Why I am negative about nitrogenous fertilizers (Part 2 of 11)
Favorable weather helping corn output
Several traders were worried that last year’s record drought would return and destroy crops, which kept corn prices high. Yet, as the amount of corn in good or excellent condition has shown, there was plenty of rain. The weather on the Great Plains, where farmers grow corn, wasn’t that hot either. Throughout the country, investors experienced rather tame weather this year, which also kept demand for electricity and (as a result) natural gas prices low.
Recent corn price trends
When the USDA (United States Department of Agriculture) released estimates that the United States would collect a historic record of corn in July, corn prices tumbled. Throughout July, corn prices crashed from just slightly above $7.00 a bushel to below $5.00. Prices somewhat recovered in August when the late summer heat arrived and drove rain away from some counties. While crop conditions fell to a seven-year average, and have now fallen even below that, they helped crops grow.
It also didn’t help that the USDA’s recent report, released on September 12, showed an increase in estimated corn output for this year. The department now expects farmers to collect 13.84 billion bushels of corn this year, driven by higher yield—up from 13.763 in August. On September 17, a bushel of corn traded at $4.54 on the CBOT (Chicago Board of Trade)—the world’s oldest futures and options trading house.
Impact on fertilizer demand
Crop price can have a significant impact on fertilizer companies’ earnings and share prices. When crop prices are high, farmers feel encouraged to use more fertilizers in order to take advantage of high crop prices and earn more money. Plus, high crop prices make fertilizers more affordable for farmers, which will increase farmers’ income and the amount of fertilizers they can purchase for the next planting season. This will ultimately increase fertilizer demand and prices, which will support the earnings and share prices of fertilizer producers. But when crop prices are low, they can negatively affect fertilizer demand.
Corn price outlook
It’s only a matter of time before corn prices bounce after falling non-stop week-over-week since July, while the market had adjusted to the expectation of record production in the United States. Corn prices will most likely bounce around $4.40 and $5.20, according to the USDA’s projections in its September 12 crop production report, which is 10 cents lower than August’s projection. The $4.50 price level is also a long-term support, so it’s unlikely that corn prices will fall significantly more.
Implication for fertilizer producers
Nonetheless, fertilizer producers—such as CF Industries Holdings Inc. (CF), Agrium Inc. (AGU), Potash Corp. (POT), and Mosaic Co. (MOS)—could face weaker demand next year because lower corn prices make fertilizers less attractive. Potash could be most negatively affected since farmers are more price-sensitive to the nutrient, as they don’t have to apply potash every year. While we’ve seen corn prices fall since July, we haven’t seen fertilizer stocks affected by much. Although the Market Vectors Agribusiness ETF (MOO) will also be negatively affected, diversification into seed manufacturers (which tend to show less volatile share price movements) will keep the ETF from falling as much.
Browse this series on Market Realist:
- Part 1 - Crop condition falls, but expect limited downside as summer ends
- Part 3 - Retail urea falls sharply, maintaining a negative outlook
- Part 4 - Why falling fertilizer prices will cut into producer revenues
- Commodity Markets