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Currency's impact on fertilizer stocks and ETFs

Part 3
Currency's impact on fertilizer stocks and ETFs (Part 3 of 4)

Why Fed tapering would hurt fertilizer producer sales

Weaker economic growth hits the Indian rupee

Since 2011, the Indian rupee has started to reverse its appreciating (strengthening) trend, and begun depreciating when emerging markets and Europe fell in economic growth or were about to enter recession. That makes investing in India less attractive, so investors were only going to put money into the country if its currency fell.

Infrastructure and import derails economic growth

Despite investment going into the country, India wasn’t able to increase its production or satisfy such demand due to lack of proper infrastructure to move raw materials from supplier to demand, according to our emerging markets analyst Dale A. Norton. As a result, India must satisfy demand via imports. As the Indian rupee fell, though, traders weren’t willing to import commodities, as they became expensive. Imports of potash, a fertilizer vital to crop production, fell too. India’s poor infrastructure became a bottleneck to economic growth.

Indian Rupee 2013-10-10Enlarge Graph

When Ben Bernanke said “taper,” the rupee went into a waterfall decline

When the Federal Reserve of the United States expressed that it would likely taper its asset purchase program sometime this year, given improvements in the unemployment rate, emerging market currencies (including the rupee) fell. The Indian rupee, which was exchangeable at 55 rupees per dollar, quickly rose to ~67.5 rupees per dollar at the end of August.

A weaker rupee means weaker sales and earnings for fertilizer producers

Because sales to India by potash manufacturers are based on contracts between Canpotex—the entity that represents Potash Corp. (POT), Agrium Inc. (AGU), and Mosaic Co. (MOS)—and Indian importers, prices and shipments are negotiated rather than traded through an exchange. So a weaker rupee can have a negative impact on the shipments and pricing of potash and phosphate fertilizers. As a result, this also bodes poorly for Intrepid Potash Inc. (IPI) and the Market Vectors Agribusiness ETF (MOO).

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