What's behind the growth spurt in fertilizer stocks?

What’s behind the growth spurt in fertilizer stocks?

Key points to remember

  • Fertilizer demand has increased from 20 million tons in 1950 to 190 million tons in 2019.
  • A handful of recent events have impacted fertilizer manufacturing and shipping, including high gas prices and the Russian-Ukrainian conflict.
  • Going forward, fertilizer stocks could be a smart addition to your portfolio.

If you’ve been paying attention to the news lately, you’ve heard about the shortage of fertilizer needed to grow crops. This shortage is the result of various events, including the pandemic, high gas prices and the Russian-Ukrainian conflict.

With a shortage of supply and increased demand, the price has risen and fertilizer stocks are benefiting. Here’s what you need to know and some stocks to consider investing in.

Why Fertilizer Stocks Are Rising

Fertilizers play a vital role in the growth of crops that are ultimately sent to market for sale. Nutrient-rich soils produce more yield per acre than they would without enrichment with fertilizers.

As the world’s population continues to grow, the demand for food increases. This means that the demand for fertilizer is increasing. In 1950, total fertilizer demand was estimated at 20 million tons. In 2019, this demand increased to 190 million tonnes.

This increase will naturally mean that fertilizer stocks will increase as they can increase profits.

However, in 2020, a mix of events began to play out, leading to a more pronounced growth spurt in these stocks. Here is an overview of each event and its impact on fertilizers.

Increase in Chinese demand

As the Chinese economy grows and more of the population finds that they can expect to improve their quality of life, the demand for goods and services increases. For example, there was an increase in demand for grains and soybeans, which the Chinese began to import in greater numbers.

Similarly, increased demand for fertilizer leads to higher prices, which improves profits for fertilizer manufacturers. The stock market reacts to rising earnings by pushing fertilizer stock prices higher.

Impact of the pandemic

For years, the cost of fertilizers has stagnated, creating a stable and reliable price. All of that changed in 2020 when the pandemic hit. The agricultural industry has felt the impact, primarily from the supply chain.

As countries shut down manufacturing and shipping, there were fewer people available to package fertilizers. The problem didn’t stop when the lockdowns were lifted, as many people had to call in sick or, in other cases, had already decided to change careers.

However, the demand for food never slackened, so a bottleneck was created where fertilizer was needed but was not as readily available. An additional byproduct of this bottleneck was inflation.

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Impact of higher gas prices

The best fertilizer uses nitrogen as a base, and most fertilizers are made from nitrogen and hydrogen. Nitrogen is derived from air and hydrogen is derived from gas.

US-based fertilizer manufacturers use natural gas and Europe uses gasoline. The combination of these two ingredients results in ammonia, which is then combined with phosphate and potassium to create a fertilizer.

The global spike in gasoline prices in early 2022 has driven up the costs of critical ingredients needed to produce fertilizer. In Europe, gas accounts for 90% of the variable costs associated with fertilizer production. While the United States is not immune to these spikes, Europe has been particularly affected due to the conflict between Russia and Ukraine.

Russia-Ukraine conflict

Fertilizer is a commodity that is traded around the world. Some countries, including Russia, have large reserves of basic materials used in the production of fertilizers.

Russia produces around 25% of the world’s nitrogen and phosphate fertilizers and 20% of the world’s potash fertilisers. It has a significant stake in the production of fertilizers used worldwide.

Belarus, a country favorable to Russia, produces around 17% of the world’s potash supply and exports most of its production. The Russian-Ukrainian conflict has resulted in sanctions against Russian gasoline and fertilizer exports.

Belarus was already subject to sanctions before the start of the conflict and has been subjected to new sanctions, with neighboring countries monitoring illegal exports crossing their borders.

Sanctions against Russia and Ukraine aim to deprive countries of money that can be used to attack Ukraine. Belarus has not engaged in a direct conflict, but its government supports Russia and Russia sends military support to Belarus. Money from exports helps support these activities.

Export restrictions

Normally, price spikes elicit little commentary or market reaction. However, the extraordinary confluence of world events has cut off access to Ukraine, also known as the breadbasket of Europe.

Some countries have taken steps to protect their reserves by introducing export restrictions or even banning certain exports. For example, Argentina has reduced its wheat exports by 40%, but Australia is eyeing record grain exports to Asia in 2023. That said, Australian exports may not be enough to overcome the loss in shipments of cereals on the world market.

Short-term and long-term outlook for fertilizer stocks

Overall, fertilizer stocks tend to be volatile in their performance. The price of fertilizers depends mainly on the cost of gasoline, since other products used in its production tend to be more stable in terms of price and availability.

In general, when the price of gasoline goes down, the price of fertilizer also goes down. However, the near-term outlook for fertilizer inventories is for higher prices through 2023, even as gas prices have fallen from their recent peak.

The factors mentioned above, such as supply chain issues, reduced exports, the Ukraine-Russia conflict and demand, will persist for some time. As a result, fertilizer stocks are likely to remain high through 2023 unless the conflict ends.

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In the long term, fertilizer stock prices will most likely pull back as adverse conditions around the world unwind. Countries will resume their exports because they have a surplus that will rot if not sent for manufacturing and consumption. A glut of grains and soybeans on the world market will drive down commodity prices and encourage farmers to plant less acreage.

Fertilizer stocks are a good investment because they are necessary for food production. What is certain is that there will always be an event that puts pressure on agricultural production and again causes the prices of fertilizer stocks to rise. The only uncertainty is when it will happen.

Fertilizer stocks to consider

With fertilizer demand unabated and an estimated compound annual growth rate of 3.8%, this industry could be a great long-term investment.

The first stock to consider is CF Industries Holdings (NYSE: CF). This company is one of the main manufacturers of hydrogen and nitrogen, two essential components of fertilizers. It also has the largest ammonia production network in the world.

In the first six months of 2022, the company reported net sales of $6.26 billion, an increase from first-half 2021 net sales of $2.64 billion. He also noted that he thinks it will take many years to rebuild global grain supplies, so he expects to see better results for some time.

Another option is The Mosaic Co (NYSE: MOS). This company produces and distributes millions of tons of potash and phosphates each year to wholesalers, retailers and producers.

For the nine months of 2022, ending September 30, net sales were $3.05 billion, compared to $966 million in the same period of 2021.

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