Farmland is arguably one of history’s oldest investment sectors, but it is now time for investors to freshen up and analyze how they have viewed the industry all these years. The main issue is that it is difficult to find investors on an individual level who can pay mind to the farming sector.
That said, one very viable proxy route is that of fertilizer stocks, which have been on the rise since May 2021, prior to the Russian invasion of Ukraine. Speaking of Russia, the country itself produces approximately 13% of the global amount of ingredients needed for fertilizer, which are chemical commodities that Russia then exports to Latin American and Asian buyers.
Due to certain sanctions that are in place as a result of Russia’s decision to invade Ukraine, the transfer of payments between banks, compounded by the many difficulties surrounding the ability to obtain large ships for transport, has slowed the transactions between Russia and those that typically purchase its fertilizer.
Adding further complications to the mix, natural gas is a key requirement for nitrogen fertilizer, but both Russia and China are restricting the export of gas. Russia, China and Canada are the world’s top three primary fertilizer exporters, accounting for about 35% of all fertilizer exports in the world. Even so, despite current geopolitical upheavals, there are still global investment opportunities available.
The year of living dangerously
The demand for fertilizer and the ingredients needed to make it has steadily increased since its COVID-19-induced lull in 2020. Interestingly enough, the pandemic took a smaller toll on agricultural industries in comparison to the toll it took on various other important sectors.
Additionally, the sustained global food demand and the rising costs of freight, energy, labor and raw materials have played a role in the increase of food prices, forcing consumers to pay more than ever for the same products they were buying before.
Early in 2021, the prices of commodities across the board were increasing ever so slightly, which encouraged farmers to plant more crops during the first half of the year. Simultaneously, the price of natural gas, which accounts for approximately 80% of the variable cost associated with the production of fertilizer, also experienced significant changes until reaching its peak in February.
At the same time, Russia started restricting the export of fertilizer as early as the previous November in an attempt to focus on its own domestic food prices. While the restrictions were initially scheduled to last until May, they have since been renewed.
Looking back two years and viewing 2020 in hindsight, it is possible to notice that certain fertilizer prices have been on a never-ending upward trajectory, soaring as high as 300% according to information from the American Farm Bureau. Farmers are doing their absolute best to adapt by planting soybeans instead of corn, which is beneficial because far less fertilizer is required to grow soybeans.
After reaching its peak during the invasion of Ukraine, the price of fertilizer began to decline, as did the costs of products such as corn and wheat. But were investors overly optimistic during the initial inevitably panicked days of the war? Potentially, but this also a lesson in the omnipresent rule of thumb — supply and demand.
Who are the players?
Fertilizer is indispensable. According to the International Fertilizer Association, without fertilizer, only half of the world’s population can be fed. Synthetic products are used more frequently than are their natural counterparts, due to their accessibility, availability, cost and yields in comparison to those of natural elements.
Unfortunately, exchange-traded funds for fertilizer companies do not exist yet, meaning it is difficult to capture the major fertilizer stocks all in one swoop. That said, some of the top companies are:
- CF Industries Holdings (CF).
- Mosaic (MOS).
- Nutrien (NTR).
- Intrepid Potash (IPI).
- Yara (YARIY).
- Sociedad Quimica y Minera de Chile (SQM).
Fuel, labor, seeds, chemicals and fertilizer all contribute to the creation of agricultural inflation. Historically, fertilizer stocks have experienced bull markets during these inflationary periods. Not only do the companies benefit from the increase in crop prices, but they yield the perks of currency-related factors as well.
Ukraine may have started shipping corn and wheat once again, but the amount it is exporting is still well below normal. India is starting to restrict its rice exports, and Indonesia is increasing the amount of grain output for the sake of food security. Even so, food-related prices have yet to rise as quickly as the increased costs of fertilizer.
In situations like this in which commodity prices are rising faster than the costs of the inputs, investors are at an advantage of the discrepancy, leaving them in a position to create inflation hedges. It is true that both food shortages and famine are highly distressing attributes of the modern world as well as the farming industry in general; however, purely in economic terms, there is still room for investors to profit from well-positioned portfolios.
As with all types of investments, these investments in particular will not be suitable for everyone. To learn more about the agricultural investments and opportunities that are out there, as well as their appropriateness or lack thereof in regard to your situation, consult your financial adviser today.