The significance of retail urea prices
Analysts use retail urea prices to illustrate the supply and demand dynamics between farmers and retailers. When retail prices are rising, they can point to rising costs or higher demand for urea. On the contrary, when retail prices are falling, they can mean increased supply, lower production costs, or lower demand. Changes in retail price can affect sales volume and sales price for wholesalers.
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Retail urea price rises for the first time since April
According to DTN Energy Source, retail prices of urea in the United States last traded at $495.50 per mt (metric tonne) on October 11, which is up from $488 per mt on October 4. This was also the first increase we’ve seen since April this year. Prices have been in a waterfall decline since May, falling as much as ~23% from ~$630 per mt. These declines are driven by two key factors: increased supply due to lower cost of production in China and falling crop prices.
Lower wholesale prices drove retail prices down
Although fertilizer producers don’t receive a retail price quote, except for Agrium Inc. (AGU), which operates one of the largest retail businesses in North America, falling retail urea prices can reflect lower wholesaler prices. In fact, retail prices tend to lag wholesale prices if the catalyst behind lower retail prices is falling because of lower cost of production. The wholesale-to-retail price ratio, since March, has fallen from 70% to as low as 55% on August 29.
Lower crop prices, a second catalyst for lower retail prices
Up until the end of June, retail prices weren’t falling as quickly as wholesale prices because crop prices were still high. So there was little incentive for farmers to cut back on fertilizer purchases. However, as corn prices fell ~33% from July highs, retail prices have come under pressure. Based on the wholesale-to-retail price ratio, it looks like retail prices still have a bit of room to fall.
Impact on the financials and share prices of fertilizer stocks and ETFs
Last week’s data was positive, as it supports the idea that the fertilizer market is stabilizing, which is a positive on fourth-quarter earnings. Share prices could still be negatively affected in the short to medium term if this isn’t priced into stocks and ETFs like CF Industries Holdings Inc. (CF), Agrium Inc. (AGU), Terra Nitrogen Company LP (TNH), Potash Corp. (POT), and the VanEck Vectors Agribusiness ETF (MOO). However, they should find support.
If the spread between retail and wholesale prices narrows, though, Agrium Inc.’s (AGU) retail earnings could be negatively affected in the short term as the company generates fewer sales to cover costs (fixed costs) that don’t depend on wholesale prices or changes in volume. Examples include marketing and sales expenses, as well as general administrative expenses.