Key takeaways
- The demand for fertilizer increased from 20 million tons in 1950 to 190 million tons in 2019.
- A handful of recent events have impacted the manufacturing and shipment of fertilizer, most notably high gas prices and the Russia-Ukraine conflict.
- Moving forward, fertilizer stocks could be a smart addition to your portfolio.
If you have been paying attention to the news recently, you have heard about the shortage of fertilizer needed to grow crops. This shortage results from various events, including the pandemic, high gas prices and the Russia-Ukraine conflict.
With a supply shortage and more demand, the price has increased and fertilizer stocks are profiting. Here is what you need to know, including a couple of stocks to consider investing in (and how Q.ai can help).
Why fertilizer stocks are moving higher
Fertilizer plays a vital role in the growth of crops that are eventually sent to market for sale. Soils rich in nutrients produce more yield per acre than they would without enrichment from fertilizer.
As the global population continues to increase, there is greater demand for food. This means the demand for fertilizer increases. In 1950, total fertilizer demand was estimated to be 20 million tons. By 2019 this demand increased to 190 million tons.
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This increase will naturally mean fertilizer stocks will move higher as they can increase profits.
However, in 2020, a mix of events started to occur, resulting in a more pronounced growth spurt in these stocks. Here is a look at each event and its impact on fertilizer.
Increased China demand
As the Chinese economy grows and more of the population finds that they can expect to improve the quality of their lives, there is an increased demand for goods and services. For instance, there has been an increase in demand for grains and soybeans, which the Chinese have begun to import in bigger numbers.
Similarly, an increased demand for fertilizer results in higher prices, which improves profits among fertilizer manufacturers. The stock market responds to the increase in earnings by pushing fertilizer stock prices higher.
Impact of the pandemic
For years, the cost of fertilizer stagnated, creating a stable and reliable price. All of that changed in 2020 when the pandemic hit. The agriculture industry felt the impact, mainly from the supply chain.
As countries shut down manufacturing and shipping, there were fewer people available to package fertilizer. The issue didn't stop when lockdowns were lifted, as many people needed to call out sick, or in other cases, had already decided to change careers.
However, the demand for food never slowed, so a bottleneck was created where fertilizer was needed but wasn't 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 its base, and most fertilizers are made by using nitrogen and hydrogen. Nitrogen is derived from air, and hydrogen is derived from gas.
U.S.-based fertilizer manufacturers use natural gas, and Europe uses gasoline. Combining these two ingredients results in ammonia, which is then combined with phosphate and potassium to create fertilizer.
The overall spike in gas prices in early 2022 resulted in higher costs for the essential ingredients needed for fertilizer production. In Europe, gas represents 90% of the variable costs involved in fertilizer production. While the U.S. is not immune to these spikes, Europe was hit particularly hard due to the conflict between Russia and Ukraine.
Russia-Ukraine conflict
Fertilizer is a commodity that's traded around the world. Some countries, including Russia, have vast reserves of the base materials used in fertilizer production.
Russia produces around 25% of the global nitrogen and phosphate fertilizer and 20% of the global potash fertilizer. It has a significant stake in the production of fertilizer used worldwide.
Belarus, a country favorable to Russia, produces approximately 17% of the global potash supply and exports most of its production. The Russia-Ukraine conflict has resulted in sanctions against Russia's gasoline and fertilizer exports.
Belarus was already undergoing sanctions before the beginning of the conflict and has been placed under further sanctions, with neighboring countries keeping an eye out for illegal exports crossing their borders.
The sanctions against Russia and Ukraine are intended to starve the countries of money that can be used towards attacking Ukraine. Belarus has not engaged in direct conflict, but its government supports Russia, and Russia sends military support to Belarus. Money from exports helps support these activities.
Restrictions on exports
During normal times, the price spikes cause little market comment or reaction. However, the extraordinary confluence of global events has cut off access to Ukraine, also known as Europe's bread basket.
Some countries moved to protect their reserves by instituting export restrictions, even banning certain exports. For example, Argentina has cut its wheat exports by 40%, but Australia is looking at record grain exports to Asia in 2023. That said, Australia's exports may not be enough to overcome the loss of grain deliveries to the global market.
Short-term and long-term outlook on fertilizer stocks
Overall, fertilizer stocks tend to be volatile in their performance. The price of fertilizer mainly depends on the cost of gasoline, as the other commodities used in its production tend to be more stable in terms of pricing and availability.
In general, when the cost of gasoline drops, so does the price of fertilizer. However, the short-term outlook for fertilizer stocks is higher prices through 2023, even though gas prices have come down from their recent high.
The factors mentioned above, such as supply chain issues, reduction in exports, the Ukraine-Russia conflict and demand, will be around for a while. Consequently, fertilizer stocks will likely stay high throughout 2023, barring a cease in the conflict.
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In the long term, the stock prices for fertilizer will most likely retreat as the adverse conditions around the world resolve. Countries will resume exports because they have a surplus that will rot if not sent out for manufacture and consumption. A glut of grains and soybeans on the global market will lower commodity prices and result in farmers planting less acreage.
Fertilizer stocks are a good investment as they're necessary for food production. What is certain is that there will always be some event that puts pressure on crop production and results in high stock prices for fertilizer once again. The only uncertainty is when that will happen.
Fertilizer stocks to consider
With demand for fertilizer not slowing and an estimated annual compound growth rate of 3.8%, this industry could be an excellent long-term investment.
The first stock worth considering is CF Industries Holdings (NYSE: CF). This company is a leading manufacturer of hydrogen and nitrogen, both critical fertilizer components. It also has the world's largest ammonia production network.
In the first six months of 2022, the company reported net sales of $6.26 billion, an increase compared to the first half of 2021 net sales of $2.64 billion. It also noted that it believes it will take many years to replenish global grain supplies, so it expects to see better results for a while.
Another option is The Mosaic Co (NYSE: MOS). This company produces and distributes millions of tons of potash and phosphates annually to wholesalers, retailers and growers.
For the nine months of 2022, ending September 30, net sales were $3.05 billion, up from $966 million during the same period in 2021.
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