Sector Overview – Fertilizer Companies

This article provides a sector overview of the Fertilizer Companies. Fertilizer companies are an excellent investment vehicle for investors looking in the agricultural space. The world population continues to grow and with that comes the added stress on resources such as arable land, water table, pests and land overuse. In order keep up with the demand of feeding the world, farmers have had to resort to using genetically modified crops coupled with liberal use of fertilizers.

My previous articles in the Sector Overview garnered plenty of interest as you readers found it valuable. So, without further ado, here’s a sector overview for the Fertilizer Companies.

Why Invest in Fertilizer Companies

  • The short version is Food Security (also, see Malthusian Catastrophe). The long version follows 🙂
  • Growing population – In 1900, we had a global population of 1.6B. Today, we stand at a massive 7.3B people. By 2050, that number is expected to grow to 9.5B!
  • Not only is the population growing, but humans are living longer due to advances in healthcare. In 1900, life expectancy for US male was 46.3 years and US Female was 48.3 years. Today, in 2015, the life expectancy at birth for US male is 76.4 years and US Female is 81.2 years. That’s an increase of  65% and 68% for male and female respectively in the past 115 years. As we make more advances in technology and overall healthcare extending our lifespans, reducing deaths due to curable diseases – this puts more demand on food producers.
  • This rise in population also brings some astonishing numbers when it comes to farming. In the next 40 years, humans will need to produce more food than we did in the last 10,000 years combined (source).
  • Global warming/Climate Change, coupled with the growth in population, has resulted in large swathes of land in losing its arability. This puts extra stress on arable land to continue being productive. Note that climate change manifests itself in various different forms, but by far the most important factor is the (fresh) water availability for farming needs. Following charts from PotashCorp show how the arable land per capita is expected to continue the decline we have observed over the decades. Coupled with the loss of renewable water for farming, this puts higher demand on agricultural and industrial purposes.

arableland & water availability

  • It is not just humans who need more feed.  There is increased demand from animals as well. As the population shifts to more protein-heavy diets (last week, China’s middle class passed the US, now at 108M people) especially in emerging markets such as China, more farmed grains are routed towards feeding livestock. For e.g., each kilogram of pork requires 6kg of feed, usually processed soy or corn. Given the scarcity of water and land in China, the country imports massive amounts of global soy and corn.Currently, China consumes 28% of the world’s soybean and 22% of the world’s corn (source). Read more about the increased pork consumption in China as the population becomes more wealthy.

The Components of Fertilizer Industry

The three main components in the fertilizer industry are: Nitrogen, Phosphate and Potash. Together, they are popularly termed NPK.

Nitrogen

Nitrogen occurs naturally in air and is one of the most abundantly available element – making ~78% of Earth’s atmosphere. But it must be converted for use by agriculture and industry. As a fertilizer, nitrogen speeds the growth of plants and is critical to crop yield. As a major component of chlorophyll, nitrogen also keeps plants green. Industrial nitrogen products are used to make plastics, carpets, batteries and more.
Product form: Ammonia, Urea

Phosphate

Made from ancient marine fossils, phosphate rock is combined with acids for use in fertilizer, feed and industrial products. By aiding in photosynthesis and cell division, phosphate fertilizer speeds crop maturity and increases yields. As a feed supplement, phosphate is necessary for skeletal development and aids in animal muscle repair.
Product form: DAP, MAP, Phosphoric Acid

Potash

Mined from natural mineral deposits left by ancient evaporated seas, potash is primarily used as a crop nutrient. Potassium strengthens plant stalks and roots, enhances water retention and helps crops fight disease and injury. In addition to improving yields, potash adds flavor, color and texture to foods. Potash is also used to make industrial goods ranging from food products to soaps. Canada is the largest producer and has the highest reserves of Potash in the world. Russia comes a close second. More details here.
Product form: Standard and Granular Potash

FertilizerConsumption

The charts above show the amount of NPK is expected to rise over the coming years and Nitrogen taking the bulk of the fertilizer industry segment.

Geographically, China (where agriculture makes 9.4% of GDP) is the largest user of all NPK resources.

Crop-wise, most fertilizers are used on grains with a smaller portion going towards oilseeds, fruits and vegetables.

Sector overview – Fertilizer Companies

There are a lot of fertilizer companies in the world – but for the sake of this article, I consider the ten largest companies only.

Note: All numbers presented are in US$.

The following chart lists the ten largest fertilizer companies in the world and provides a great perspective breakdown of which of the NPK elements each company focuses on. The Ammonia refers to Nitrogen, Phosphoric Acid refers to Phosphate, and KCI refers to Potash.

Screen Shot 2015-10-16 at 8.12.27 PM

Fertilizer Companies - Overview

Fertilizers - MktCap & Yield

 

Further Reading

Disclosure: Long AGU. My full list of holdings is available here.

20 thoughts on “Sector Overview – Fertilizer Companies

  1. Good article, I’ve never been to big on the materials sector as a whole, but interesting take including the influence of population, weather, and food shortage. There’s an argument for these “Materials” being a required component for a “Staple” … food.

    • Materials can be a good play when large macro trends are considered such as population, climate change etc. I agree that a fertilizer company can fall either in materials or staple depending on your take on things.

      R2R

  2. Good Article and like that you put it in perspective to population growth. If you combine this with recent farming initiatives to incorporate sensor technology to tell you when and how much to water and fertilize then you have the makings of growth (pun intended),

    I definitely will be adding POT & AGU to my watch list,

    • I think we will need to bank a lot of technological advancements and vertical farming over the coming years to become more self sufficient and keep feeding the world. Agriculture really hasnt advanced as much over teh years and we still follow old tried-and-true method. Definitely more need for innovation there.

      Happy investing!
      R2R

  3. R2R,

    Thanks for the overview!

    Recently initiated a position in POT, although there are some other enticing plays here. We’ll see how it goes, but I’m pretty excited about the long-term potential. The cheap valuations and attractive yields surely provide a lot to like. 🙂

    Best regards.

    • Nice pick up, Jason. POT has a very lucrative dividend and the past dividend growth has been growth, although that will probably slow down going forward. The earnings growth estimate is also low, which I think was the motivation for POT to make a move on K+S last month, although they’ve dropped that bid now after resistance of the takeover move from K+S. Will be interesting to see these companies grow long term. I still prefer my AGU exposure 🙂

      Best
      R2R

  4. Nice overview. Though not a fertilizer company, I like ADM for all the same reasons you mention above. POT is looking very interesting and I have seen a few buys in that name too. That yield is hard to ignore.

  5. it took my eye off POT…ash for awhile as many dividend investor has it in their portfolio. Until you lay it out with attractive yield and prospect. I might look into adding this sector as winter probably the lower earning season for them, and would be a good entry point in this sector. Great timing.
    Thank you for sharing!!

  6. First DivHut’s article about packaging companies and now this one on the fertilizer companies. Such boring industries, such exciting opportunities.

    And hey, at least now I don’t have to move to Colorado to buy POT 😉

    Sincerely,
    ARB–Angry Retail Banker

  7. I surely got an interest into that sector, especially Potash! It looks like a boring company but really is a great adding for different types of dividend investors.

    Cheers,

    Mike

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