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.
Fertilizer remains more expensive but has come down
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, retailers have been facing pressure to cut selling prices—otherwise, farmers will likely delay purchases.
While the price ratio remains elevated, it has come down from August highs, as retail prices have fallen faster than crop prices. The relative price ratio now stands at 111.29 for urea, 132.89 for phosphate, and 121.35 to potash.
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 consequently retailers as well, it can have a negative impact on wholesalers’ sales volume. To make fertilizers more affordable, retailers will likely cut fertilizer prices. This would negatively affect Agrium Inc. (AGU), which operates a retail business.
In the short term, sales volume could negatively impact fertilizer manufacturers. Agrium could also be negatively affected via lower retail prices. If this isn’t priced into shares, then the Market Vectors Agribusiness ETF (MOO) will also be negatively affected. On the other hand, you may also consider the possibility that corn prices are now very low and will soon start to rise as farmers in the Southern Hemisphere shift plantation away from corn to soybean, and low corn prices attract new demand. This case would be positive for the stocks and ETFs mentioned.
© 2013 Market Realist, Inc.