* Adjusted profit $1.34 a share vs $1.82 estimate
* Sales down 6 pct, retail business hurt by drought
* Sees 4th-qtr profit below analysts' view
By Rod Nickel
Nov 7 (Reuters) - Canadian fertilizer company Agrium Inc 's shares slumped 7 percent after it reported a 56 percent drop in third-quarter profit Wednesday on lower potash sales and offered a weaker-than-expected outlook for the fourth quarter.
Downtime at Agrium's Saskatchewan potash mine and drawn-out contract talks with China and India hurt third-quarter performance, CEO Mike Wilson said.
Agrium's Toronto-listed shares dropped 7.2 percent to around $98.78 in early trading. The stock was up 55 percent this year through Tuesday, helped by spiking grain prices due to the U.S. drought.
"We believe negative initial market reaction could prove pessimistic," said analyst Edlain Rodriguez of Lazard Capital Markets, in a note to clients.
Fertilizer fundamentals remain strong, especially with U.S. farmers likely to plant a near-record-large acreage of corn, a heavy user of crop nutrients, in the spring, he said.
Rival Potash Corp of Saskatchewan last month reported third-quarter earnings down 22 percent due to a standoff on new contracts with China and India. Agrium, Potash and Mosaic Co sell potash from Western Canada to offshore markets through marketing agency Canpotex.
New contracts with China and India, the world's top two potash consumers, were anticipated by late summer but are now expected by late this year for China and possibly early 2013 for India.
Both are believed to be seeking discounts from Canpotex, with China currently amply supplied and potash too expensive for some Indian farmers after a cut in government subsidies.
Agrium sells nearly half its potash in North America.
The company's Vanscoy, Saskatchewan mine was shut down due to expansion-related work for at least eight weeks in the quarter, dropping potash sales by more than half to 160,000 tonnes, including some supplies the company had to buy from other producers to meet sales commitments.
Potash helps plants develop strong roots and retain water, boosting yields and helping them resist disease, drought and insects. Unlike nitrogen, however, farmers don't usually apply it every year.
Agrium's net earnings for the third quarter ended Sept. 30, fell to $129 million, or 80 cents per share, from $293 million, or $1.85 per share, a year ago.
Excluding one-time items, earnings were $1.34 per share. Analysts were expecting, on average, $1.82, according to Thomson Reuters I/B/E/S.
Agrium posted weaker earnings despite strong performance in its sales of nitrogen, which has returned big profit margins due to low costs of natural gas, a key ingredient.
Sales at Agrium's retail business of selling seed, chemicals and fertilizer to farmers - the largest in the United States - dropped 10 percent as the US faced its worst drought in over half a century.
"The negative impact of the U.S. drought on the company's retail segment was much stronger than we expected, and appears to have caught most sell-side analysts by surprise," said Robert Winslow, analyst at National Bank Financial. "This may not be well viewed by investors since retail results are supposed to help moderate overall earnings volatility."
Agrium is attempting to fend off a push by its largest shareholder, Jana Partners, to spin off its retail division, which Jana says would provide a bigger return to investors than Agrium's integrated strategy.
On Monday, rival nitrogen producer CF Industries Holdings Inc posted a better-than-expected quarterly profit as low-cost natural gas offset a drop in sales from the dry North American summer.
Total sales for Agrium fell 6 percent to $2.96 billion, below analysts' average forecast of $3.13 billion.
The Calgary, Alberta-based company forecast fourth-quarter earnings of $1.50 to $1.90 per share, below analysts' expectations of $2.10.
Agrium said it expects to use 10 percent less of its potash mine's capacity in the fourth quarter year over year, due to weak international demand.