Farmers’ ability to generate cash is important to fertilizer producers. Although a lagging indicator of financial performance, farmers’ income for a specific calendar year is an indicator of how much cash farmers will have to purchase fertilizers the following year. When farmers are enjoying a nice stream of income, they are more willing to spend, just like how most people will spend more when they get a large bonus.
U.S. farmer’s net cash income is provided on an annual basis by the United States Department of Agriculture (USDA). For the year 2012, total net farm cash income in the United States rose to a record $135.6 billion, slighting above 2011. Although several crop conditions were poor because of last year’s drought, higher prices for crops like corn, soybean and wheat, as well as insurance reimbursements, have more than offset lower production.
Fertilizer producers will benefit from last year’s drought as farmers decide to take advantage of the higher crop prices this year. The more important takeaway, however, is that farmers have the capital to purchase the fertilizers and may be willing to purchase fertilizers at higher prices. At the same time, fertilizer prices are relatively cheap compared to corn prices, a major crop of U.S.’s agriculture production, as mentioned in our other article “Fertilizer prices are relatively cheap to corn.” This means more revenue, margins and earnings for fertilizer producers such as CF Industries Holdings, Inc. (CF), Potash Corp. (POT), Mosaic, Co. (MOS) and Agrium, Inc. (AGU), all of which are leading fertilizer producers in the United States.
The Global X Fertilizers / Potash ETF (SOIL), which invests in fertilizer manufactures world-wide, will also benefit. The nice thing about this ETF is that it’s composed of approximately 24% of companies that have United States as their domiciles or homes.