U.S. Markets closed

Why 2014 crop price movements will affect potash stock returns

Xun Yao Chen

Why Mosaic sees a much more upbeat outlook than Potash Corp. (Part 4 of 5)

(Continued from Part 3)

Fertilizer price

While potash prices bottomed, Mosaic Co. (MOS) currently doesn’t expect “dramatic” short-term potash price increases, echoing a similar call made a few weeks back by Potash Corp. (POT). Because the downward part of the cycle is prolonged, the upswing is expected to take time as well, said the company. So investors expecting a significant rally could be disappointed.

Low crop prices

Perhaps Mosaic Co. doesn’t see a dramatic rise in potash because crop prices are low. Favorable weather conditions and fertilizer applications contributed to a record crop year for farmers in the United States last year. That drove corn prices down from close to $7.00 a bushel to ~$4.20 a bushel. December 2014 U.S. corn futures were sitting near $4.50 per bushel a few days ago.

Fertilizers are still affordable, and farmers can still make money at these grain prices—especially since potash and phosphate prices have fallen quite substantially from last year. But it’s important to consider that corn prices have fallen by a larger extent than fertilizer prices last year. So from a different angle, we could see this as negative: affordability has fallen.

Unless crop prices rise, it’s unlikely that companies such as Mosaic Co., Potash Corp., Agrium Inc. (AGU), and Intrepid Potash Inc. (IPI) would be able to substantially increase their fertilizer prices. Historically, movements in the PowerShares DB Agriculture Fund ETF (DBA) have highly correlated with POT and MOS shares. This ETF has even led potash and phosphate prices.

Crop demand and supply

Slowing growth in emerging markets—India and China, for example—could weigh down food consumption growth, crop prices, and farmers’ purchase behavior. Should economic growth (which drives disposable income and food consumption in emerging markets) weaken further, we could see crop prices negatively affected.

But it’s important to recall that higher supply has been a key driver behind lower crop prices for the last few years, which is subject to change. This year, farmers are also expected to use less land for corn plantation in the United States, which would lend support to corn prices. On the other hand, coffee and sugar prices have surged as dry conditions persist in Brazil.

Continue to Part 5

Browse this series on Market Realist: