What inventory levels tell us
Inventory levels reflect current industry supply and demand balance and safety stock. When inventory levels rise, they’re often a negative sign, as the supply of fertilizer is outpacing demand. While manufacturers can adjust to the weaker demand by cutting production, they often lag. But when inventory reaches a certain level, it will usually fall as cyclical demand returns or the pace of production cuts begins to outpace falling demand.
Inventory level breaks above three-year peak
Historically, total phosphate inventory in the United States (according to monthly data compiled by the Fertilizer Institute) has hovered around 700,000 short tons (1 short ton is equivalent to 0.907 metric tonnes). In August, the indicator broke out of the range, rising from 677,760 to 741,600 short tons—its highest level since 2009. But the latest data shows that phosphate inventory fell in September to 691,000 short tons.
Increased supply and weaker demand
The year-over-year growth also fell—from 50.57% in August to 43.19% in September. But it still remains elevated. Analysts often use the annual change to factor in typical seasonal purchasing or production patterns. While inventory levels grew in negative territory last year, they had returned to positive growth since April 2013, as a weaker rupee, unfavorable government phosphate subsidy in India, and new production capacity pushed inventory higher.
Cheaper fertilizer likely supported some demand
Inventory likely fell in September because retail prices have fallen and the rupee strengthened against the dollar, which made phosphate fertilizer cheaper to farmers. However, this may just be a short-term positive. As long as India’s unfavorable subsidy holds and the rupee remains elevated, demand for phosphate will likely remain weak. Low crop prices and elevated production could also keep inventory levels high.
Inventory growth could remain elevated for a while
Weaker sales will have a negative impact on phosphate producers such as Mosaic Co. (MOS), Potash Corp. (POT), and Agrium Inc. (AGU). While CF Industries Holdings Inc. (CF) used to be negatively impacted, it recently sold its phosphate business to Mosaic Co. (MOS).
If inventory growth remains elevated, consider it a negative for these fertilizer producers. On the other hand, if inventory growth begins to fall, share prices could benefit because the market often moves based on expectations and anticipation rather than the current trend. This will also affect the Market Vectors Agribusiness ETF (MOO), accordingly.
© 2013 Market Realist, Inc.
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