Both Agrium and Potash confirmed late Tuesday morning they are in discussions for a merger of equals.
Shares of the Canadian fertilizer firms initially jumped 12 percent before trade was briefly halted, after Bloomberg reported that both companies were in talks about a merger. Options were active on rumors of the discussions.
The stocks briefly reopened before trade was temporarily halted again. Trade resumed after official confirmation from the two firms.
Agrium shares ended the day up 7 percent, while shares of Potash climbed more than 10 percent on the day. Both stocks traded in positive territory for the year.
Two-day performance (as of intraday Tuesday)
Source: FactSet
A deal could be announced as early as next week, Bloomberg said, citing sources familiar with the matter. No final decisions have been made and the companies could decide against a deal, the report had said.
The companies did not immediately respond to requests from CNBC for comment.
A merger of Potash and Agrium would combine the world's biggest crop nutrient company by capacity and North America's largest farm retailer, Reuters said.
"It does feel like a very likely deal. It doesn't seem like a pie in the sky," said Jonas Oxgaard, senior analyst of U.S. chemicals at Sanford C. Bernstein, which is "overweight" Potash. He said both firms are Canadian and their merger shouldn't face resistance from the Canadian government.
Last fall, Potash withdrew its $8.9 billion offer to buy German rival K+S.
Mohsin Bashir, portfolio manager at Stone Asset Management, which owns Agrium shares, told Reuters a deal between the two Canadian companies would "make them a better force to compete on a global scale" but added that regulator approval may be difficult to gain.
Potash is the third-biggest seller of the potash fertilizer, but owns the most capacity, some of which is idle due to industry struggles, Reuters said. Profits of fertilizer companies have suffered as prices of potash and other crop nutrients have fallen to multi-year lows due to oversupply and weak demand.
"Consolidation is typically what you see when margins are weak," Oxgaard said, noting mergers and acquisitions among major agricultural firms but not fertilizer companies.
Merging with Agrium would give Potash a direct channel to U.S. farmers through Agrium's retail stores, which as of May accounted for 17 percent of the U.S. market, Reuters said.
The merger speculation lifted other stocks in the industry. Shares of fertilizer company Mosaic ended the day nearly 9 percent higher.
Shares of chemicals producer Huntsman briefly rose more than 2.5 percent in mid-morning trade before ending the day about 1.4 percent higher. CF Industries traded about 5 percent higher in late-morning trade, but ended the day up about 4.76 percent higher.