Agrium Inc posted a better than expected quarterly profit on Wednesday thanks to strong sales of seed and crop protection chemicals, sending its shares higher along with those of its peers.

Agrium said the outlook for its businesses and products remains strong and it is starting to see signs of improving demand fundamentals as it approaches the fall season.

The Canadian fertilizer maker and agricultural products retailer said it expects a rebound in fertilizer application rates this fall. Farmers stung by the credit crunch and high fertilizer prices have deferred purchases over the past year.

Agrium, which has been pursuing a hostile bid for smaller U.S. rival CF Industries Holdings Inc since February, also reiterated that it remains fully committed to the deal.

Excluding one-time items, Agrium posted earnings of $2.43 a share in the second quarter, well above the average analyst forecast of $1.83 a share, according to Reuters Estimates.

Retail is a great business, even in what has been probably one of the lousiest environments it has ever had to traverse, said Morningstar analyst Ben Johnson. The retail results were really good and are going to get better, as you approach early 2010 and nutrient margins begin to improve.

Net income fell to $370 million, or $2.35 a share, from $636 million, or $4.00 a share.

The 42 percent decline in net income was due to lower sales prices and volumes for nitrogen and phosphate products, combined with significantly lower potash sales volumes.

Nitrogen, phosphate and potash are the three main nutrients used by farmers around the globe.

DIFFICULT CONDITIONS

Fertilizer companies posted record results a year ago, but the credit crunch, coupled with a collapse in commodity prices and a slump in fertilizer demand, has led to a drastic change in conditions for the industry over the past year.

Potash Corp of Saskatchewan, the world's largest fertilizer producer, recently reported a drop of almost 80 percent in its second-quarter profit.

However, conditions in the sector have begun to show signs of improvement. India recently negotiated a steep cut in potash pricing with global suppliers, this has created some certainty around pricing and brought other buyers like Brazil back into the market.

Agrium said the outlook globally for nitrogen-based fertilizers like urea and ammonia appears more stable, because of increased demand from India, Pakistan and Brazil.

Global phosphate markets have also recently shown some signs of stabilizing, the Calgary, Alberta-based company said.

Agrium shares rose 1.7 percent to $47.90 on the New York Stock Exchange and were up 1.5 percent at C$51.43 in Toronto. Potash Corp and Mosaic Co gained 4 percent and 2.7 percent, respectively.

Shares of CF Industries rose 1.4 percent, while those of rival Terra Industries climbed 4.6 percent, after CF sweetened its takeover bid for Terra earlier on Wednesday.

Agrium, CF and Terra have been locked in a three-way merger battle from early this year. CF made a hostile bid to acquire Terra in January, while Agrium made a proposal to acquire CF a month later.

CF has repeatedly rejected Agrium's overtures, contending the offer substantially undervalues the company. CF remains locked in its own hostile bid for Terra and has characterized Agrium's offer as an attempt to scuttle that deal.

Agrium reiterated that it remains fully committed to acquiring CF.

We will continue to press CF to execute a mutually beneficial merger agreement despite the fact that CF has so far ignored a clear mandate from their stockholders to conclude a transaction with us, said Agrium's Wilson.

Our offer remains far superior to any alternative articulated by CF, including remaining independent or paying a premium for Terra, he added.

 (Reporting by Euan Rocha; additional reporting by Isheeta Sanghi in Bangalore; editing by Rob Wilson)