Why expensive fertilizers mean low purchase incentive 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.
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Fertilizers remain more expensive, but have come down
Over the past few months, fertilizers 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 continued to slide, fertilizers remain expensive. The price ratios of corn to retail urea, phosphate, and potash prices in North America were 116, 139, and 125, respectively, on October 30, 2013.
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, they 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.
Fertilizer purchases negatively impacted
As long as fertilizers remain more expensive, fertilizer manufacturers’ and Agrium’s sales volume could be negatively impacted. A further increase in the ratio would be even more negative—unless met by increasing demand for fertilizers. If this isn’t priced into shares, then the VanEck 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.