Crop Profitability Correcting: Crop Nutrient Prices Essentially Flat
Sep 19, 2012
Agrium and PotashCorp released their September monthly crop input market report data series Monday September 17, 2012 after the close, three months into this weather driven, supply-based crop price rally.
Crop Profitability Correcting-
The report showed that crop profitability was highly volatile. The previous up-cycle began in June 2010 with returns over variable cost (ROVC) at just $19 billion, peaking in June 2011 at $87 billion. ROVC troughed twice at $49 billion, soared back to $87 billion in July 2012, but was hit hard by falling crop yields, dropping to $69 billion in September 2012.
Nutrient prices have shown a trend toward de-coupling from grain prices. The season's big rally in crop prices has yet to show-up in crop nutrient prices, which have bucked grains' up-ward movement. While soy and corn prices have soared, crop nutrient prices have been flat for 12-24 months and were essentially flat month over month (MoM). Urea (NOLA, New Orleans) was down 1%, Midwest potash was unchanged and Central Florida phosphates were up 3%.
Crop Profitability Stable At High Levels-
Overall farm belt crop profitability is stable at high levels, but spot cash margins are not representative of farm-year crop margins since growers have been selling into this rally on the way up. Plus crop profitability could correct, given normal planting conditions and trend-line crop yields for the next crop.
This would result in more normalized on-farm prices with corn around $5/bu, soy around $12/bu, and wheat around $6/bu. Still, as the September 30 Grain Stocks Report is likely to show, the beginning inventory for this year’s 2012-13 crop starts off the lowest since the mid-1990’s.
North American potash inventory has been above the five-year average since December 2011which is now 33% above the five-year average - an increase over August's 29% reading, which was due to a 0.22 million tonne decrease in North American inventory. Exports to China and South America and summer fill still needs to ramp up to affect supply. Do not expect much movement on potash until inventory softens and exports increase.
U.S. Phosphate inventory is now 14% below the 5-year average, better than the 10% below average in August, due to a 98 thousand tonne decrease. Phosphate inventories are much tighter than potash.
Crop Nutrient Pricing Essentially Flat-
Nitrogen remains flat after peaking in May at $765/tonne, the NOLA urea price was essentially steady, down 1% ($4/tonne) to $480/tonne. The Black Sea price was flat at $385/tonne. The spread between NOLA and Black Sea shrank to $95/tonne, which should still attract imports into the NOLA market, though to a lesser extent than the past several months. The spread began 2012 at $65/tonne and peaked at $286/tonne in April 2012.
Midwest potash price was flat at $558/tonne after peaking at $634/tonne 13 months ago in August 2011. The Saskatchewan potash price declined MoM $9/tonne to $532/tonne.
Central Florida MAP price was up 3% in September to $588/tonne. After peaking at $664/tonne 13 months ago in August 2011, prices fell 1% per month over that 13 month period.
Natural gas prices are trending up from very depressed levels. The spread between North American natural gas and European natural gas may have peaked at $12/million metric british thermal units (MMBTU) in April 2012 when the Ukraine price was $14/MMBTU vs. NYMEX at $2/MMBTU. The spread is still high but is trending narrower at $11.21/MMBTU for September.
Risks for agricultural input equities reflect the fact that the production agriculture business is subject to significant volatility owing to several factors that lie outside the control of the customer base of millions of individual growers that affect supply and demand for crop production, and therefore crop prices: (1) highly variable weather; (2) changing government policy; (3) highly varying crop yields (4) the relative value of the U.S. Dollar; and (5) the recent spike in the corn price; and (6) resulting overhang in the U.S. Ethanol mandate due to the prospect for high food inflation in a deflationary environment, as evidenced by very low bond yields.
Mr. Gulley rates Agrium(AGU) a buy and PotashCorp (POT) neutral.