Why the Nufarm Limited (ASX:NUF) share price is surging higher

Our market has sunk firmly into the red but at least shareholders in Nufarm Limited (ASX: NUF) have something to smile about as the stock was among the best performers on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index yesterday.

The stock jumped 3.6% to a near four-week high of $7.16 in the final hour of trade. It’s the fifth best performing stock on the ASX 200 after Ausdrill Limited (ASX: ASL), Sims Metal Management Ltd (SGM), Evolution Mining Ltd (ASX: EVN) and Speedcast International Ltd (ASX: SDA).

Nufarm’s strong performance is a welcome change from its big August sell-off on the back of the Monsanto lawsuit over the use of Glyphosate. Monsanto was ordered to pay US$289 million by a US court after a cancer sufferer sued the company for causing his illness by using the chemical in its weed killer product.

Nufarm uses a similar active ingredient in its crop protection products and a Brazilian court had ordered the suspension of the use of Glyphosate.

But Nufarm announced today that the Brazilian court’s decision has been overturned. The suspension was supposed to have come into effect this week.

Deutsche Bank estimates that Glyphosate-based products account for 23% of Nufarm’s total revenue and 15% of earnings before interest, tax, depreciation and amortisation (EBITDA). The broker warned that losing all these sales will shave 15% off the company’s earnings per share.

The regulatory pressure over Glyphosate may not be over yet though as the debate over whether the chemical is carcinogenic rages on.

However, even if regulatory pressure intensifies, I don’t believe the use of Glyphosate will be outlawed. New rules may require better warning labels or the mandatory use of safety equipment. The fact is, there isn’t a good substitute for the chemical when it comes to crop protection.

Furthermore, the recent approval of Nufarm’s proprietary omega-3 canola by the US Agriculture Department (USDA) brings the company a big step forward in commercialising the product.

Getting the tick of approval by the USDA will pave the way for the company to gain approval from other countries, including Australia.

The new seeds represent an exciting opportunity for Nufarm with omega-3 oils currently only being able to be sourced from fish. Omega-3 canola is a more sustainable way to produce the healthy fatty acid.

The ongoing drought in parts of New South Wales and Queensland, and the controversy over Glyphosate will hang over Nufarm’s share price over the near-term, but investors with a longer-term view should use any share price weakness as a buying opportunity.

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Motley Fool contributor Brendon Lau owns shares of Nufarm Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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