Amid global trade tensions, fertilizer prices are again getting some attention as China balks at previous promises to purchases more American farm products. A more focused agribusiness equity play is the Global X Fertilizers/Potash ETF (NYSEArca: SOIL).
SOIL, which is more than eight years old, “seeks to provide investment results that generally correspond generally to the price and yield performance, before fees and expenses, of the Solactive Global Fertilizers/Potash Total Return Index,” according to Global X.
Fertilizer companies have suffered from lower profits in recent years after crop nutrient prices fell to multi-year lows on excessive supply and demand and declining commodity prices.
Something Different About The Fertilizer
“Fitch Ratings’ fertilizer pricing assumptions have been revised, reflecting underlying market dynamics, but we do not expect any rating changes as a result of these revisions,” said Fitch Ratings in a recent note. “The reduction in ammonia and diammonium phosphate (DAP) prices incorporates seasonal weaknesses and increased long-term supply risks. Mildly positive short-term market pricing trends for urea and phosphate rock are reflected in small upwards assumptions revisions.”
American farmers have been struggling with low crop prices and the loss of Chinese markets due to President Trump’s trade struggle with Beijing and are therefore likely to purchase $464 million less agricultural machinery, mainly tractors and harvesters, from Deere & Co. this year than the manufacturer predicted.
“The pressure on prices should ease from 2H19, aided by US fall applications, some production curtailments and gas prices bottoming out. We assume a gradual recovery beyond 2019 as the pace of capacity additions moderates but have rebased our prices at a lower level to capture the supply risk stemming from shorter lead times for new capacity than other nutrients,” according to Fitch.
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High potash prices could lift SOIL in the latter stages of 2019, assuming demand rises for crops and trade fears ebb.
“Our higher potash assumptions in 2019 reflect prices to date,” said Fitch. “Long-term prices remain unchanged. Potash supply contracts with major Chinese and Indian buyers – previously a price floor for the global spot market – have not been renewed since 3Q18, limiting price visibility for 2H19. New capacity in the CIS expected after 2019 is also likely to put pressure on prices. Furthermore, although not our base case, higher potash prices beyond 2019 may encourage Canadian producers to restart idled plants and add new capacity (e.g. BHP’s Jansen facility), which would limit price gains in the medium term.”
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