Why fertilizers have underperformed the market by 40% this year
Underperformance to the S&P 500
Although the S&P 500 is at its record high this year, the same cannot be said for the VanEck Vectors Agribusiness ETF (MOO) and major fertilizer producers like CF Industries Holdings Inc. (CF), Potash Corp. (POT), Mosaic Co. (MOS), and Agrium Inc. (AGU).
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MOO, as well as major fertilizers, have underperformed this year because of falling fertilizer prices and lower sales. Falling fertilizer prices were initially driven by increased production capacity, lower coal prices in China, and weaker demand as the Indian rupee depreciated. Towards the middle of 2013, record crop output and slow harvest progress as well as the uncertainty of the Belaruskali and Uralkali breakup contributed to further declines in retail and wholesale prices and purchases.
Crop price outlook
Although corn prices continue to move lower, expectations of a record output have mostly been priced in. We would be surprised if corn fell below $4.00 a bushel. Investors can view that as a positive, but we don’t see catalysts that could cause crop prices to rise back to what they were—unless economic growth in emerging markets strengthens or weather disrupts production over the next few quarters.
Fertilizer demand and price
While fertilizers may be cheap, they’re more expensive than they were in 2012, as price declines in fertilizers haven’t been enough to offset lower crop prices. Above-normal yield could have led to significant nutrient removal this year, which is positive for fertilizer demand as farmers patches their soil up. But the application of these nutrients could be delayed given lower crop prices. So until we see expectations of higher crop prices or plantation, fertilizer prices will see limited price gains over the next few months and quarters.
We are seeing some improvements in urea prices in China, as farmers return for next year’s plantation and coal prices are on the rise. This should support global urea prices, but price increases up to 2012 highs are unlikely at the moment, as there are rumors that the Chinese government could remove its export tax next year due to sufficient domestic fertilizer supply.
Value and retirement play
Amid weakness, several companies have halted capacity expansion plans, which will increase the amount of free cash that companies can distribute as dividends to investors. Ongoing share buyback programs and increased dividends should support prices too—making fertilizer stocks attractive to value investors or for a retirement account. Momentum and growth investors may see lackluster returns in the short to medium term.
To learn what Potash Corp.’s (POT) management said on its latest earnings call, see Why Potash Corp.’s earnings call was so important for the industry.