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.
Fertilizers are now more expensive to farmers
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 up, retailers have been facing pressure to cut selling prices, otherwise farmers will likely delay purchases.
From September 27 to October 11, the relative price ratios have risen from 106.05 to 112.35 for urea, risen from 118.11 to 121.57 for potash, and risen from 130.44 to 136.74 for phosphate. Most of the recent increase is explained by lower corn prices.
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, which 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 prices attract new demand. This situation would be positive for the stocks and ETFs mentioned.
© 2013 Market Realist, Inc.
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