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The heat is taking its toll on crops and everyone is scratching their heads over whether global fertilizer demand will offset lower U.S. phosphate and potash applications and drive players, including The Mosaic Company (NYSE:MOS), Potash Corporation of Saskatchewan Inc. (NYSE:POT), CF Industries Holdings, Inc. (NYSE:CF), Agrium Inc. (NYSE:AGU) and Terra Nitrogen Co. LP (NYSE:TNH), higher or lower.

Crop conditions continued to deteriorate this past week. In Iowa, the corn crop listed as good to excellent fell to 36% in the week ending July 15. This is down from 46% the prior week, which was the worst reading since summer 1993. It's no better in Illinois, where corn in good to excellent condition is 11%, down from 19% the prior week. In Indiana, corn listed as good to excellent fell to 8% from 53% last year and down from 12% in the week ending July 8.

Across the country, crops listed in good to excellent condition are the lowest since the drought of 1988.

Since the current drought is comparable to 1988, we revisited the year-over-year change in fertilizer prices in 1989 to get insight into how fertilizer stocks may play out from here. Overall, prices were broadly higher in April 1989 from April 1988 and broadly lower in October 1989 from October 1988. The most significant gains came from nitrogen, which we'll touch upon a bit more below the table.

Year

Month

Anhydrous ammonia

Nitrogen solutions (30%)

Urea 44-46% nitrogen

Ammonium nitrate

Sulfate of ammonium

Super-phosphate 44-46% phosphate

Diammonium phosphate (18-46-0)

Potassium chloride 60% potassium

1988

Apr.

208

137

183

166

140

222

251

157

Oct.

191

136

188

170

146

221

246

157

1989

Apr.

224

142

212

189

154

229

256

163

Oct.

180

130

172

180

154

204

218

153

Apr-Apr % Change

7.69%

3.65%

15.85%

13.86%

10.00%

3.15%

1.99%

3.82%

Oct-Oct % Change

-5.76%

-4.41%

-8.51%

5.88%

5.48%

-7.69%

-11.38%

-2.55%

Dollars per ton: Source USDA

It's likely that fertilizer prices rose as unaffected farmers boosted applications to maximize yield in the wake of higher grain prices. This helped offset lower demand from farmers who had chosen to plow under their crop and collect insurance payments, preserving potash and phosphates for the next season's crop.

Investors should expect a similar trend this time around, with fertilizer prices strong through fall and spring and heading lower into fall 2013.

The exception may be ammonia producers. Both ammonium nitrate and sulfate of ammonia, which are high sources of nitrogen, saw prices increase in the year from October 1988 to October 1989. This makes sense, given nitrogen—unlike potash and phosphate—leaches out. It also makes sense that urea nitrogen saw prices fall while ammonia increased, given ammonia nitrate doesn't lose nitrogen to the atmosphere while urea does.

The broad-based price strength from April to April suggests investors buy all fertilizer producers. The decline from October to October also suggests profit taking in non-ammonia nitrogen plays, such as potash. Overall, if history is our guide, purer nitrogen plays such as Terra Nitrogen are your best bet.

Source: A Look Back At 1988 Fertilizer Prices Suggests Nitrogen Plays Are The Best