Agriculture: Fertilizers and Crops

Rob Ballard, CFA | Portfolio Manager

In this week’s PIO, we continue our series on the Russian-Ukraine crisis on commodities by looking at agriculture.  Agriculture is of critical importance to our civilization – the advent of farming led the transition from hunter-gatherers to settlements and agricultural innovations over time freed up a significant percentage of the workforce, driving societal milestones such as the Industrial Revolution.  Agriculture is often overlooked as its modest size relative to our global economy (roughly 5% of GDP) belies the importance of feeding the world.

The chart below depicts a blend of North American fertilizer prices.  As you can see, fertilizer prices have been on the rise leading to a surge in food prices across the world.

On the input side, there are three main types of fertilizers: nitrogen (an input into ammonia and urea), potassium (an input into potash), and phosphate.  The price of nitrogen-based fertilizers has risen dramatically in the year, particularly ammonia which is up over 500% over the last 18 months.  Natural gas is the main input used to produce ammonia and the dramatic rise in natural gas prices, particularly in Europe, has been a significant contributor.  In addition to supplying much of the natural gas to Europe, Russia is the world’s largest ammonia exporter at approximately 25% of global exports.

Moving to potash, the situation becomes even more dire.  Russia and Belarus are the world’s 2nd and 3rd largest exporters and account for 40% of the world’s potash exports.  Potash is the most critical fertilizer due to its scarcity and any disruptions from Russia and Ukraine would have a significant impact on global food production.  Phosphate is the least discussed fertilizer and our preferred investment in the Resource Fund, partially because it has been overlooked and performed so poorly over the last decade.  These low prices have led to production shutdowns and a shortage, particularly in North America where there are only 4 companies that produce phosphate fertilizer.  Importing phosphate is becoming increasingly difficult – China (the world’s largest phosphate exporter) and Russia (a significant producer) have banned phosphate exports while Morocco (the 2nd largest exporter) has had import tariffs imposed by the US Department of Commerce.

“This means that” we have a promising outlook for phosphate producers and developers in North America.

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