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Corn inventory set to cross 2010 high, supporting long-term price

Xun Yao Chen

Fertilizer trends recap, September 23–27 (Part 2 of 10)

(Continued from Part 1)

The impact of crop prices on the fertilizer industry

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.

Corn Price 2013-09-27

Corn prices now at long-term support

On September 27, corn prices stood at ~$4.56 a bushel, sitting right on top of a long-term support trend. Corn prices have fallen from ~$7.00 a bushel in July 2013, driven by the USDA (United States Department of Agriculture) estimate of a record output year. The current estimate, based on the September USDA World Agriculture Supply and Demand Estimates report, calls for an output of 13.8 million bushels of corn—a key crop used in almost all daily foods. 2013′s harvest is expected to surpass 2009′s record of 13.2 million bushels, and it’s up 29% from last year’s poor output.

While crop prices rose as late summer heat raised caution that the harvest could be trimmed, the fear was only temporarily. Drought was more localized rather than spread across the corn belt, and yields came in much higher than expected for farmers. Higher fertilizer use, adequate rain, and a decent temperature are factors contributing to solid yields.

Global Corn Stock to Use Ratio 2013-09-27

Stock-to-use ratio now about to cross 2010′s level

Based on the USDA’s latest projection on supply and demand, the stock-to-use ratio for corn, which reflects the expected demand for crop to inventory, has risen from 14.6% to 14.7%. It’s now close to surpassing 2010′s September figure. If the global corn stock-to-use ratio can hold at its current level, then corn prices will likely stay near current levels. See corn prices during 2010—we’re right in the middle.

Negative impact on sales price and volume

Given lower corn prices, farmers may be discouraged from using as much fertilizer next year compared to this year or 2012. This could negatively impact demand in the short term, which may prompt retailers and wholesalers (fertilizer producers) to cut prices. While price cuts will help with sales volume, lower prices will negatively impact revenue overall.

Lower revenue and earnings expected

Lower revenue will translate to lower earnings and possibly share prices if the market hasn’t priced the fall in yet. This could be negative for fertilizer manufacturers like CF Industries Holdings Inc. (CF), Agrium Inc. (AGu), Potash corp. (POT) and Mosaic Co. (MOS), as well as the Market Vectors Agribusiness ETF (MOO). Over the short to long term, the USDA expects corn prices to stay relatively stable and low—unlike the increase we’ve seen since 2005 that was driven by higher ethanol production, poor weather, and increased demand from emerging markets. Anything can change, however.

Continue to Part 3

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