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Stock-to-use ratio revised lower, but higher than last year: negative for fertilizers

The global stock-to-use ratio

The global stock-to-use ratio reflects the amount of inventory available to consumption, which depends on supply and demand. In the agriculture industry, when the stock-to-use ratio is rising, it often indicates that crop output will exceed crop use. Higher supply-to-demand balance generally results in lower crop prices. This can be a negative for fertilizer producers as farmers reassess how much fertilizers they may want to purchase next year.

Global Corn Stock to Use Ratio 2013-07-26Enlarge Graph

Slight downward change in stock-to-use ratio

The stock-to-use ratio is published monthly by the United States Department of Agriculture (USDA). In July, the USDA slightly lowered its estimate for the world’s corn stock-to-use ratio, based on estimates of this year’s potential harvest and corn use, from 14.68% in June to 14.64%. According to the department, a slower start to the planting season and lower plantation acreage than initially projected were reasons for revising the figure lower. Although you may see this as a negative, the market was relieved by the news, because investors took it as a sign that bad weather conditions won’t likely hurt corn’s production outlook for this year.

Ending higher than last year, corn price tumbles

With production expected to outpace demand, the global stock-to-use ratio is now estimated to be higher than last year’s, when record heat in the United States produced one of the lowest yields in history and sent corn prices soaring. The news that the USDA has held its estimated figure mostly unchanged has negatively affected corn prices, which fell from $7.02 per bushel on July 12 to just $4.92 per bushel on July 26. This could negatively affect demand for fertilizers because lower corn prices make fertilizers seem more expensive, so a less profitable investment. Demand for potash could be hurt the most, as the fertilizer is most price-sensitive because farmers don’t necessarily have to use it every year if enough potassium is left in the soil.

Negative implication for fertilizer stocks

Some fertilizer manufacturers that could be negatively affected include Potash Corp. (POT), Agrium Inc. (AGU), Mosaic Co. (MOS), and CF Industries Holdings Inc. (CF). The Market Vectors Agribusiness ETF (MOO), which invests in several businesses in the agriculture industry, could also be negatively affected in the medium term.