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.
- Nitrogen: an important input in the process of making nitrogen is natural gas (NH4) so with the current energy crisis because lack of investments in oil and gas (see chart of CAPEX in the global energy and mining industry) prices are accelerating on natural gas pushing up the price of nitrogen.
- Phosphorus: is produced from mined phosphate rock which is crushed into powder with the main global production of phosphate rock coming from a few sources from the United States, China, and Morocco, and according to some predictions we could run out of phosphate rock in as little as 50 to 100 years. Phosphate is critical for all living organisms and it helps plant growth and support strong cell development in crops. Over the past year, China has limited exports of phosphate to the global market to protect domestic demand which has caused prices to accelerate even further, and the war in Ukraine has recently added even more pressure with Russia imposing export ban on phosphorus and potash. Recently, the high demand for lithium-iron-phosphate batteries has caused attention with Mosaic CEO and a recent Nature article suggesting these batteries for electric vehicles could cause a problem for the global agricultural sector.
- Potassium: comes from potash ore which is extracted and then refined with Canada being the world’s top producer followed by Russia, China and Belarus. Potash in fertilizer encourage water retention in plants, increase crop yields, and help plants resist disease. Potash prices have galloped more than 330% from the lows in 2020 to the highest levels since at least 2012 (see chart below).
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.
- CF Industries
- ICL Group
- Yara International