U.S. Markets closed

Corn prices rise further because of late dry weather

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 the earnings and share prices of fertilizer producers.

(Read more: Mosaic and CF Industries could be severely undervalued (Part 2))

Corn prices crash on USDA’s estimates

On August 28, corn prices stood at $5.04 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.

Lately, however, hotter and drier weather in the Midwest has stoked concerns that yield will be lower than what was previously expected, which had sent corn prices up from the low of $4.55 per bushel in August 15.

(Read more: Mosaic and CF Industries could be severely undervalued (Part 3))

Corn price outlook

It was only a matter of time until corn prices were likely to 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. Although corn prices have bounced, they won’t likely move back to near ~$7.00 anytime soon, given the favorable weather we’ve had so far this year. 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’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.

More From Market Realist