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Why the corn price fall is a possible negative for fertilizer stocks

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: Why Agrium Inc. suspending capacity addition will affect other producers (Part 1))

Corn Price 2013-07-26

Corn prices crash on USDA’s estimates

On July 26, corn prices stood at $4.32 per bushel, based on data provided by CBOT (Chicago’s Board of Trade)—the world’s oldest futures and options trading house. Corn prices have crashed over the past few weeks, as the USDA (United States Department of Agriculture) kept this year’s corn production outlook and global stock-to-use ratio estimates relatively unchanged. Encouraged by high corn prices caused by a severe drought in the United States last year, farmers have allocated a record area for corn plantation.

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

Impact on fertilizer manufacturers

Larger supply of corn relative to demand means lower corn prices. Fertilizer producers such as CF Industries Holdings Inc. (CF), Agrium Inc. (AGU), Potash Corp. (POT) and Mosaic Co. (MOS) could face lower fertilizer prices next year because their products are now more expensive to farmers. Since farmers need to apply nitrogenous fertilizers every year, demand for these fertilizers is unlikely to see a significant reduction—but prices could still be hurt.

Potash producers may have to lower their prices more to keep customers coming back, because demand for potash is more price-sensitive. This would negatively affect revenue for potash companies, but it could be just what they need to lure Indian farmers back into the market. Indian farmers haven’t purchased much potash in the past two years because of unfavorable subsidy policy and high potash prices, so attracting them could support revenue. 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.

(Read more: Analysts’ demand estimates favor potash over other fertilizers)

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