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VIDEOThe Fertilizer to Grow Prices
By
Ryan Krueger
Apr 23, 2009 4:10 pm
Supply destruction will prove to be more bullish than demand interruption is bearish.
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An un-reported 8 million acres were “missing” in the USDA planting intentions report, and I shared my opinion at the time that they weren't missing at all, but rather undecided. Between choosing whether to plant corn or beans or other competing crops, along with a few credit lines squeezed by outside markets, you have a lot of fertilizer orders that were delayed, which was no surprise at all. We haven't been buying fertilizer stocks to spread on my firm’s recent crop price bullishness. If anything, we've been sellers of volatility all year on both sides of the market -- including this group -- expecting less to happen near term than many bulls and bears are betting on.
Longer term, with already historically tight grain supplies, under-planting will offer the best fertilizer for higher crop prices. So, we remain long underlying commodities and patiently wait to become longer equities in the industries that support them. Below is the chart of an ETN, whose symbol is JJG and tracks the Grain markets only inside the DJAIG Commodity Index.
The crops that are way behind schedule leave bulls to speculate on reduced supply and bears on reduced demand. The reality, however, is that seed and equipment and irrigation technology today allowing farmers to get in the ground MUCH faster than ever before. And when they do, they will need fertilizer.
Here's an interesting example: Monsanto (MON) recently unveiled its planter, which can seed with 20" row spacing instead of the traditional 30" spacing, to further enhance yield per acre. Keep in mind, as US farmers have paid for remarkable innovations, much of the world is decades behind.
Consider India, which is home to 17% of the world’s population but only 11% of its arable land. On each acre India’s crop yields about one-third what the same acre does in the US. In most parts of the world, potash has been under-applied for years, and the soil is depleted.
Only 7 companies control more than 85% of the potash on the planet. The deposits are almost exclusively found in Russia, Belarus and Canada. By comparison, the far-more-analyzed OPEC member nations control about one-third of the barrels of crude produced. If there was a new potash mine found and brought online, it would cost more than a couple billion dollars and take more than 5 years.
Supply destruction will prove to be more bullish than demand interruption is bearish, in my view. As for the credit crisis and its unmistakable influence in every market -- all the way down to the farm -- I predict the solutions to “fix” paper assets whose supplies are exploding higher will be the icing on the cake to bid for natural resources in limited or shrinking supply.
In memory of our fallen friend and trusted colleague, Bennet Sedacca, 100% of the donations made to the RP Foundation through April will be channeled to philanthropic endeavors consistent with the RP mission, working closely with the Sedacca clan in the distribution of those funds. We thank you kindly for your support as we strive to effect positive change in the lives of children.
Positions in MON, POT, corn, soy
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