Fertilizer prices stabilize but prospects remain cloudy

Part 3

US retail urea prices supported near $470 help fertilizer stocks

Retail urea price

Analysts use retail urea prices to illustrate the supply and demand dynamics between farmers and retailers. When retail prices are rising, they can point to rising costs or higher demand for urea. On the contrary, when retail prices are falling, they can mean increased supply, lower production costs, or lower demand. Changes in retail price can affect sales volume and sales price for wholesalers too.

US Retail Urea Price 2013-11-26Enlarge Graph

Touching a new low

According to DTN Energy Source, retail urea prices in the United States stood at $493.75 per metric tonne on November 22, 2013. This was an increase from the low of $466.85 per metric tonne on November 15, 2013.

Prices have fallen since April due to lower production costs and increased supply pressure from Chinese producers. Further weakness in crops also negatively affected prices. The latest decline in retail urea price likely reflects lower corn prices.

Moving together with wholesale price

Although fertilizer producers don’t receive a retail price quote—except for Agrium Inc. (AGU), which operates one of the largest retail businesses in North America—falling retail urea prices can reflect lower wholesaler prices. Retail prices tend to lag wholesale prices if the catalyst behind lower retail prices is falling because of a lower cost of production.

While retail prices made new lows in mid-November, this was largely driven by lagging price cuts at retailers like Agrium Inc. (AGU). The price ratio between the wholesale and retail price is now approaching the four-year average of 74.68%. On November 27, it stood at 73.09%. So while this was negative for AGU, this is less negative for wholesale nitrogenous fertilizer producers like CF Industries Holdings Inc. (CF) and Terra Nitrogen Company LP (TNH).

Implication for fertilizer stocks

Over the next few weeks, retail urea prices will likely find a floor around $470. That would be positive for Agrium Inc. (AGU) as well as urea manufacturers like CF, TNH, and Potash Corp. (POT). The Market Vectors Agribusiness ETF (MOO) would also benefit over the medium term, although there isn’t a real catalyst for urea prices to jump significantly from here.

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