Because fertilizers are used to help crops grow, the relative prices of fertilizers to crop prices affect farmers’ returns. When prices of fertilizers are low compared to crop prices, farmers are incentivised to purchase more fertilizers to grow more crops, which is positive for fertilizer producers as it raises revenues, earnings, cash flows and share prices.
Fertilizers prices relatively cheap to current corn price
As of March 29th, retail prices for urea, phosphate, and potash fertilizers stood at $575, $673 and $648 per metric tonne, respectively. On the same day, corn price was traded at $6.95 per bushel on the Chicago Board of Trade. By dividing the fertilizer prices by the corn price, the price ratio of a metric tonne of urea, phosphate and potash fertilizers to corn price was 82.77, 96.85, and 93.25, respectively, lying near 2011 lows.
Divergence in trend
The lower ratio was primarily driven by higher corn prices as a record drought in the United States reduced harvest and supply in 2012. Historically, when crop prices rose, fertilizers did as well since farmers take advantage of higher prices and decide to plant more. In 2012, however, fertilizer prices did not rise. Broadly speaking, weak global demand from countries such as China and India resulted in increased competition, which drove prices for phosphate and primarily potash lower. While demand for nitrogenous fertilizers, such as urea, rose, 2012’s severe drought had hurt expected demand, and increased competition or exports from China added pressure to nitrogenous fertilizer prices.
Implications for fertilizer producers
While weaker pricing is negative for fertilizer producers, current fertilizer to corn price ratio supports fertilizer producers, such as Potash Corp. (POT), Agrium Inc. (AGU), CF Industries Holdings Ltd. (CF) and Mosaic Co. (MOS). The relative cheapness of fertilizers will encourage farmers to purchase more fertilizers, which will help these companies by increasing revenues, margins and earnings. The VanEck Vectors Agribusiness ETF (MOO), which invests in every stage of the agriculture industry, will also benefit.