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U.S. corn prices used to be the best way to predict the stock price for Canadian fertilizer purveyor Potash Corp of Saskatchewan. That is, up until last summer's drought. The dry spell caused a major dislocation between corn prices, which skyrocketed, and Potash's stock price, which pretty much just sat there.
Today's disappointing profit results and reduced sales forecast from Potash could be an indicator that the corn price is once again the main driver of Potash stock. Let's go to the numbers.
This chart shows the daily connection between U.S. corn prices (active futures contract is used here) and the Potash stock price. It proceeds in two, or potentially three stages.
From June 2011 to July 2012, the two moved in tandem with a correlation coefficient of 0.8522 (r-squared 0.726 if you want to get technical). But, between July 2012 and January 2013 the correlation fell into negative territory at -0.03.
It is now possible to argue that the historically close relationship between North American corn prices and Potash has resumed, although the sample is small. For all of 2013, the correlation is a relatively unhelpful 0.31. Since May, however (I told you the sample was small), the correlation has climbed to a far more interesting level at 0.60.
It makes sense that fertilizer demand follows corn prices, which is why traders have referred to them when trading in the sector. Higher corn prices motivate farmers to buy more fertilizer to increase crop yields.
I'm tempted to conclude that the pattern has been re-established and, barring a major meteorological event, that corn prices are once again an effective gauge to predict Potash stock performance.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights , and follow Scott on Twitter at @SBarlow_ROB .
Scott Barlow