Currency's impact on fertilizer stocks and ETFs (Part 1 of 4)
The significance of the US dollar
As commodities trade globally, often using the US dollar as a medium, price movements in the US dollar have important consequences for fertilizer producers. A weaker US dollar is often positive for fertilizer companies. On the other hand, a higher US dollar is often viewed as negative.
What is monetary easing?
Monetary easing is one common method that the central banks use to prevent the financial system and the economy from collapsing. It also supports employment and economic growth by primarily reducing the interest rate that people can borrow and save on, which increases borrowing and reduces saving (or increasing spending).
Monetary easing affects the currency market
Ever since the Fed (central bank) of the United States began to ease the financial system, the US dollar has fallen in value compared to other currencies. As the supply of the US dollar increases in the system, other countries’ currencies become more attractive.
Lower US dollar value tends to push the prices of commodities (including crops) up. From an external point of view, the lower US dollar will make it more attractive for other countries to purchase commodities that often trade under the US dollar, which pushes up prices. Internally, crop prices will go up similarly to the following situation. If people received an increase of 10% in salary, then there would be more money to purchase an unchanged amount of crop. As people now have more money, they will bid prices up.
Crop prices show a negative relationship to the US dollar
So, as the chart above shows, crop prices have shown a pretty strong negative correlation with the UUP ETF that tracks the value of the US dollar against a basket of other currencies. The correlation ranges from -1 to 1. Negative signs reflect a negative relationship between one variable and the other, and a positive sign shows there’s a positive relationship between the two variables. The closer the numbers are to 1, the stronger the relationship.
A low US dollar is positive for fertilizer stocks and the MOO ETF
So as long as the US central back continues with its monetary easing program, crop prices will rise over the long term. As one of the key drivers that affect fertilizer producers’ revenues, higher crop prices bode positively for fertilizer stocks such as CF Industries Holdings Inc. (CF), Potash Corp. (POT), Mosaic Co. (MOS), and Agrium Inc. (AGU). This will also affect the Market Vectors Agribusiness ETF (MOO), which has an even stronger negative correlation of -0.89 over the past five years.
Browse this series on Market Realist:
- Part 2 - Why quantitative easing in the US means easing around the world
- Part 3 - Why Fed tapering would hurt fertilizer producer sales
- Part 4 - Why India’s economy will be the next test for fertilizer stocks