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Rising Commodity Prices Help Agriculture, Harm Chemicals

With commodity prices rising, agriculture companies benefit and chemical firms get squeezed.

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High agricultural commodity prices are fertile soil to the fortunes of crop input producers. However, rising raw material costs are pressuring chemical companies to raise prices in an effort to maintain profitability.

High Crop Prices Bode Well for Crop Input Sales.
Prices of most major field crops, including corn, soybeans, wheat, and cotton, have been on quite a bull run since mid-2010. Adverse weather conditions across the globe have limited crop supply, and driven by a growing population and rising incomes, demand for food shows no signs of abating. These factors have led to a tight supply-demand market for multiple crops. According to the latest estimates provided by the U.S. Department of Agriculture, or USDA, the stocks-to-use ratio (a measure of supply and demand that historically exhibits negative correlation with crop prices) for U.S. corn is 5.0%, its lowest level since the 1995-1996 growing season. For soybeans, the U.S. stocks-to-use ratio stands at 4.2%, the lowest figure on record. Low stocks and high crop prices send strong signals to farmers that agricultural inventories must be rebuilt. As a result, more acres should be planted in 2011. The USDA's chief economist expects 9.8 million additional acres, a 4% increase over the prior year, and the largest year-over-year increase in the U.S. since 1996. With more acres planted, we expect sales volumes for crop inputs, such as fertilizer, seed, and crop chemicals, will increase. High prices also motivate growers to increase yields through greater use of agricultural inputs. Additionally, higher crop prices improve farmer economics, giving crop input producers leeway to raise prices.

Jeffrey Stafford does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.