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Essential fertilizer trends: Corn price and fertilizer stocks

Xun Yao Chen

Essential weekly fertilizer trends (Part 1 of 10)

The impact of crop price on fertilizer stocks

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

Corn prices relatively flat due to no data

With lack of data from the USDA over the past two weeks, corn prices have pretty much lingered flat. On the supply side, the market pretty much expects a record production this year with solid yield. On the demand side, lack of data meant little movements in corn prices.

Corn ethanol requirement could scale back

However, the EPA (Environmental Protection Agency) could be cutting back corn-based ethanol blending requirements for 2014 to 13 billion gallons, according to Reuters. Current law requires 14.4 billion gallons of corn-based ethanol production for the year 2014. It’s still a draft and a proposal, and the EPA commented it’s not final.

Domestic consumption of ethanol was near 12.9 billion gallons throughout 2010 to 2012, according to agricultural economist Darrel Good at the University of Illinois. During the first seven months of 2013, consumption was ~100 million gallons more than over the same period in 2012.

Medium-to-long-term negative on corn price

Ethanol production makes up ~30% of total corn use in the United States. While corn prices were down 1% on the news, it’s not necessarily going to have much of a short-term negative impact on corn price, because current demand isn’t going to fall much. However, it will have a medium-to-long-term impact on corn demand.

Low corn price will limit incentive to apply fertilizers

If corn prices do stay low, then there will be less incentive for farmers to increase fertilizer application in the future. This would have a direct negative impact on fertilizer demand (and possibly prices), which bodes poorly for companies such as CF Industries Holdings Inc. (CF), Potash Corp. (POT), Agrium Inc. (AGU) and Mosaic Co. (MOS). As an ETF that invests in several agriculture businesses, the Market Vectors Agribusiness ETF (MOO) will also be negatively affected.

Continue to Part 2

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