Why relatively cheap potash prices support sales volume among potash stocks

Relative expensiveness of fertilizers

For farmers, the relative price of fertilizers to crop price is an important factor that influences buying decisions, because it affects profits. When fertilizer prices are relatively high compared to crop prices, there’s less incentive for farmers to purchase more fertilizers. On the other hand, when fertilizer prices are cheap, farmers may be encouraged to purchase more fertilizers, which would be positive for fertilizer producers.

Potash to Corn Price Ratio 2013-07-19Enlarge Graph

Potash-to-corn price stable at six-year low

At the end of June 2013, the potash-to-corn-price ratio (calculated by dividing the price per tonne of potash by the price of a bushel of corn) stood at 67 times. In the United States, maize (corn) takes up the majority of fertilizer use. So the price of corn is an important indicator. This is most important for potash producers because demand for potash is more elastic than nitrogenous fertilizers such as urea. Farmers have the opportunity to forgo potash use from time to time, since plants don’t directly consume the nutrient.

The ratio between potash and corn prices has fallen since 2009, as corn prices rose at a faster pace than potash prices. Last year’s record drought in the United States also supported corn prices, while prices for potash were pressured by a supply increase and lower food inflation in other parts of the world. This has supported demand, as Potash Corp. (POT), the largest potash producer in the world, commented that the 78% year-over-year growth in sales volume during the first quarter of this year was partially driven by strong demand in the United States, where farmers decided to take advantage of high corn prices.

Expectation for the remainder of 2013

Although investors expect corn prices to fall further this year, as farmers take advantage of high prices to make profits, additional potash capacity will keep pressuring potash prices. This means that potash prices should stay relatively cheap for farmers, which would be positive for potash producers such as Agrium Inc. (AGU), Potash Corp. (POT), Mosaic Co. (MOS), and Intrepid Potash Inc. (IPI). It would also benefit the Market Vectors AgriBusiness ETF (MOO).