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Fertilizer Stocks Should Help your Portfolios Grow
According to global trends, the world’s population is likely to increase nearly 25% by 2030, to 8.2 billion. Not only are there going to be more consumers, but with a growing percentage of society now living above the poverty level, there is a rising need for food. In order to meet estimated growth in food demand, improvements in crop yields are needed. Moreover, demand for fertilizers should advance, with prospects for potash, phosphate, and nitrogen producers standing out.
Potash producers perhaps hold the most potential. The key input for this nutrient is potassium. Supply of this mined product is limited, and concentrated in a few countries (primarily Canada and eastern Europe). What’s more, a small number of companies control a major portion of global capacity, perhaps enabling them to control supply and coordinate pricing. Market fundamentals suggest these entities are ready to extract favorable terms from major agricultural countries, namely Brazil, India, and China, which account for roughly 45% of total demand. After reaching 52 million tons in 2010, global potash shipments should approximate 55-60 million tons this year, as farmers work to boost soil fertility and replenish inventory levels.
The industry’s outlook has attracted interest from those on the outside. Earlier this year, BHP Billiton (BHP) failed in a hostile takeover bid of Potash Corporation (POT), as opposition from Canadian politicians proved pivotal. In spite of the setback, the Australian behemoth remains committed to gaining exposure to potash markets. In fact, there is speculation that Mosaic (MOS) may be in BHP’s crosshairs. Mining competitor Rio Tinto (RIO) probably also has a sweet tooth for fertilizers. The question remains, can either of these entities, in spite of their substantial financial wherewithal, entice nutrient producers to accept buyout bids? After all, there is no disputing the growing importance of fertilizers.
The world’s leading fertilizer producer is Potash Corporation, with a relatively stronger presence in the potash realm. It controls 20% of world potash capacity, 2% of nitrogen production, and 5% of phosphate. While the company recently achieved record quarterly potash production of 2.8 million tons, capacity is on pace to advance considerably in the years ahead. In fact, Potash is in the midst of a multi-billion-expansion effort that should lead to an 80% advance in annual capacity for the nutrients, to approximately 17.0 million tons by 2015.
Nitrogen and phosphate producers are not only benefiting from rising global demand, but also lower raw materials costs. Natural gas is the principal input for both nutrients, accounting for more than 50% of nitrogen’s production process. These fertilizers are used in large amounts to produce many crops, including corn. During periods of high crude prices, portions of corn crops are used to make biofuels like ethanol and soybean oil, placing added importance on nutrients. Much like potash, there are a relatively few number of competitors in the phosphate and nitrogen space, as barriers to entry and economies of scale loom large.
Mosaic Company is a producer of phosphate and potash nutrients for use in crops and animal feed, serving customers in approximately 40 countries. It is responsible for nearly 12% and 13% of global potash and phosphate capacity, respectively. Agrium (AGU) is a wholesaler of fertilizer nutrients and a retailer of agricultural products. The latter sells a plethora of crop nutrients, protection products, and seeds. Meanwhile, the wholesale business manufactures a full slate of nitrogen, potash, and phosphate offerings for agricultural and industrial customers. These companies, together with Potash, comprise Canpotex, an international marketing and distribution company. The cumulative size of the venture enables the entity to behave like a cartel, coordinating mine operations and cargo shipments.
CF Industries (CF) operates two segments, with a lion’s share of business being generated from nitrogen sales in the U.S. Thanks to a $4.7 billion acquisition of Terra Industries in 2010, the company controls approximately 30% of North American nitrogen production capacity. The nutrient maker holds a substantial advantage over competitors, as many of its nitrogen facilities are located in close proximity to areas rich in natural gas. What’s more, CF Industries has one of the highest market shares in the U.S. corn-belt, positioning it to benefit from relatively solid crop futures, as well as growing ethanol production.
Population, income, and economic growth in the developing world are resulting in sharp declines in arable land per person. Moreover, demographic trends suggest demand for food, fuel, and feed for livestock will firm in the years ahead, necessitating greater applications of fertilizers. Given these factors, as well as limited new supplies and long development times, the aforementioned companies appear to have bright futures.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.