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Crop condition deteriorates because of hotter and drier weather

Xun Yao Chen, Agriculture Analyst

Crop condition

Crop condition is an indicator published every week by the United States Department of Agriculture (USDA) during the planting and harvest season. The indicator is useful in estimating the yield that farmers will be able to harvest this year. Solid percentages often point to strong crop production, which tends to alleviate pressure on the global stock-to-use ratio—another key indicator watched by agriculture investors, analysts, and traders. On the other hand, low percentages often point to a weak production year, which can push corn prices up and increase demand for fertilizers in the following year.

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

Conditions remain favorable

The USDA releases crop condition updates every week on Monday, reflecting data for the previous week. For August 23, the percentage of corn crops under “good” and “excellent” condition reported fell from 61% in the prior week to 58%. The decline appears to have been driven by hotter and drier weather that’s hurting crop yields. As corn uses the bulk of fertilizers in the United States, it’s the most important crop to follow.

Nonetheless, favorable warm and wet weather as well as strong potash application earlier this year have helped push conditions to above the seven-year average. Conditions have remained above average so far. Last year, when the United States saw a record number of hot days, which led to a severe drought across the country, several crops were badly damaged. As a result, the percentage of crops in good or excellent condition fell from 60% to just above 20%.

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

Expectation of record corn output

Given the record area used for corn plantation this year, the United States is expected to produce a historic record number of corn this year. The USDA agrees, with estimates of 13.80 billion bushels of corn output for this year. In 2009, U.S. farmers had produced 13.20 billion bushels of corn. As a result, analysts expect the global stock-to-use ratio to recover this year, and corn prices will end lower than they did last year as long as the current trend continues.

(Read more: Cheap fertilizer prices to increase demand for fertilizer producers)

Effect on fertilizers

While lower crop conditions are pushing corn prices up, unless we see conditions deteriorate much further, corn prices aren’t likely to end up above $6.00 per bushel this year. This could negatively affect fertilizer companies such as CF Industries Holdings Inc. (CF), Potash Corp. (POT), Agrium Inc. (AGU), and Mosaic Co. (MOS) because farmers will be less incentivized from using as much fertilizer as they did this year. Because demand for potash is more price-sensitive than nitrogenous fertilizers, this would negatively impact Potash Corp. (POT) and Mosaic Co. (MOS) more. The Market Vectors Agribusiness ETF (MOO), which invests in various businesses within the agriculture industry, would also be negatively affected.

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