Potash overview: Expanding on indicators driving stocks like POT

Part 2
Potash overview: Expanding on indicators driving stocks like POT (Part 2 of 13)

Why fertilizer stocks may not benefit from rising food prices

Food inflation exposure

One of the reasons investors might choose to invest in fertilizer stocks or ETFs such as Potash Corp. (POT), Mosaic Co. (MOS), Agrium Inc. (AGU), Intrepid Potash Inc. (IPI), and the Market Vectors Agribusiness ETF (MOO) is to get some exposure to food inflation. While crops such as corn and wheat usually come to mind, most people also eat vegetables, dairy products, and meats as part of their daily diet.

Milk and Cow MilkEnlarge Graph

Food prices

Prices of milk, lean pork, butter, coffee, cocoa, and oranges have risen since the start of the year, climbing more than 25%. If prices continue to rise, they could put some inflationary pressure on the overall CPI (consumer price index) in the United States. While food prices tend to be volatile, and the Fed generally focuses on non–food-related and non–energy-related price increases to gauge inflation and set monetary policies, high inflation might affect restaurant stocks such as McDonald’s (MCD) unless consumer demand for restaurants rises as price increases slow.

Milk prices

We can attribute recent price increases in milk to a continuation of strong demand from China. While milk cows’ head counts have stagnated over the last few years, perhaps because prices for feed rose on higher crop prices while milk prices remained flat, we could see more cows over the medium term if milk prices continue to rise. More cows mean higher feed demand, which is positive for crop prices.

But perhaps more importantly, higher milk prices reflect strength in the Chinese consumer. Since fertilizer stocks largely depend on emerging markets’ growth, recent price increases could be positive for fertilizer stocks and the Market Vectors Agribusiness ETF (MOO).

Pork and oranges

While prices for oranges and pork rose recently due to virus and supply woes, the moves are likely to have an insignificant impact on fertilizer stocks. Although China is a large consumer of pork, the United States pales in comparison. Plus, the United States doesn’t export much pork to China. In fact, feed demand could even be negatively affected in the short term as farmers use less feed. In the United States, fruits make up just 3% of total potash and phosphate application.

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