U.S. Markets close in 1 hr 37 mins

Steady corn condition remains negative for fertilizers demand

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))

Corn in

Condition holds steady

The USDA releases crop conditions every week on Monday, and it reflects data for the previous week. On August 9th, the percentage of corn crops under “good” and “excellent” condition stood unchanged at 64% from last week, driven by the favorable plantation climate. The indicator has stood above 60% for most of this year. As corn uses the bulk of fertilizers in the United States, it’s the most important crop to follow.

Favorable weather and strong demand for potash by U.S. farmers earlier this year are reasons for the high number. 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 just might produce a record number of corn this year. The USDA agrees, with estimates of 13.95 billion bushels of corn output for this year, which is ~850 million more than the planting year 2009–2010. 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: Natural gas price affects fertilizer profits)

Impact on fertilizer earnings

Although falling corn prices will be positive for consumers and food companies, such as McDonalds (MCD) and Wendy’s (WEN), farmers may be discouraged from using as much fertilizer as they did this year, given lower crop prices for next year. This bodes negative for fertilizer companies, such as CF Industries Holdings Inc. (CF), Potash Corp. (POT), Agrium Inc. (AGU), and Mosaic Co. (MOS), that derives more than 33% of their revenues from the United States.

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, will also be negatively affected.

More From Market Realist