Head of Equity Strategy
Summary: Food prices are up 34% y/y in March and potash (one of the ingredients in modern fertilizers) prices in North America are up 330% from the lows in 2020. Combined with high natural gas prices and various exports restrictions on phosphate the price on fertilizer is going through the roof causing lower crop yields and less profitability for farmers creating an ugly dynamic for food prices this year and potentially next year. We take a look at the underlying factors driving fertilizer prices and highlights the different companies within this theme.
The dynamics behind galloping food prices
In Friday’s equity note we wrote about how growth stocks, typically software and technology companies, are seeing their growth slowing down to low single-digit figures while the previous boring value stocks are seeing high double-digit growth figures. Exxon Mobil and Chevron reported Q1 earnings showing 52% y/y and 68% y/y revenue growth respectively underscoring where investors should be looking for exposure amid rapidly rising inflation and interest rates.
Today’s earnings focus is on Nutrien which is a Canadian producer of potash, nitrogen and phosphate and not a company we normally focus on, but given that we are observing the third largest price gains in food prices (measure by the UN Food and Agriculture World Price Index, see chart below) since 1991 these agricultural chemical companies are an important source of information, but potentially also returns for investors. Nutrien will report after the market close and is expected to deliver revenue of $7.6bn up 64% y/y, but revenue growth is expected to remain high throughout all of 2022 showing how the limit of the physical world is now delivering strong revenue growth through higher prices.
The higher food prices are a function of rapidly rising fertilizer which is a function of many things but below are the most important factors driving the NPK (nitrogen (N), phosphorus (P), and potassium (K) – the acronym for fertilizer.
Fertilizer is a very energy intensive process and thus underscores our point from last week that our economic system (GDP) is a function of energy input into the system and productivity, with energy input being the most important long-term driver of rising economic growth. Thus the longer term the energy crisis could have a severe impact on economic activity as we highlighted in our equity note The inconvenient truth on energy and GDP. The link from the current food and energy crisis to the equity market goes through the cost of living crisis as it hurts consumers and their confidence which then in turn brings economic growth down. It is a dangerous dynamic and something that could become a major theme for the rest of 2022.
As a result of our theme of the world has hit a physical limit and that we expect the energy crisis to continue, the fertilizer theme will continue to be a strong secular theme. The geopolitical crisis of Russia since the country invaded Ukraine is amplifying all of the above and the world could soon see another food crisis. The list below shows the world’s largest publicly listed companies within fertilizer, nitrogen, phosphate, and potash.
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