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The wholesale-to-retail price ratio
The wholesale-to-retail price ratio may reflect the difference in economic power between fertilizer producers and fertilizer retailers. When the wholesale-to-retail price ratio is rising, it likely reflects better economic fundamentals for wholesalers compared to retailers. On the other hand, when the wholesale-to-retail price ratio is falling, investors may see it as a negative.
Retailers made slim margins before
The indicator shown above uses the wholesale DAP Mid Cornbelt price divided by the average price in the United States. A close to 100% figure at the beginning of 2010 may suggest that retailers that sell phosphate fertilizers weren’t selling prices significantly above a premium. This likely reflects the fact that there were fewer phosphate fertilizer producers that sold to numerous phosphate fertilizer retailers. Higher buyer power could contribute to slim margins for retailers.
Competition heating up due to structural changes
Since early 2010 (and the end of 2009), there’s been an overall decline in the wholesale-to-retail price ratio. Compared to how phosphate prices have moved since 2009 to 2012, it doesn’t seem like the changes in the wholesale-to-retail price ratio are particularly driven by cyclical demand—just like how miners often outperform manufacturers in a cyclical uptrend because it’s costly to increase capacity in the short term.
The downtrend we’ve seen over the past three years, which now stands right around 80% on October 11, could mean either that the retail industry is consolidating and gaining distribution power over wholesalers, or that competition level among wholesalers is rising. The latter case is more likely due to overcapacity in China and an increase in capacity in the Middle East.
Negative long-term impact on phosphate fertilizer producers
If the current trend remains in place, then phosphate producers like Mosaic Co. (MOS). Potash Corp. (POT), CF Industries Holdings Inc. (CF), and Agrium Inc. (AGU) will also be negatively affected—although to a lesser extent. This would negatively affect the Market Vectors Agribusiness ETF (MOO) over the long term as well.
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