Your Reading List

Fertilizer prices and the stock market

In the past, the stock price of agricultural manufacturing and supply companies has given a clue to the future

Have you ever waited for something to go on sale, then it never does and you’re stuck paying full price, or maybe even more?

A question I often get from farmers is how they can manage their fertilizer price fluctuations. According to Agriculture and Agri-Food Canada, fertilizer is the fourth-largest operating expense for Canadian farms at 11.7 per cent. For grains and livestock my team and I use options and futures to help manage the price fluctuations, but at the present time there is no established fertilizer futures market. The Chicago Board of Trade tried a fertilizer futures product in the 1990s, and the Chicago Mercantile Exchange had a contract available between 2004 and 2007. These products were not used enough and were discontinued.

Related Articles

One of the more common ways of predicting fertilizer prices is using seasonality. To be considered a seasonal trend, the underlying commodity needs to experience regular and predictable changes that reoccur every calendar year.

You may have heard that fertilizer prices are usually the least expensive from about midsummer until early fall. Going back a couple of decades, this holds true 19 out of 20 times. So now you should know exactly when to buy your fertilizer based on seasonality to help call the top/bottom… if only it were that easy.

You can think of seasonal data as only one part of the puzzle. All of my recommendations to farm clients are based on combining multiple areas of research. The next type of data that can help you make fertilizer pricing decisions is based on using the stock market.

There is an exchange traded fund (ETF) that trades on the New York Stock Exchange with the ticker SOIL: NYSE (see chart below).

This chart shows the past year’s performance of the Global X Fertilizer/Potash Exchange Traded Fund (NYSE: SOIL). The downward trend is indicated by the price being below the 50-day (blue line) and 200-day (red line) moving averages. (click chart for larger view)

This chart shows the past year’s performance of the Global X Fertilizer/Potash Exchange Traded Fund (NYSE: SOIL). The downward trend is indicated by the price being below the 50-day (blue line) and 200-day (red line) moving averages. (click chart for larger view)

It is called Global X Fertilizers/Potash ETF and it is a good place to start using the stock market to track fertilizer prices internationally. Currently, this ETF is composed of companies that are 28 per cent Chinese, 18 per cent Indian, 14 per cent North American, 12 per cent other Asian, 11 per cent Latin American, and 21 per cent other. In the past year, fertilizer prices have been declining and so has this ETF.

Keep in mind this ETF was first created in 2011, not allowing you to make actionable decisions based on longer-term historical data. We like to have at least 10 to 15 years of data when conducting our studies to give an accurate representation.

North America

It is good to know where fertilizer prices are internationally, but what about just in North America? There are two companies that we analyzed to help give us a better understanding of where fertilizer prices might be heading in North America — PotashCorp of Saskatchewan and Mosaic Co. We cross-referenced the share price of these companies with fertilizer prices, going back 20 years.

Our results were quite interesting and found that Potash and Mosaic gave a three-month lead time for where fertilizer prices may be headed with 90 per cent accuracy.

Another ETF that we find useful is Market Vectors Agribusiness (ticker MOO: NYSE — see chart below).

This chart shows the past year’s performance of the Market Vectors Agribusiness Exchange Traded Fund (NYSE: MOO). The downward trend is indicated by the price being below the 50-day (blue line) and 200-day (red line) moving averages. (click chart for larger view)

This chart shows the past year’s performance of the Market Vectors Agribusiness Exchange Traded Fund (NYSE: MOO). The downward trend is indicated by the price being below the 50-day (blue line) and 200-day (red line) moving averages. (click chart for larger view)

We use this ETF to help give us an indication of where the overall agriculture sector may be headed. The current top-five holdings are Monsanto, Syngenta, Kubota Corp, Zoetis Inc., and Deere & Co. Since the holdings can change and the ETF started in 2007, we used companies in our study that gave us at least 15 years of data (see below).

  • Deere & Company (DE: NYSE)
  • Monsanto Company (MON: NYSE)
  • Syngenta (SYT: NYSE)
  • Archer Daniels Midland Company (ADM: NYSE)
  • PotashCorp of Saskatchewan (POT: NYSE)
  • Agrium Inc. (AGU: NYS

We decided to do a similar comparison with U.S. farm cash receipts (cattle, hogs, wheat, corn, and soybeans) as our previous study. Our research found that the companies above gave an indication one year ahead of time for where U.S. farm cash receipts may be heading with an 88 per cent correlation. Based on how most of these companies have declined in 2015 and 2016, there may be some more tough times ahead for the agriculture industry.

Bottom line: When you are making your decisions on when to buy fertilizer, when to sell your grains, or if you should build another bin, the decision should never be made on just one piece of information. Why? To reduce your risk. The human brain is an irrational organ, which is why emotion often defeats reason.

Have a process for your farm decision making and try to remove the emotion. Gather all the information from credible sources to make an informed decision. As I always say to my clients, manage your risks before they manage you.

Adam Pukalo is with PI Financial Corp. Member-Canadian Investor Protection Fund

About the author

Adam Pukalo's recent articles

Comments

explore

Stories from our other publications