Here’s Why Fertilizer Companies Were Hit Hard

Thursday was an ugly day for the markets.  The Dow (NYSEARCA:DIA) fell 1.13%, while the S&P 500 (NYSEARCA:SPY) declined by 1.67%.  One of the hardest hit stocks in the commodity space was CF Industries Holdings, Inc. (NYSE:CF).

CF Industires is a global leader in fertilizer manufacturing and distribution, the second largest nitrogen fertilizer producer in the world, and the third largest phosphate fertilizer producer among public companies.  On Thursday, shares dropped more than 11% as corn prices continue to decline.  “The perception among investors is that as the price of corn drops farmers use less fertilizer, although that is not always the case. Fertilizer stocks are highly correlated to the corn price,” said Colin Isaac, chemicals analyst at Atlantic Equities.

The Teucrium Corn Fund (NYSE:CORN), which tracks the performance of three corn futures contracts expiring on different dates, is down 15% year-to-date.  As the chart below shows, several fertilizer companies including Agrium Inc. (NYSE:AGU), Mosaic (NYSE:MOS), and Potash Corp. (NYSE:POT) all underperformed the Teucrium Corn Fund on Thursday.  Mosaic, the largest producer of potash, closed 7% lower on Thursday, despite announcing a $1.2 billion share buy back plan.

Commodity (NYSEARCA:RJI) prices can be very confusing for investors.  While the long-term bullish case for agricultural is strong due to the growing global population, prices are still affected by market sell-offs.  Furthermore, supply issues continue send mixed signals.  Last week, the U.S. Department of Agriculture lowered its forecast for the size of the U.S. corn crop for the fourth time in a row and also made a similar cut to domestic demand.  In its crop report, the Agriculture Department cut its estimate of this year’s corn crop by 1%, to 12.31 billion bushels.

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Although decreasing supply should raise prices, much of the supply cut was already baked into the market.  “I don’t think there’s enough on either the bull or the bear side to sink your teeth into it,” said Chad Henderson, analyst with Prime Ag Consultants in Brookfield, Wis.  In our Commodities Premium Newsletter, we analyze several ways to gain exposure to commodities.  Currently, we are waiting for large cap agricultural (NYSEARCA:RJA) plays such as Deere & Company (NYSE:DE) to reach our downward price targets before adding to a position in this volatile market.  For investors seeking more detailed professional analysis on commodities and other wealth preserving investments, we invite you to try our premium service free for 14 days.