Jul. 13, 2012
Drought conditions in the U.S. Midwest have caused soil moisture levels to plummet, forcing official yield estimates for the current growing season lower.
As a result, agricultural commodity futures have moved sharply higher, with corn, wheat and soybean prices up 29%, 28% and 14%, respectively, over the past month.
This comes just six weeks after most observers feared a blockbuster U.S. plant and record yield forecast would send domestic corn inventories surging.
“Corn prices were in sharp retreat as a result – until Mother Nature turned up the heat,” said Steve Hansen, analyst at Raymond James. “Mother Nature’s ability to expeditiously uproot the consensus outlook for corn rarely fails to impress.”
On Monday, the USDA reported that the portion of crop rating “good” or “excellent” has fallen to 40% from 72% in May, marking the steepest intra-season deterioration since 1998.
Mr. Hansen explained that the directional link between crop prices and fertilizer equities is based on a simple theoretical notion that incentives matter. In other words, higher corn prices should motivate farmers to maximize their fertilizer (nitrogen, phosphate and potash) applications in the fall and spring in order to reap the highest possible return on their future crop, and vice versa.
Corn accounts for approximately 45% of potash consumption in the United States.
“The historical record suggests this price inter-relationship is strong, even if on-the-ground fundamentals are little impacted by short-term price moves,” Mr. Hansen said in a note to clients.
However, the drop in corn yields may not be as positive for phosphate and potash demand as it is for nitrogen.
Jaret Anderson, analyst at Mackie Research, pointed to a July 11 article in Fertilizer Week that the ploughing down of crops too damaged by drought to be harvested leaves almost all of the phosphate and potash applied in the spring still available in the fall on the affected areas.
“The ‘ploughing down’ refers to farmers choosing to knock down crops that are deemed too damaged by drought to be profitably harvested,” Mr. Anderson explained in a report. “These sorts of decisions will be made over the coming weeks.”
While nitrogen needs to be applied every year to impact yields, the phosphate and potash not absorbed by plants can be stored in soil. So by knocking down a corn crop in July before it has absorbed all of the phosphate and potash present in the soil, a farmer may retain some of these nutrients, Mr. Anderson said.
So while a case can be made for nitrogen being the largest beneficiary of the three primary nutrients, the analyst expects potash and phosphate producers to also capitalize as farmers around the world take advantage of strong crop prices by applying plenty of all fertilizers.