Essential Fertilizer Trends Weekly (Part 5 of 11)
The significance of retail urea prices
Analysts use retail urea prices to illustrate the supply and demand dynamics between farmers and retailers. When retail prices are rising, they can point to rising costs or higher demand for urea. On the contrary, when retail prices are falling, they can mean increased supply, lower production costs, or lower demand. Changes in retail price can affect sales volume and sales price for wholesalers too.
Retail urea price stops declining
According to DTN Energy Source, retail prices of urea in the United States last traded at $487.63 per mt (metric tonne) on October 25, continuing their fourth straight week of sideways price movement since the prices went into a waterfall decline in April. Just a few months ago, prices stood above $600 per mt (metric tonne).
Prices have fallen since April due to lower production cost and increased supply pressure from Chinese producers. Further weakness in crops also negatively affected prices. The latest movements in retail urea price likely reflect limited changes in corn prices—even though they remain more expensive for farmers, as we saw in Part 4. An increase in the cost of production could be supporting wholesale and retail prices.
Retail price tends to move together with wholesale price
Although fertilizer producers don’t receive a retail price quote—except for Agrium Inc. (AGU), which operates one of the largest retail businesses in North America—falling retail urea prices can reflect lower wholesaler prices. Retail prices tend to lag wholesale prices if the catalyst behind lower retail prices is falling because of a lower cost of production.
Impact on fertilizer stocks and ETFs
Last week’s data was positive, as it supports the idea that the fertilizer market may be stabilizing, which is good news. Share prices could still be negatively affected in the short to medium term, though, if this isn’t priced into stocks and ETFs like CF Industries Holdings Inc. (CF), Agrium Inc. (AGU), Terra Nitrogen Company LP (TNH), Potash Corp. (POT), and the Market Vectors Agribusiness ETF (MOO). But they should find support.
If the spread between retail and wholesale prices narrows, Agrium Inc.’s (AGU) retail earnings could be negatively affected in the short term as the company generates fewer sales to cover costs (fixed costs) that don’t depend on wholesale prices or changes in volume. Examples include marketing and sales expenses as well as general administrative expenses.
Browse this series on Market Realist:
- Part 1 - Essential Fertilizers Weekly: Why the bottom line is essential
- Part 2 - USDA reports crop condition above 60%, negative for fertilizers
- Part 3 - Why corn prices are down to $4.30 a bushel—but likely priced in