CF Industries reported second-quarter results that were generally in line with analysts’ expectations. Nitrogen volumes were up 2.2% year over year as the nitrogen application season in North America finished at a rapid pace following delays to planting caused by wet weather in the Corn Belt.

Last season, warm weather in the spring pulled planting forward. For the first six months of 2013, nitrogen volumes declined 1.9% compared with the same period in 2012. Nitrogen prices were essentially flat year over year, with strength in ammonia offsetting weakness in urea. Ammonia prices reflected a strong order book entering the application season and solid demand. That said, ammonia prices have come down recently and we’re expecting lower prices in the third quarter. Urea prices have waned due to a significantly higher level of imports to the U.S.

Gross profit per ton in nitrogen came in at $235 in the second quarter compared with $276 per ton in the year-ago period. Higher realized natural gas costs of $3.79 per MMBtu compared with $3.13 per MMBtu in the prior-year period dented margin. Over the long run, most analysts are expecting a significant decline in CF’s nitrogen profitability; our long term forecast calls for gross profit closer to $100.

The forecast for margin compression is based on higher gas costs and lower corn prices down the road. We don’t believe CF’s current low-cost position in sustainable, thus we do not award the company an economic moat. For 2013, we’re expecting another year above our mid-cycle estimates for CF. Management is projecting 92 million acres of corn will be planted in the U.S. in 2014 compared with about 97 million acres this season. The phosphate business continues to struggle. Sales declined 18% year over year, with weakness in both prices and volumes. Phosphate gross profit per ton came in at only $43 per ton compared with $102 per ton in the second quarter of 2012. Lower purchases from India and an increase in supply from Saudi Arabia and China are weighing on the market.