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Corn prices may rise higher, but fertilizer stocks may still fall

Xun Yao Chen, Agriculture Analyst

Impact of crop prices

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 earnings and share prices of fertilizer producers.

(Read more: Why Chinese producers are driving nitrogenous fertilizer prices down (Part 1))

Corn prices crash on USDA’s estimates

On August 23, corn prices stood at $4.95 per bushel, based on data provided by CBOT (Chicago’s Board of Trade)—the world’s oldest futures and options trading house. Corn prices crashed in mid-July, as the USDA (United States Department of Agriculture) kept this year’s corn production outlook and global stock-to-use ratio estimates relatively unchanged due to favorable weather. Since then, above-historical-average corn crop conditions have driven corn prices down further. Lately, however, concerns about hotter and drier weather in have pushed corn prices up, causing corn prices to bounce from the low of $4.55 per bushel in August 15.

(Read more: Why Chinese producers are driving nitrogenous fertilizer prices down (Part 3))

Corn price outlook

As we’ve seen in previous articles, corn prices were likely to bounce after falling non-stop week-over-week since July, as the market had adjusted to the expectation of a record production in the United States. But corn prices won’t likely move back to near ~$7.00 anytime soon, given the favorable weather we’ve had so far this year. And corn prices will most likely bounce around $4.50 and $5.30, according to the USDA’s projections in its August 12 crop production report. The $4.50 price level is also a long-term support level.

(Read more: Analysts’ demand estimates favor potash over other fertilizers)

Impact on fertilizer manufacturers

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. While we saw corn prices fall since July, we haven’t seen fertilizer stocks been 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.

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