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Essential fertilizer trends: China’s food price picks

October 22, 2013 | Market Realist

Why is China’s food price important to fertilizer stocks?

The CPI (Consumer Price Index) is a measure of the overall price of goods that the common household consumes. The most significant component of the headline CPI to farmers is the Food CPI. When CPI is rising, it means food price is rising. The faster it’s rising, the better for fertilizer stocks. Conversely, falling growth can be a negative.China Food Consumer Price Index 2013-10-17Enlarge Graph

With a ~18% of the world’s population, China’s food prices are of critical importance to the global fertilizer market. Depending on the type of fertilizer, consumption in China can make up from 18% to 31% of global use.

China’s food inflation picks up

In September, China’s food inflation rose to 6.1%, up from 4.7% in August. Price increases were primarily driven by an increase in fresh vegetables and meat. The September data most likely reflects an increase in demand as well as some supply problems.

Higher demand, lower supply

Drought, frost, and flooding were factors that negatively affected food supply this year in China, while the rest of the world saw much more favorable weather, yield, and production. Faster economic growth since China accelerated its spending program to keep its 7.5% growth target for 2013 is driving national income. So demand for food—particularly vegetables and meat that are considered more luxury fare—is rising.

Farmers will use more fertilizers

As the overall CPI, which now stands at 3.1% is within the government target, actions to reduce growth are unlikely. That means demand will keep growing. To meet this demand, farmers will be using more fertilizers, which would support demand for fertilizers like potash, phosphate, and nitrogenous fertilizers.

Higher food prices are positive for stocks

If food prices in China continue to rise, expect China’s demand for fertilizer to increase as well. This would be positive for fertilizer stocks and ETFs like CF Industries Holdings Inc. (CF), Potash Corp. (POT), Agrium Inc. (AGU), Mosaic Co. (MOS), and the Market Vectors Agribusiness ETF (MOO). Fertilizer prices may benefit from this as well.