Sunday, July 3, 2011

Two conflicting cases for fertilizer stocks this week

Two pieces of news moved stock prices of fertilizer companies this week .

As most of us probably have noticed, stock prices of fertilizer companies move closely together with crop prices (especially corn prices) in the short-term. Surveys by the U.S Agriculture Department (USDA) reported on Thursday that U.S. farmers planted far more corn than expected this growing season. This report sent corn prices plunging and sparked speculation that upward pressure on food prices may be coming to an end. Corn futures for July delivery tumbled to 9.9% to $6.29 a bushel after falling as low as $6.15 on Thursday. Shares of agriculture stocks were affected despite a 4-day rally for Dow Jones Index.

From Wall Street Journal,
USDA's conducted during the first two weeks of June found farmers had planted 92.3 million acres of corn, the second most since World War II after 93.5 million acres in 2007. ..........

As recently as June 9, USDA officials had guessed that excessive rain and widespread flooding this spring limited farmers to 90.7 million acres. But a separate USDA report also found supplies were bigger than expected in early June, signaling relief for food companies, livestock producers and consumers.

In the meantime, fertilizer stocks found strength in Canpotex's success in negotiating a price hike of potash with China. The agreed-upon price of $470 per tonne was $70 higher than last year. Many had expected $450 per tonne. This contract signalled tightness in the supply of potash and continued strong demand from China, the largest fertilizer consuming country in the world.

In my opinion, share prices of fertilizer stocks will go through a streak of volatility and possibly weakness as crop prices, especially corn prices are testing their support. Once corn prices find their support, say, between $5-$6, the tightness in supply of fertilizers should regain importance. After all, it is generally believed that the economics of using fertilizers makes sense as long as corn prices stay above $3.56, soy bean $8.49, wheat $6.73.

Note: Canpotex is a potash consortium formed by Potash Corp (POT), Mosaic (MOS) and Agrium (AGU). It controls 70% of the world potash trade.

Disclosure: The blog author does not own any of the above positions in her personal account as of July 3, 2011

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