Plant nutrient affordability
The Mosaic Company (MOS) issues a weekly plant nutrient affordability index, which is calculated by taking the plant nutrient price index over crop price index. The plant nutrient price index is a weighted average of three main NPK (nitrogen, phosphates, and potash) fertilizers weighted by share of nutrient use by plants in the US. The crop price index is calculated taking prices of corn, wheat, and soybean weighted by acre share of each crop.
Nutrients remain affordable
The plant nutrient affordability ratio, as of the week ending February 19, 2016, stood at 0.69, which is up from 0.65 one week ago and from 0.61 one month ago. But the ratio seems to have reversed its path in January, meaning that the crop nutrients are becoming less affordable.
What contributes the most to such a softness in affordability is a steeper increase in fertilizer prices relative to crop prices. Urea’s (nitrogen) affordability ratio increased from 0.52 one week ago to 0.60 as of the week ending February 19. The affordability ratio for MOP (muriate of potash) dropped slightly to 0.75 from 0.76 over the same period, while that of DAP (diammonium phosphate) remained unchanged.
Impact on agricultural fertilizer companies
A higher ratio (which means less affordable) impacts agricultural fertilizer companies such as CF Industries (CF), Potash Corporation (POT), Terra Nitrogen (TNH), and Agrium (AGU), some of whom can also be accessed through the Materials Select Sector SPDR ETF (XLB), which invests 12.4% in agricultural chemical companies. But bear in mind that crop nutrients remain affordable compared to the ratio of 0.85 one year ago and to the average of 0.74 since 2010. Over this period, fertilizer prices have declined by as much as 33%, and crop prices have significantly declined by as much as 30%.
Also, bear in mind that the stock-to-use the ratio (which we saw in Part 1 of this series) showed that the global corn inventory has increased. This offers a partial explanation to why crop prices have declined. Usually, a ratio below one means that the fertilizers are more affordable compared to the base year of 2005.
In the next and final part of this series, we’ll look at these fertilizer companies’ valuations multiples.