It has been a wild spring for farmers in the U.S. After the USDA predicted farmers would plant one of the biggest crops in a decade, a rainy spring in the Corn Belt delayed plantings by weeks in some areas, leading many to think farmers would eventually give up and sow far less. After a certain point in time, it makes more sense for farmers to leave the fields unsown and collect an insurance payment, rather than plant too late into the season and risk a poor harvest. But according to yesterday's USDA report, farmers eventually managed to get the whole crop planted, the second-biggest since World War II.
The news caused corn prices to crash, on the belief that the massive planting would result in a massive harvest. High crop prices encourage farmers to plant more and use more fertilizer to try to reap higher yields, so fertilizer companies saw their stock prices fall as well. The table below shows some of the carnage, on a day when the broader market did quite well.
|
Company |
Day's Change |
|---|---|
|
Mosaic |
(0.99%) |
|
CF Industries |
(5.13%) |
|
Intrepid Potash |
(1.46%) |
|
Terra Nitrogen |
(3.08%) |
|
CVR Partners |
(2.98%) |
But maybe you can see the flaw in this logic. Yes, corn supplies will probably be higher after the harvest, so it makes sense that corn prices fell. And yes, there tends to be a strong correlation between high crop prices and high fertilizer prices. But high corn prices are only good for fertilizer companies because it means farmers will plant more and buy more fertilizer. The farmers did plant more, so now they need more fertilizer. This is a classic example of getting cause and effect backward.
Additionally, the plantings were heavily delayed, missing the best part of the season. This typically results in a smaller harvest. The global stocks-to-use ratio, a measure of how much supply is available, is close to the lowest it's been in 50 years. One big planting season won't fix that, even if the weather had been good.
Fertilizer demand will remain high for the next couple of years as farmers continue to plant as much as possible and try to eke out higher yields to rebuild supplies. Yesterday's price drop in these companies is nothing to worry about, and just makes for a great buying opportunity.
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