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The importance of the fertilizer-to-corn price ratio
For farmers, the relative price of fertilizers to crop price is an important factor that influences buying decisions because it affects profits. When fertilizer prices are relatively high compared to crop prices, there’s less incentive for farmers to purchase more fertilizers. On the other hand, when fertilizer prices are cheap, farmers may be encouraged to purchase more fertilizers, which would be positive for fertilizer producers.
Fertilizers are now more expensive to farmers
Over the past few months, fertilizer prices have become substantially more expensive for farmers. While the price ratio of fertilizers to corn stood at just 75x, based on dollar per metric tonne of fertilizer over dollar per bushel of corn, that rose to ~125x at the end of August. As corn prices never really bounced back up, retailers have been facing pressure to cut selling prices, otherwise farmers will likely delay purchases.
Compared to August 27, from September 27, relative price ratios have:
Implication for wholesale manufacturers
Retail prices aren’t what most fertilizer manufacturers, like CF Industries Holdings Inc. (CF), Agrium Inc. (AGU), Mosaic Co. (MOS), and Potash Corp. (POT), sell at. These producers sell most (or all) of their fertilizers at wholesale prices. But because high retail prices can deter farmers from purchasing fertilizers and corn prices aren’t expected to rise much in the near term (which may also prompt retailers to postpone their purchases), it can have a negative impact on these companies’ sales volume—a key driver of performance. To make fertilizers more affordable, retailers will likely cut fertilizer prices, which often reflects falling wholesale prices.
In the short term, and perhaps into the medium term, sales volume could negatively impact fertilizer manufacturers. Falling prices, however, could have a more lasting impact on companies’ revenues, which affects earnings, cash flows and share prices. This also applies to the Market Vectors Agribusiness ETF (MOO), which invests in major fertilizer stocks.
© 2013 Market Realist, Inc.