Fertilizer prices are important metrics for fertilizer firms’ revenues. However, the price of fertilizer is also important for producers from a farmer’s perspective. When the price of fertilizer relative to the price of corn is low, it is often a positive for the fertilizer companies.
When prices of fertilizers are relatively cheap compared to the prices of corn that farmers can sell for, it suggests the farmers can use more fertilizer to increase production. Using more fertilizers will drive the prices of fertilizers up, as was the case in 2011. Alternatively, lower fertilizer prices may point to excess supply in the market, lending an opportunity for manufacturers to reduce supply. Although a reduction in supply may reduce farmers’ demand, as the process often raises fertilizer price and higher prices tend to reduce purchase quantity, fertilizer products can be quite price inelastic from a historical perspective1.
Since the price of fertilizer is lying near the lower end of the range over the past four years, the data is positive for fertilizer producers such as Agrium, Inc. (AGU), CF Industries (CF), Mosaic, Inc. (MOS) and Potash Corp. (POT). This should also favor the Global X Fertilizers / Potash ETF (SOIL), an ETF that invests in global leading fertilizer companies. Investors may want to use this rate as a supplement to crop prices. If crop prices fall, the rate will rise. Even though an increase in the rate is often favorable, it is not when falling crop prices are the main drivers as it does not translate to higher prices for fertilizers.
- Price inelastic means that a certain percentage reduction in price will decrease quantity demanded by a lesser amount ↩