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Falling corn prices negatively impacts fertilizer demand

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

Daily Corn Price 2013-08-14

Corn prices crash on USDA’s estimates

On August 14th, corn prices stood at $4.61 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.

While rainy cool weather, which helps corn grow, had pushed crop prices down, there is speculation that most of the Midwest rain will miss Iowa — the biggest U.S. grower. In a report announced by Maryland-based Commodity Weather Group LLC, more than a third of the Midwest remains “notably dry.”

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

Corn Price 2013-08-14

Corn price outlook

Prices may bounce back after a non-stop week-over-week decline since mid-July. But corn prices won’t likely move back to near ~$7.00 anytime soon given the weather situation we’ve had so far this year. Now that the market is expecting a record output, much of the downside have likely been priced in. Based on a long-term trend, corn price could find support around $4.50 this year.

(Read more: Natural gas price affects fertilizer profits)

Impact on fertilizer manufacturers

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.

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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