Fertilizer Stocks and Funds: Where the Best Opportunities are


by Emmeran Eder, Euro on Sunday

VMany experienced farmers are rubbing their eyes at the moment. They have never seen such price jumps in fertilizers as in the past few weeks in their entire lives.

Calcium ammonium nitrate (KAS), the most important nitrogen fertilizer for German farmers, went up in price by almost 60 percent to just under 1,000 euros per tonne. The situation is not much different with other nitrogen fertilizers. The prices for phosphate and potash fertilizers also rose sharply, albeit less than the nitrogen variants.

The reason for the price explosion is the war in Ukraine and the sanctions against Russia and Belarus, which is allied with Putin. But this development is only the tip of the iceberg. Because already in the second half of 2021, i.e. before the start of the fighting in Ukraine, fertilizer prices have doubled or tripled.

There are several reasons for this. On the one hand, there are delivery and transport problems in the wake of the corona pandemic. In addition, many traders did not stock up on the nutrients in good time because they had been used to getting fertilizers cheaply for many years. Also the cost of CO2-Certificates have risen sharply and make energy-intensive production more expensive.

Gas makes fertilizer expensive

However, the massive increase in the price of gas has the largest share in the increase in the value of nitrogen fertilizers. Because the production of nitrogen fertilizer consumes an enormous amount of energy. Most of the time, gas is used, which accounts for 70 to 80 percent of the price of nitrogen fertilizer, so it has a significant influence on it. For the other important fertilizers, phosphate and potash, gas is not as important.

While nitrogen is primarily used to increase the quantity of plants, ie the increase in biomass, phosphate and potassium are important for quality, taste and fruit yield. The three types of fertilizer are often used in combination as NPK compound fertilizers. N stands for nitrogen, P for phosphate and K for potassium. Depending on the plant, the proportions of the individual fertilizer variants vary. The types of fertilizer are also used individually for special applications. While nitrogen is obtained in a chemical industrial process, which is possible anywhere in the world, phosphate and potassium have to be mined in open pits and are therefore local. Potassium is sufficiently available globally, but phosphate has been becoming increasingly scarce for years.

The situation is now aggravated by the war in Ukraine. True, the country is not a major supplier of fertilizers. However, the situation is different with Russia and Belarus.

Failure of cheap fertilizer

Russia is one of the world’s major producers of nitrogen fertilizers. But that’s not all: the country can produce nitrogen cheaply because it has a lot of cheap gas at its disposal. With the loss of Russian products, cheaper fertilizer is withdrawn from the world market.

In addition, the state is the world’s third-largest potash exporter, and ranks fourth for phosphates. Russia’s Ministry of Finance had already regulated the export of nitrogen and phosphate fertilizers more tightly at the beginning of December 2021 in order to better supply the domestic market and raise prices for its own farmers to press.

The government in Putin’s empire had limited exports of nitrogen fertilizers to about 5.9 million tons and shipments of compound nitrogen fertilizers to 5.35 million tons. The limitation applies until the beginning of April this year. Although fertilizers from the world’s largest country have so far been exempt from Western sanctions, the cap is likely to continue beyond April. Because of the financial sanctions, payments to Russia are very difficult and no extraditions are made. “There should be great difficulty in getting the products to the customers,” says Michael Wudonig, press spokesman at K + S.

The same applies to potash exports, since Uralkali, the third-largest potash supplier in the world, is active in the Perm region of Russia, with a global market share of 16 percent. The second largest, Belaruskali, is based in Belarus. Because of US sanctions, the company can no longer deliver to the Baltic Sea ports via Lithuania. Only exports via Russia to China remain. In addition to potash, Belarus also exports other fertilizers and, with a volume of almost three billion US dollars, is the sixth-largest exporter in this segment worldwide.

Europe, South America and Central Asia get around half of their fertilizer from Russia and Belarus. Established suppliers from the USA, Canada, Europe, Morocco and Qatar can only compensate in moderation in the short term. Especially since some big players such as the Norwegian fertilizer company Yara or the US producer CF Industries Holdings have even partially suspended their nitrogen production because the expensive gas no longer covers their costs. “It will take some time before new capacities are built up and available. That won’t happen overnight,” says Wudonig.

The EU is therefore considering fertilizer subsidies for farmers to help them cope with the exploding costs. There is also discussion about postponing the introduction of restrictions on the use of pesticides in the near future. Many farmers will try to reduce their own use of fertilizers or switch to organic materials such as manure. But that will do little to prevent fertilizer prices from rising further this year or staying at high levels.

Especially since China has also imposed an export ban on fertilizers in order to secure its own production. The country is one of the most important fertilizer producers in the world.

Not all producers benefit

Companies that have their costs under control and have access to a good gas or potassium supply, such as the US group Mosaic or K + S, should therefore benefit. Their prices have recently increased significantly. Others like Yara, which have problems with expensive commodities, cannot increase their capacities, which is also reflected in the only moderate price increase so far.

Brazil is even worse hit than Europe. In Europe there are still many nutrients in the soil, which is why fewer have to be supplied. In the depleted soils in Brazil, on the other hand, a lot of fertilizer has to be used, half of which has so far come from Russia. “We are praying for a speedy end to the war,” says Brazil’s Agriculture Minister Tereza Dias.


INVESTOR INFO

The producer of salts and potash fertilizers earns splendidly and, at best, expects operating profits to double in the current year. That would be the best result in the company’s history. This is primarily due to the high prices for fertilizer due to its scarcity on the world market. According to the company from Kassel, it is able to pass on the rising costs for electricity and energy to its customers.

The US group Mosaic is one of the top manufacturers of concentrated phosphate and potash and the third largest fertilizer producer in the world. Mosaic benefits from the high prices of plant nutrients and has the advantage that the energy supply in the USA is more secure than in Europe, which is why the stock has recently been an investor favorite. The good development is likely to continue for the time being. Goldman Sachs and Morgan Stanley have recommended buying the stock. Management has launched a $1 billion share repurchase program.

The DWS Invest Global Agribusiness fund invests in companies that are active in the areas of fertilizers, agricultural equipment, seeds, crop protection, as well as logistics, processing and distribution of food. Fertilizers and agrochemicals make up around a third of the portfolio, which is dominated by North American companies. In the last five years, the fund has achieved an annual return of a good eleven percent.

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Image sources: Miha Creative / Shutterstock, Istockphoto


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