrien products, it may not translate into lasting pricing power.

CF Industries Holdings Inc

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FC

Current yield:

2.46%

P / E forward:

18.08

Price

$ 48.80

Just value:

US $ 55

Value

Quite valued

Pit

Nothing

Moat trend

Stable

Star rating

***

Data as of June 21, 2021

A leading producer and distributor of nitrogen fertilizers, CF Industries (CF) operates seven nitrogen facilities in North America and has joint venture partnerships in the UK and Trinidad and Tobago.

The company produces nitrogen primarily using low-cost US natural gas, making it one of the cheapest nitrogen producers in the world. “CF’s factories are connected to its major Corn Belt customers in the United States through an extensive pipeline, rail and barge distribution network, giving the company an advantage in terms of transportation costs by compared to foreign competition without access to pipelines, ”says a Morningstar stock report.

As one of the largest producers of nitrogen fertilizers in North America, CF’s fortunes are closely tied to the area planted to corn in the United States. “Nitrogen fertilizers are essential for obtaining higher yields in corn because the crop, unlike soybeans, does not produce its own nitrogen,” says Goldstein who sets the fair value of the stock at US $ 55.

On a more positive note, the low gas costs in North America relative to the rest of the world have “made CF and other North American producers more competitive with their foreign rivals, which rely on natural gas or raw materials. higher-cost coal-based raw materials, ”Goldstein Notes.

Natural gas represents nearly 50% of production costs.

CF is also investing in carbonless ammonia, which is expected to see increased demand as an alternative fuel to hydrogen. “This represents an additional source of demand for ammonia at a higher price, because ammonia is a low carbon fuel,” Goldstein explains.

Cameco Corp

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CCO

Current yield:

0.34%

P / E forward:

Price

$ 23.27

Just value:

$ 24

Value

Quite valued

Pit

Narrow

Moat trend

Positive

Star rating

***

Data as of June 21, 2021

Cameco (CCO) is one of the largest producers of uranium in the world. Forced by years of declining uranium prices, the Canadian company cut production, instead buying in the spot market to meet contract deliveries. Over the long term, the company has the ability to increase annual uranium production by restarting closed mines and investing in new ones.

“Uranium offers a rare opportunity for growth in metals and mining,” says a Morningstar stock report, noting that while China’s structural slowdown could end a decade-long boom for most raw materials, it will not impact uranium.

Uranium prices have been falling for years, due to the overabundance of supply, but this situation is not sustainable as much of the existing production would not be profitable at these prices. “We expect global uranium demand to increase by around 40% by 2025, a staggering amount for a product that has seen near zero demand growth over the past 10 years,” said Morningstar business manager Kristoffer Inton, who is forecasting new reactor capacity to drive the fastest growing uranium demand in decades.

Its growth projections are based on quadrupling the Chinese reactor fleet and new reactors in India, South Korea and Russia. These reactors should produce nuclear power rather than resorting to conventional means such as coal.

As a result, the supply of mined uranium will struggle to keep pace amid growing demand and declining secondary supplies. “These deficits are expected to start affecting price negotiations over the next two years,” said Inton, who values ​​the stock’s fair value at $ 24 and expects significant long-term earnings growth, supported by price. higher uranium and growing demand.