Earlier in this series, we saw how NPK (nitrogen, phosphorus, and potassium) fertilizer prices moved in the week ending January 27, 2017. It’s important to look at these prices compared to crop price levels because it helps determine fertilizer affordability.
When crop prices are high, farmers will likely earn more income. In a soft crop price environment, farmers might look to lower costs for fertilizers and other overheads.
Fertilizer Affordability Index
For the week ending January 27, 2017, the Fertilizer Affordability Index remained unchanged at 0.65x week-over-week. A ratio below 1.0x means that fertilizers are more affordable than during the base year.
It isn’t surprising that current fertilizer prices are more affordable than the base year because prices have fallen significantly. Companies such as Intrepid Potash (IPI), Israel Chemicals (ICL), and CF Industries (CF) lowered their costs of production and offered deep discounts to farmers (NANR). With fertilizer and crop prices trading at multiyear lows, it will be interesting to see how the ratio changes in the near term.
As you can see in the above graph, Mosaic (MOS) calculates fertilizer affordability by measuring the fertilizer price index (key fertilizers indexed to 2005) over the crop price index (key fertilizer consuming crops indexed to 2005).
For ongoing details and updates on these individual companies, be sure to visit Market Realist’s Agricultural Fertilizers page.