This fertilizer stock enjoys advantages that can be sharpened through options trading
CF Industries sits in an interesting spot as energy volatility rattles much of the market. The key is understanding what natural gas means to CF, which makes nitrogen fertilizer. Gas is not a secondary input. It is the cost structure. Natural gas accounts for roughly 34% of total production costs and about 80% to 85% of the cost of producing ammonia, the foundational building block for CF’s fertilizer. That means feedstock matters enormously. A $1-per-MMBtu move in gas prices changes ammonia production costs by about $32 per ton, granular urea by $22 per ton, urea ammonium nitrate (UAN) by $14 per ton and ammonium nitrate by $16 per ton. In 2025, CF’s gas cost rose to $3.31 per MMBtu from $2.40 in 2024, and that increase cut gross margin by about $316 million. As I write this, the front-month Henry Hub future was ~$3.26 per MMBtu on Wednesday. It might seem that sharply rising natural gas prices in some places could harm CF, but the issue isn’t the absolute cost of gas — it’s where CF sits on the global cost curve. CF’s real advantage is that it is a large North American nitrogen producer with access to comparatively cheap U.S. natural gas. That matters because international competitors, especially in Europe and parts of Asia, are paying substantially more. If European and Asian producers pay more, CF will enjoy a significant input-cost advantage. The negotiated price can vary by location, but to gauge the magnitude of the difference, we can compare the price of the ICE Endex Dutch TTF natural gas contract with the CME/NYMEX Henry Hub contract. To do this, a little math is necessary because the Dutch contract is valued at 37,191.82 euros for 744 MWh. So: $1.1548 ~ 1 euro 1 MWh = 3.412 MMBtu $42,949.11 = 2,538.53 MMBtu $16.9189 / MMBtu, over 420% higher than the U.S. Henry Hub contract. In a world where global oil and gas prices remain elevated, many businesses simply see their margins squeezed. But higher global energy prices can actually be constructive for CF because they constrain high-cost international supply. When European and Asian producers face much more expensive feedstock, nitrogen product prices tend to adjust higher, and low-cost producers like CF are in a position to capture that spread. Put differently: higher global energy costs may hurt CF at the margin, but they tend to hurt its competitors more. That is also why nitrogen is a little different from many other commodity businesses. Nitrogen prices can adjust relatively quickly to changes in energy costs. That does not make margins immune, but it does help limit the damage. When the cost curve shifts up globally, selling prices often move with it. For a low-cost producer, that dynamic can be especially favorable. Since the Feb.28 strike on Iran, Dutch gas futures, already substantially higher than U.S. gas futures, have risen by more than 56%, while U.S. futures have risen only 15%. Without a pipeline, as Europeans learned painfully when the Nord Stream pipeline was sabotaged, replacing gas in a tight market is very difficult. Prices have come down since the Nord Stream attack, largely due to LNG imports, which are now at risk because of Iran’s threats in the Strait of Hormuz. Under normal circumstances, approximately 20% of global LNG passes through this strait. Unsurprisingly, CF Industries shares have rallied nearly 24% since the initial strikes and, as one would expect, options premiums have risen sharply as well, as traders handicap possible outcomes. CF implied volatility actually surpassed the highs that followed the “Liberation Day” tariff announcements in spring 2025. Consequently, buy write, cash covered puts and call spread risk reversals all have more attractive breakevens. For example, a June 100/125/145 call spread risk reversal costs ~ $1.70, about 1.4% of the stock price. A trader has long exposure from 125 to 145, or below 100, which was the 52-week high before the war broke out. DISCLOSURES: None. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
