Why the Mosaic Company’s affordability index improved to 0.72

Market Realist

Why do nitrogen fertilizers continue to face pressure from China? (Part 1 of 3)

Affordability improves

The Mosaic Company’s (MOS) latest weekly Plant Nutrient Affordability Index showed improvements on April 4, 2014. The ratio—calculated by dividing the Plant Nutrient Price Index by the Crop Price Index and weighted by fertilizer use—fell from 0.74 to 0.72. The lower the ratio, the more affordable fertilizers are for farmers in the U.S. Since 2005, the ratio has averaged 0.83, which suggests current fertilizer prices are relatively cheap on a historical basis.

Breakdown

A further breakdown of the ratio will show that affordability rose because of higher crop prices and urea affordability. While potash prices rose from an average of $365 per short ton the prior week to $372 per short ton, the Crop Price Index rose from 235 to 237. Based on average affordability ratio of 1.03, potash remains highly affordable to farmers.

Although urea affordability also improved on the back of higher crop prices, lower urea prices likely played an important role. According to Mosaic, granular urea prices fell from $358 per metric tonne in Middle East during the prior week to $345 per metric tonne for the week ending April 4, 2014. Prices of prilled urea in Yuzhney (Black Sea) fell from $304 per metric tonne to $299 per metric tonne.

Supply fundamentals

Despite the fact, urea affordability ratio of 0.65 remains below historical average of 0.70, which may mean farmers aren’t so price conscious, and nitrogen fertilizer prices are also driven by supply fundamentals. The following indicators will illustrate other fundamentals that are likely driving global urea prices down, and what may be in store for companies such as CF Industries Holdings, Inc. (CF), Terra Nitrogen Company, L.P. (TNH), CVR Partners, LP (UAN), and Agrium Inc. (AGU) that are largely exposed to nitrogen fertilizer prices. This is also applicable to nitrogen fertilizer producers.

Continue to Part 2

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