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Scaled-back ethanol mandate bodes poorly for fertilizer stocks

Scaled-back ethanol mandate bodes poorly for fertilizer stocks (Part 1 of 4)

Why corn prices are down due to an ethanol requirement reduction

The impact of crop price on fertilizer stocks

Crop price is a key driver of fertilizer prices and demand. When crop prices are high, farmers are encouraged to apply more fertilizers in order to take advantage of high crop prices for the next planting season.

Crop Prices 2013-11-26Enlarge Graph

While the above case is positive for CF Industries Holdings Inc. (CF), Agrium Inc. (AGU), Mosaic Co. (MOS), Potash Corp. (POT), and the Market Vectors Agribusiness ETF (MOO), falling or lower crop prices are negative.

Prices are down from last year

Crop prices have all been down this year due to favorable weather, successful plantation, and increased supply. Corn, which uses large amounts of all sorts of fertilizers, fell ~40%, dropping from around $8.00 to as low as $4.18 a bushel recently. Given the lower corn price, farmers in Brazil are expected to plant less corn and more soybean. If weather doesn’t disrupt production, expect soybean prices to remain low.

Prices for corn hit lows of $4.30 a few weeks ago, as new crops came in amid record production estimates. But prices fell lower when the EPA (Environmental Protection Agency) proposed the first cut in the amount of ethanol that needs to blend with gasoline. This change would limit the amount of corn ethanol consumption from 14 billion gallons in 2014 to between 12.7 billion and 13.2 billion gallons.

Blend wall

The EPA made this proposal to fix a problem called the “blend wall,” which happens when the annual requirement exceeds the amount of ethanol that can be mixed with gasoline. Overuse of ethanol in transportation fuel can cause damage, according to oil companies and refiners, while ethanol producers say they’re just creating fears to protect their own products.

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