13 Jan

Why Fertilizer Investors Should Pay Attention to Cost Curves


Cost curve

Managing the cost of production is key for a commodities business (MOO). Cost of production can impact the realized prices of fertilizers and, in turn, impact the profitabilities and valuations of fertilizer companies. These companies include PotashCorp (POT), Mosaic (MOS), Intrepid Potash (IPI), and CF Industries (CF). Let’s dig down more deeply.

Why Fertilizer Investors Should Pay Attention to Cost Curves

Steep versus flat cost curve

In the above chart, we’ve compared a flatter cost curve with a steeper cost curve. As in other commodity businesses, market prices for the agricultural chemicals business are set by supply and demand.

When the demand (x-axis) increases (moves to the right), the cost per product ton increases. The increase occurs because the producer with a higher cost of production comes online to meet the additional market demand. The producer that comes online, known as the marginal producer, sets the market price, which is represented by the price ceiling.

However, when the cost of production declines, the cost curve flattens, and the marginal producer can produce at a lower cost. Market prices for the commodity fall and squeeze the margins.

Profitability in 2016

The profitabilities of most fertilizer companies in 2016 were marred by a flatter cost curve. It became non-sustainable for some players to continue producing at higher operating rates. Prices had fallen significantly as a result of oversupply caused by marginal producers. As a result, some companies rolled back their production by idling their manufacturing plants.

In the next part, we’ll look at the profitabilities of some fertilizer companies.

Latest articles

Hexo (HEXO) had a hard time last week. A lot of headwinds pulled the stock down. However, the stock rose and closed with a gain of 17% on Thursday.

Elliott Management expects AT&T stock to reach $60.0 by the end of 2021 if it adopts the restructuring plan. The stock has a potential upside of almost 60%.

Tesla (TSLA) stock is having a strong run this month. After a weak start, the stock has closed with gains for nine consecutive trading days.

Chipotle is scheduled to report its third-quarter earnings on October 22. Despite the rise in the stock, Chipotle's earnings could drive the stock more.

The Cannabis 2.0 era has officially started. Now, Canadians can legally access a host of cannabis-infused products like beverages, vapes, and edibles.

Despite vaping concerns, Aurora Cannabis plans to introduce vape products in December. Reports of vaping-related illnesses started in late August.