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Why is potash now more expensive for farmers?

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.

Potash to Corn Price Ratio 2013-08-14Enlarge Graph

 

Potash is more expensive after a July drop in corn prices

In July, we saw an increase in potash to corn price from 66.99 times to 84.17 times due to a much larger decline in corn prices than potash prices. The indicator is calculated by dividing the price per tonne of potash by the price of a bushel of corn. In the United States, maize (corn) takes up the majority of fertilizer use. So the price of corn is an important factor that drives demand for fertilizers. This is most important for potash producers because demand for potash is more price-elastic than nitrogenous fertilizers such as urea, and farmers can forgo some potash use from time to time.

Corn price rising faster than potash price for the last four years

The ratio between potash and corn prices has fallen since 2009, as corn prices rose at a faster pace than potash prices. Last year’s record drought in the United States also supported corn prices, while prices for potash were pressured by a supply increase and lower food inflation in other parts of the world. This has supported demand, as Potash Corp. (POT), the largest potash producer in the world, commented that the 78% year-over-year growth in sales volume during the first quarter of this year was partially driven by strong demand in the United States, where farmers decided to take advantage of high corn prices.

Possible interpretation of this indicator

As potash prices are now more expensive to farmers and farmers made large purchases earlier this year, demand for potash could hurt in the United States next year. But corn prices aren’t likely to fall much further, as the USDA (United States Department of Agriculture) expects this year’s crop production to hit a record. So while the recent increase is negative, it’s not all that bad, considering that the indicator has averaged around 100 in the past. This may just be slightly negative for Agrium Inc. (AGU), Potash Corp. (POT), Mosaic Co. (MOS), and Intrepid Potash Inc. (IPI) as well as the Market Vectors AgriBusiness ETF (MOO).1

  1. Note that potash producers have benefited from rising potash-to-corn-price in the past, but this growth was driven by higher demand, rising corn price, and economic growth in emerging markets.