* EPS $0.79 vs $1.24
* CEO says will take action if potash prices wane
* Shares rise 2.7 pct on Toronto Stock Exchange (Adds analyst and company comments, updates stock prices; in U.S. dollars unless noted. Changes dateline from New York)
TORONTO, Feb 11 (Reuters) - Fertilizer maker Agrium Inc (AGU.TO) (AGU.N) said profit fell 28 percent due to inventory writedowns and lower sales volumes, but its shares jumped on its outlook for a turnaround in demand later in the year.
The company said on Wednesday that fourth-quarter net income dropped to $124 million, or 79 cents a share, from $172 million, or $1.24 a share, a year earlier. It also said it expects a buoyant second half to the year as farmers begin ramping up the application of fertilizer once again.
"Given the ongoing volatility in crop prices, predicting acreages and crop input demand remains difficult," Chief Executive Mike Wilson, cautioned on a conference call with analysts.
"What is clear is that farmers will plant a crop this spring and they will require a lot of crop inputs to do so."
Fertilizer prices soared in the first half of 2008 on peaking demand, tight inventories and record grain prices. But since then, the global credit crunch and the widening recession have weighed on the agricultural sector.
Prices of nitrogen and phosphate fertilizers tumbled toward the end of 2008 as farmers stayed out of the market in hopes that prices would decline ahead of the spring planting season in North America. Brazilian farmers, hurt by tight credit markets, also cut spending on inputs.
However, prices held for potash -- the third key crop nutrient -- as producers rapidly cut production to keep inventories under control. Eight companies control about 85 percent of global potash supply, with a handful of others accounting for the rest.
Agrium, one of the world's largest nitrogen fertilizer producers, curtailed production at a number of North American operations due to the sudden decline in prices and buildup in inventories.
The nitrogen market faced significant downward pressure in the fourth quarter, but has shown some improvement over the past month, Agrium said.
The company was more cautious on its potash outlook. It said it expected demand to pick up this spring from last fall, but cautioned that it would be difficult to indicate the extent of the improvement.
During the conference call, Wilson did not rule out the possibility of layoffs or shutting in its potash plant totally if sales do not improve.
"We match our production to our sales; we don't do it in the reverse fashion," he said during the call.
"Our production has been throttled around 50 percent. We have not laid off anyone at this point. We have not shut in our plant totally at this point, but if sales don't strengthen we would likely do that."
Analysts also see a turnaround in fertilizer prices once the spring planting begins in North America.
"The first half of the year is not going to be anything to write home about," said Richard Kelertas, an analyst at Dundee Securities, in Montreal. "The proof in the pudding will be in the second and third quarters when everything starts to show up. The key thing here will be the spring plant."
Agrium's results included a noncash foreign exchange gain of 53 cents a share, natural gas and power hedge losses of 47 cents and a recovery in stock-based compensation of 19 cents.
The company also took inventory writedowns of $1.40 a share, linked mainly to a decline in prices of nitrogen and phosphate fertilizers.
Shares of fertilizer producers, which rose sharply in the first half of 2008, have since collapsed. But the better than expected results and improved outlook sent Agrium shares up by 2.7 percent to C$47.25 by early afternoon, after pushing as high as C$48.83 earlier in the day.
$1=$1.25 Canadian Reporting by Scott Anderson, additional reporting by Euan Rocha, in New York; editing by Rob Wilson