As prices fell, buyers went into wait-and-see mode. Urea shipment fell 3.55% compared to the same quarter in 2012, while ammonia fell 2.00% and UAN sales dropped 10.17%.
UAN sales fell more
Because nitrogenous fertilizers must be applied each year, demand is less sensitive to price. What isn’t bought this quarter will be bought over the next few months. CF Industries’ (CF) UAN sales volume decline was worse than ammonia and urea because of a later start in its fall-fill program, which partially explains why CF’s UAN sales price didn’t fall as much compared to urea or ammonia and the general market, in our view. Fill programs are like discount sales used to fill extra demand at lower price and load excess supply.
Late harvest delaying purchases
Please note that CF also sells other nitrogenous fertilizers, but these are the main products. While management mostly focused on price, a delay in this year’s U.S. harvest could have deferred purchases, as has been the case with potash and phosphate fertilizers, based on Potash Corp.’s (POT) earnings call. A similar case can probably be said for Agrium Inc. (AGU) and Mosaic Co. (MOS). Most of this, however, is priced in, as these companies have fallen during mid-summer or have stabilized since then. This also applies to the VanEck Vectors Agribusiness ETF (MOO).
Side note: Why the Fed is afraid of deflation
As investors might have noticed, lower prices can drive expectation of lower prices and delay purchases, which negatively impacts demand. When this occurs within an industry, it may not be a big problem. But when this happens at a large scale, and the expectation of lower prices outweighs any other benefit, an economy can fall into contraction, as no one wants to spend. This is one reason why central banks around the world are so afraid of deflation (a consistent fall in prices) and are cautious about low inflation.