Countries keep crop inventories to ensure stability in food prices in the event of an unpredictable natural disaster. Therefore, the global stock to use ratio is a leading indicator for near term fertilizer demand. As the stock to use ratio falls, supply will have to increase the following year to replenish inventory. While lower figures favor equal or higher fertilizer demand, higher figures point to potential declines in demand compared to previous years.
Compared to other crops such as soybeans or wheat, corn requires more nitrogen fertilizers. Historically, the global corn stock to use ratio averaged 23.5%. Due to a severe drought in 2012, the ratio reached a record low of 12.04% on December 2012 based on an average of 2011/2012 market year’s actual, 2012/2013′s estimated, and 2013/2014′s projected use by the USDA, the United States Department of Agriculture. To put it simply, actual figures represent past usage, estimates are “guesses” based on sample data, and projections rely on certain assumptions about the future.
The lower stock to use ratio and crop price for corn should generate higher demand for nitrogen based fertilizers in the year 2013, as was pointed out in CF Industries (CF) and Terra Nitrogen Company L.P. (TNH)’s third quarter earnings call. Agrium, Inc. (AGU) will also benefit because approximately 60% of the company’s revenue comes from nitrogen based fertilizers. For investors who would like also like to diversify investment in other fertilizers like potash and phosphate, in addition to nitrogen based products, the Global X Fertilizers / Potash ETF (SOIL) is an option.