Crop prices play an important role in the decision to purchase fertilizers, and so these can have a significant impact on fertilizer companies. Higher crop prices can propel a farmer to increase output, and lower prices can lead to less output.
In 2Q15, average corn prices fell 23% year-over-year to $3.60 per bushel. Average wheat prices also fell 23% year-over-year to $5.10 per bushel, and average soybean prices fell 33% year-over-year to $9.60 per bushel. A lower price environment squeezes profit margins for farmers and so affects their use of fertilizers.
It’s easy to conclude that lower crop prices had a negative impact on Potash Corporation’s, also known as PotashCorp’s, 2Q15 earnings. PotashCorp’s quarterly revenue fell 8.5%. In contrast, when crop prices were soaring in 2011, PotashCorp’s revenue increased 33%.
Outlook for crops
Soybean prices are expected to increase. As a result, PotashCorp believes Brazil will expand the acres dedicated to soybean production by 3% to 5% by the end of 2015. The company believes this should lead to an increase in potash use.
According to the company’s July 2015 market overview report, monsoons in India were favorable for agriculture in June, but below-average rain as a result of El Niño is a looming concern.
PotashCorp (POT) and other fertilizer companies including CF Industries (CF), Mosaic (MOS), and Agrium (AGU) benefit from favorable conditions in emerging markets such as China, India, and Brazil, as well as in developed markets such as the US and Canada. The broader VanEck Vectors Agribusiness ETF (MOO), which invests 33% of its portfolio in agricultural chemical stocks, also benefits from favorable agricultural conditions.
Weakness in the potash segment in the second half of 2015 led PotashCorp’s management to reduce its upper range guidance for earnings per share from $2.05 to $1.95. The range for 2015 is now $1.75 to $1.95 per share.