Essential Fertilizer Trends Weekly (Part 3 of 11)
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. Plus, high crop prices make fertilizers more affordable for farmers, which increases 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 prices relatively flat due to no data
With the lack of data from the USDA during the first half of October, corn prices have pretty much lingered flat. On the supply side, the market generally expects a record production this year with solid yield. On the demand side, lack of data meant few movements in corn prices.
The corn ethanol requirement could scale back
However, an article by Reuters mentioned that the EPA (Environmental Protection Agency) could be cutting back corn-based ethanol blending requirements for 2014 to 13 billion gallons. The current law requires 14.4 billion gallons of corn-based ethanol production for 2014, and it was designed on expectations that gasoline consumption would continue to grow from 2007, which didn’t happen. The AAA Motorclub that represents 53 million drivers urged the amount of ethanol required to be blended with gasoline in 2014, according to an article released on October 28 by the Detroit News.
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 Reuters article, 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 could have a negative medium-to-long-term impact on corn demand growth and price.
Supply factors aren’t having much impact on corn price
On the supply side, higher corn condition and further corn harvest didn’t have much of an impact on corn prices. Corn prices traded at $4.43 a bushel on October 15. They last traded at $4.32 a bushel on October 29. This could mean that the market has mostly priced in the expectation of a record output.
Impact on fertilizer stocks priced in
Low corn prices could have a negative impact on next year’s fertilizer demand and 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. However, because corn prices haven’t fallen much, despite better crop condition and ongoing harvest, the market likely has priced in low corn prices. For that reason, the market could have priced this factor into fertilizer stocks as well—at least over the short term.
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