Essential Fertilizer Trends, November 1–7

Part 5
Essential Fertilizer Trends, November 1–7 (Part 5 of 9)

Indian rupee weakens to 62.48 a dollar, hurting fertilizer stocks

The importance of currency in the globally traded fertilizer market

As potash and phosphate are two globally traded commodities, more so than nitrogenous fertilizers, currency fluctuation can have a significant impact on demand. Since fertilizers usually trade based on the dollar, when a major importer’s currency falls, it makes fertilizers much more expensive. This can negatively impact fertilizer producers’ sales and earnings.

Indian Rupee 2013-11-06Enlarge Graph

Rupee weakens

As one of the major consumers and importers of potash and phosphate, India’s currency can have a large impact on fertilizer demand. On November 8, one US dollar could be exchanged for 62.58 Indian rupees, making a significant jump from 61.5 over a week. An increase in the number of rupees per US dollar is a weakening (depreciation) of the rupee. Conversely, a decrease in the number of rupees per one US dollar means the rupee is strengthening (appreciating) in value.

Drivers

The Indian rupee has been depreciating since mid-2011. The main direct drivers that have contributed to the weaker currency include deteriorating economic growth, high inflation, and growing government deficit.

  • When economic growth is falling, it makes investing in the country less attractive. This makes it less attractive for foreign investors to invest, and will lead to a weaker currency.
  • When there’s high inflation, the central bank will often raise the interest rate to cool the economy down even further. Although higher interest rates may make holding Indian debt more attractive, weaker economic growth and confidence among investors will often result in a weaker rupee.
  • When a government’s budget deficit is growing, the government may have to cut back on spending or raise tax. These moves can have a negative impact on the economy since government expenditure can be a large source of employment and expenditure, which again makes the Indian rupee less attractive.

2013 developments 

The rupee began to depreciate in of May this year, as talks of Fed tapering drove the U.S. dollar higher. As India relies on imports to fulfill its raw material inputs, a stronger dollar meant a weaker rupee, which makes it more expensive for domestic manufacturers to import. As a result, economic growth weakened. And because economic growth weakened, investors started to pull more money out of the country, creating a ripple effect.

As emerging markets’ fundamental outlook improved, particularly China’s, and the central bank in India stepped in to halt further depreciation in the Indian rupee, we’ve seen the rupee strengthen since September. The announcement that the Fed wasn’t going to taper until it saw better economic fundamentals in September kept the rupee strong. A few days ago, though, we saw the Indian rupee weaken sharply, as more favorable U.S. data is cautioning investors about Fed tapering. Should the Fed taper, investors can expect demand for potash to remain sluggish as a weaker rupee offsets lower fertilizer prices.

Impact on fertilizer sales and price

As long as the rupee stays elevated, potash and phosphate suppliers like Mosaic Co. (MOS), Potash Corp. (POT), and Agrium Inc. (AGU) will be negatively affected via lower sales price and volume. This would also negatively affect the Market Vectors Agribusiness ETF (MOO). While Intrepid Potash Inc. (IPI) doesn’t supply to India, weak demand could negatively affect potash prices, so IPI would also be negatively affected.

The Realist Discussions