Fertilizer Bulls Are Ignoring Planting Cycles

Over the last several weeks, I have read countless analyst reports, news articles and blog entries that have all tried to make the case that the earnings of the fertilizer companies are all set to soar.  The investment thesis proposed by these authors revolves around surging world demand and the recent flooding in the Midwest.  While the flooding has been tragic, fertilizer bulls have argued that the flooding will act as a catalyst for companies such as Monsanto (MON) and Potash Corp. (POT). 

These traders are speculating that farmers will choose to replant their crops in an effort to cash in on surging commodity prices, and that to achieve these results they will be forced to relay on tremendous amounts of fertilizer to ensure adequate crop yields.  Given the current supply and demand imbalance in the food markets I have no doubt that the long-term thesis for fertilizer stocks is correct; however, in the short term I believe that the fertilizer bulls are mistaken, as they are ignoring the basic planting cycles for corn and soybeans.  It is my opinion that it is simply too late for farmers to replant in an economic manner.         

According to the Iowa State extension office the optimum time to plant corn is between April 20 and May 10. The longer that one delays planting, or takes to replant, the dramatically lower the crop yield will be.  While Fertilizers may help support late plantings, there comes a point where the cost-benefit equation is decidedly against farmers.  I believe we are very close to that point.  After all, we must remember that farmers are some of the most subsidized Americans and the most recent farm bill is but another example of the strong support that farmers have on Capital Hill.  Even if they do not replant, they are guaranteed a significant amount of replacement income, which for some is tied to the prices of the crops they would have produced.  Since this is the case, I see no reason for farmers to spend additional money on fertilizer products when they can simply collect from the government at the end of the year.

Below is an interesting chart on corn yields matched up against the planting date.  When looking at the chart it is important to remember that it is nearly July and the ground is still wet.  

 

Those who farm soybeans are in a similar predicament.  According to the Iowa State extension office the optimum time to plant soybeans is between April 25 and May 5.  Much like corn yields, the yield for soybeans declines dramatically the further into the summer you get.  Soybean crops will be at a greater disadvantage than corn crops this summer because they are more finicky and tend to perform poorly in saturated soils;  when this occurs, disease in the seedlings can run rampant.  Below you will notice that the soybeans chart is quite similar to that of corn.   

Even with high crop prices, I do not believe that the market incentives for growing corn and soybeans are enough to outweigh the risks of replanting this late in the season.  There is simply not enough time left, especially when you can avoid the cost of fertilizer and other inputs and the inherent risks of planting by accepting government subsidy payments.

For Further Review:

Iowa State Extension Office

Disclosure: None

Comments

[rookie48:]

What is the % of crop yeild affected by the floods in relation to the total North American crop yeild? Farmers are still buying fertilizer everywhere else....

2008 Jun 27 03:17 PM

[visaman:]

Part of the problem with this article is that it zeroes in on only the planting season for US farmers. The US is not the only country that is growing food and has a growing season. Many countries of the world have more than one growing season. Take many of the countries located around the equator, like Brazil, which has 4 season to grow crops in. When you take into account that many of these other contries are expanding their farming acreage at an exponential growth rate and are planting/growing more than once a year, you begin to see the potential that potash has right now and in the future!

So if you're going to talk about growing cycles, next time, include more than just the local market.

2008 Jun 27 06:27 PM

[Dr. Masood ...:]

In analyzing a business like POT, let us not forget the global customers/ markets it caters for. The writer failed to consider an enormous and increasing demand for POT products in major Asian, American and even European markets.

2008 Jun 27 09:20 PM

[ken wender:]

Who cares about this, they have pricing power and that is all that matters. Sept pricing will be up another 20%

2008 Jun 28 07:48 AM

[User 171011:]

Uhm, anyone ever hear of the southern hemisphere?

Do some DD man. The reason CanPotEx is working on doubling their capacity for overseas shipping might be because, most of their product goes overseas where your theory about planting cycles ... isn't worth the dirt they fertilize.

2008 Jun 28 08:50 AM

[Cicero:]

The author clearly notes that the thesis of fertilizer bulls revolves around two prongs, "surging world demand" and "the recent flooding in the Midwest". He explains their reasoning about flooding: “fertilizer bulls have argued that the flooding will act as a catalyst" as farmers replant. He specifically notes that he agrees with the bulls about one prong: "I have no doubt that the long-term thesis for fertilizer stocks is correct", before clearly zeroing in on just the flooding prong: "short term I believe that the fertilizer bulls are mistaken, as ...it is simply too late for farmers to replant in an economic manner." He goes on to do a good job substantiating his opinion. I don't think he could have been much clearer.

2008 Jun 28 06:37 PM

[ddieter:]

Overheard at County Fair in Lafayette County, WI,
Even with reduced yields, farmer are replanting due to the high corn prices. Corn has hovered around $2.00/bushel and it's over $7.00+, do the math!
Farmers are a positive bunch. There is still corn being planted or replanted, along with soybeans, depending on location.

2008 Jun 28 07:38 PM

[will:]

Potash sees 260 in 2 weeks!

2008 Jun 29 10:29 AM

[legmaker:]

I really like your reasoning for what you have said, but the growing season in many areas had late frosts and too much moisture. Farmers with corn in the fields take their insurance checks for the portion or all of the crop destroyed and will plant soybeans after anyways. For one, they will not let their fields set, and generally a bad crop is still better than no crop at all and they will still make money. Worse case scenerio is that they will put wheat in. Most of the comments on this one sound ignorant, call a farmer if you dont know something dont put it in writing.

2008 Jun 29 05:30 PM

[Linda D:]

Does the writer of this article not know that fertlizer is in demand in other places in the world? The USA is only in the Northern Hemisphere! Talk about somebody that didn't do their research!

2008 Jun 30 01:16 PM

[blink0404:]

What a timely article. I found one similar on grain, corn, and soybeans today on greenfaucet. Very similar message with a little more analysis. Check it out: www.greenfaucet.com/co...

Also pretty good analysis of what to buy, predictions for the future.

2008 Jun 30 01:41 PM

[Cicero:]

Linda, read the posts before commenting. See mine above, before you posted. Your criticism is off base.

Micheal, it seems as if your tidbit is vital - it's too late for corn, but you can still plant another crop.

2008 Jun 30 11:30 PM

[visaman:]

Linda's criticism is not off base.

The author could have been more clearer Cicero! He didn't get into the specifics of the growing world demand that even in the short term will affect fertilizer prices. The US market is just one part of it. He only chose to talk about the US market in the short term and didn't talk about the World market in the short term! I think that would have been more clear if all the data was included.

2008 Jul 01 08:19 PM

[Cicero:]

Visaman, I disagree. The author clearly notes that the thesis of fertilizer bulls revolves around two prongs, "surging world demand" and "the recent flooding in the Midwest". He agrees with the former prong and then clearly and conscioulsy devotes his piece to offering insight into the latter. The Midwest flooding is a short term event here in the US. What does the World Market in the short term have to do with it perhaps being too late to replant corn (other than enticing a farmer to push the risk due to higher reward)? Other commenters added valuable insight (such as, Duh! They can plant other crops later than corn).

2008 Jul 03 06:18 AM