Farmers all over the world are key fertilizer customers. Since fertilizer is a cost that can impact farmers’ margins, it’s important to monitor farm economics and how they evolve over time.
The above graph shows various operating costs for corn for a US farmer in 2015. According to the USDA (United States Department of Agriculture), fertilizer was the major cost of operations, accounting for as much as 41.0% of operating costs. It was followed by seeds, which accounted for 31.0%.
Following the bumper crop season in 2011, prices for corn took a hit, and farm income suffered. From 2012–2014, farm income for US corn farmers continued to fall year-over-year. In 2015, it rose only 2.0% year-over-year.
Impact on fertilizer
With falling farm income, costs need to be rationed carefully. Fertilizers can be a major cost of production. So farmers looking to reduce their fertilizer costs can significantly impact sales for agricultural fertilizer companies such as PotashCorp (POT), CF Industries (CF), Agrium (AGU), and Mosaic (MOS).
The fertilizer business is cyclical. During a boom time, fertilizer companies can earn high margins, which they can reinvest into capacity expansion. However, overcapacity leads to increased supply and eventually lower fertilizer prices. That triggers companies to idle some of their capacities or scrap expansion plans altogether until demand stabilizes fertilizer prices. In 2016, the agricultural fertilizer industry (SOIL) was in its bottom cycle, and we saw many companies idling their operations.
In the next part, we’ll take a look at the biggest players in the fertilizer industry.