Nutrien Nutrien Nutrien

Nutrien earnings in focus as food prices could destroy confidence

Equities 8 minutes to read
PG
Peter Garnry

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.

  • 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.

  • Nutrien
  • K+S
  • Mosaic
  • SQM
  • CF Industries
  • ICL Group
  • Yara International
Source: Bloomberg
Source: Bloomberg
Source: Saxo Group

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
Beethovenstrasse 33
CH-8002
Zurich
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.