Rain helped crop condition but is negative for fertilizer stocks

Market Realist

Fertilizer trends recap, September 23–27 (Part 1 of 10)

The significance of corn price

Crop condition is an indicator published every week by the USDA (United States Department of Agriculture) during the planting and harvest season. Each week, the NASS (National Agricultural Statistics Service) sends a questionnaire to about 4,000 people who are somewhat representative of every county. It then compiles the returned answers and releases them to the public at the end of every Monday, reflecting the prior week’s data.

Conditions improve with rain

For September 23, the USDA reported an increase in the percentage of corn crops in “good and “excellent” conditions, rising from 53% to 55%, as rain returned to the crop field. Crop conditions have been falling over the past few weeks as late summer drought in some areas had negatively affected crops.

Last week’s (September 16–20) rain had curtailed fieldwork for some farmers but had aided some late-developing summer crops by alleviating drought pressure. As corn uses the bulk of fertilizers in the United States, and it’s used in many foods we consume today, it’s the most important crop to follow.

Impact on crop prices

Crop condition is a factor that affects crop yield, which in turn affects corn prices. Solid percentages often point to strong crop production, which tends to alleviate pressure on the global stock-to-use ratio—another key indicator agriculture investors, analysts, and traders watch. On the other hand, low percentages often point to a weak production year, which can push corn prices up and increase demand for fertilizers in the following year.

Impact on fertilizer stocks

While higher crop condition is positive for consumers and restaurants, it has a negative impact on fertilizer stocks like CF Industries Holdings Inc. (CF), Agrium Inc. (AGU), Potash Corp. (POT) and Mosaic Co. (MOS). As falling crop prices make it more expensive for farmers to purchase fertilizers when they make purchasing decisions for next year’s crop, it can have a negative impact on sales volume.

In order to maintain demand, retailers may cut sales price and postpone their purchase of fertilizers at the wholesale level (which these fertilizer producers sell at). As a result, this can negatively impact the sales volume, sales prices, and revenues of the previously mentioned stocks. This also applies to the Market Vector Agribusiness ETF (MOO), since it invests in all of the four large fertilizers mentioned.

Continue to Part 2

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