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A High Yield Play on Lower Corn Yields

The U.S. cut its corn-harvest estimate 12 percent and said inventories next year will be smaller than fore cast in June as the worst Midwest drought since 1988 erodes prospects for a record crop.  With the increase in corn prices, companies using corn will be hit with higher expenses while those increasing corn yields will prosper.  The rise in corn prices will affect food prices as corn is a primary food source for livestock.  Investors must be wary of how the increase in corn prices may affect their portfolios.

Crop conditions as of July were the worst for that date since the drought of 1988, government data show.  Tighter supplies than expected may boost costs for ethanol makers including Archer Daniels Midland Co. (ADM) and several meat producers.  Investors are lightening up on their protein diets, unloading shares of Sanderson Farms Inc. (SAFM), Pilgrim’s Pride Corp. (PPC) and Tyson Foods Inc. (TSN) over the past month amid a swift rise in futures prices for feed grains.

Fertilizer stocks are moving higher after the government reported greater than expected damage to corn crops.  Shares of fertilizer makers CF Industries (CF), Potash (POT) and Mosaic (MOS) have already made a significant move up in price.  In addition, one fertilizer stock to watch was an IPO in November 2011 that pays a high dividend yield.

Rentech Nitrogen (RNF) was formed by Rentech, Inc. to own, operate and expand its nitrogen fertilizer business.  Rentech Nitrogen’s assets consist of a nitrogen fertilizer facility located in East Dubuque, Illinois, owned by Rentech Nitrogen, LLC, the operating subsidiary of Rentech Nitrogen Partners, L.P.  The facility is located in the Mid Corn Belt in the northwestern corner of Illinois, adjacent to the Iowa and Wisconsin state lines, and produces primarily anhydrous ammonia and urea ammonium nitrate solution, using natural gas as its primary feedstock, for sale to customers in the Mid Corn Belt.

Rentech Nitrogen Partners, L.P. (RNF) announced today the declaration of a cash distribution of $1.17 per common unit for the second quarter of 2012. The distribution is payable on August 14, 2012 to holders of record as of August 7, 2012.  RNF is trading at $30.56 at the time of this writing.

This will be the second cash distribution paid by Rentech Nitrogen since its initial public offering (IPO) in November 2011, and will result in cumulative cash distributions since the IPO of $2.23 per common unit.  Of that amount, $1.70 relates to the twelve months ending December 31, 2012, and $0.53 relates to the period from the IPO through December 31, 2011.

Rentech Nitrogen believes that it is well positioned to exceed its forecast of cash available for distribution in the range of $2.86 per common unit for the twelve months ending December 31, 2012.  RNF is trading at $30.56 at the time of this writing.  Based on $2.86 in dividends, RNF has a dividend yield of 9.36%.  Based on the current year EPS, RNF trades at a PE of 10.8.  RNF has a Forward EPS Long Term Growth (3-5 Yrs) of 12%.

The Partnership will provide details on its guidance during its previously announced conference call to discuss financial results for its 2012 second quarter on August 3, 2012.

Revenues for the three months ended March 31, 2012 were $38.5 million, as compared to$23.9 million for the comparable period in the prior year. Current period revenues benefited from higher sales prices caused by a combination of low levels of grain and fertilizer inventories and expectations of higher corn acreage in 2012.  An early spring application window, strong nitrogen demand, strong plant production and on-stream time, and low natural gas prices contributed to the exceptional results for RNF.  During the quarter, RNF operated the plant at maximum capacity to take advantage of the strong market dynamics.

RNF continues to benefit from relatively low North American natural gas prices, which, when coupled with strong nitrogen product prices, resulted in gross profit margin of 59% for the period, up from 43% for the comparable period in the prior year.

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