According to the popular narrative, the U.S. recession will become so acute that it will destroy demand for everything from gasoline to golf balls… and fertilizer to footwear.
But nutrients are not Nikes. (Feel free to pull out that little nugget of wisdom at a holiday party this year.)
You might be familiar with this anecdote; we debunked one part of this “demand destruction” myth on Saturday, when we talked about copper.
Because even if a recession causes consumers to cut back on sneaker purchases, it does not follow that farmers will cut back on crop nutrients – aka fertilizers.
Nevertheless, the demand-destruction storyline is causing widespread stock-price destruction, especially in natural resources sectors like metals mining and fertilizer production.
And just like copper, demand for fertilizer is still standing.
Investors need to pay attention to this. The “demand-destruction” story has inflicted so much stock-price damage in some sectors that excellent buying opportunities are presenting themselves.
Let’s talk about one of those right now…
Inflation Isn’t Your Biggest Concern – THIS Is
Everyone’s got their eye on inflation… As investors, we watch for interest-rate hikes in response… For a good reason.
But the most powerful force causing an alarming change for ordinary Americans? That’s something I’ve seen coming for quite some time now.
On the surface, really, the only way you’ll notice it is on days where select stocks skyrocketed and others crashed.
But if you REALLY want to prepare for what’s coming…
You’ve got to get the full story.
The Bullish Case for Fertilizer
To cut straight to the point, I am bullish on the fertilizer industry in general. That’s why I just recommended a company I expect to capitalize on resurgent demand growth for potash and phosphate fertilizer.
The “Big 3” types of fertilizer are nitrogen, phosphate, and potassium (potash). The prices for both phosphate and potassium fertilizers are far above their 10-year average levels.
Fertilizer demand has slackened somewhat from peak levels, but it remains fairly elevated, as pricing levels clearly indicate.
For example, even though diammonium phosphate prices have slumped 27% from their May peak, they remain about 70% above their five-year average.
Similarly, the benchmark Brazil Potash CFR Granular price is down 50% from the peak it hit last May. Nevertheless, at $600 per metric tonne, the current price is still 32% above the average price of the last five years.
But instead of focusing on these historically high fertilizer prices, many investors seem to be fretting about the recent price drops. It’s unlikely that fertilizer prices will continue tumbling from their peak.
Fertilizer prices spiked last spring because of Western sanctions against both Belarus and Russia. Together, these two countries produce about 30% of the world’s potash supply and about 20% of all fertilizer exports.
In the U.S., for example, Russian supplies about 6% of total potash imports and 20% of diammonium phosphate imports.
Therefore, when this massive supply “disappeared” from Western supply chains, fertilizer prices skyrocketed. Since then, however, prices have “normalized” to some extent. The recent price declines simply reversed part of the springtime price spike.
But the sanctions against Belarus and Russia remain in place, which should put a floor under prices. As farmers acclimate themselves to the “new normal” and resume buying, fertilizer prices should stabilize, if not move higher once again.
But What About Demand Destruction?
In keeping with the ongoing narrative, you may ask, “Won’t high fertilizer prices curtail demand somewhat?”
Maybe, but we must remember that crop prices are also well above long-term average levels.
Relative to their five-year average prices…
- Wheat is 37% higher…
- Corn is 48% higher…
- Sugar is 29% higher…
- And soybeans are 29% higher.
Because the prices for these crops are well above their five-year average levels, farmers have ample incentive to “pay up” for the nutrients they need to maximize their crop yields. On the other side of the equation, the current phosphate and potash prices are high enough for well-positioned companies to produce sizeable profits.
Looking down the road, most fertilizer industry observers anticipate strong long-term demand for all crop nutrients, especially phosphate and potash.
BHP Group (BHP) expects global potash demand to double over the next two decades. Similarly, Grand View Research predicts global phosphate demand will triple over the same period.
The relentless need to feed a hungry planet will power these demand trends. Basic botany will also play a key role.
Potassium is essential for optimizing plant health. Potassium-deficient soil produces a range of undesirable effects, like low-quality, low-yielding plants that utilize water less efficiently and are more susceptible to pest and disease damage.
Additionally, many crops remove large amounts of potassium from the soil. For example, harvesting an average crop of…
- Alfalfa removes about 450 pounds of potassium per acre…
- Potatoes removes about 500 pounds of potassium per acre…
- Tomatoes removes about 500 pounds of potassium per acre…
- And sugarcane removes about 350 pounds of potassium per acre.
Therefore, in order to maintain the viability of their fields, farmers must replace at least some of the lost potassium.
Bottom line: The outlook for fertilizer demand, both near-term and long-term, supports a bullish outlook for fertilizer pricing… and that bodes well for companies. Time looking into this opportunity would be time well spent.
Regards,
Eric
P.S. I’ve spent considerable time looking into the trends and opportunities, and I recently rang the “buy” bell on a company that I think is in a good spot to profit.
Based on current prices, it is trading for less than five times next year’s expected earnings. Fertilizer itself may not be cheap, but that’s definitely a discounted stock price.
If you would like to learn more about this company and gain access to all of my current recommendations, click here to learn how you can join Investment Report today.
As you look at your Thanksgiving feast over the holiday, consider the role fertilizer played in efficiently growing much of it.
On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.
