First and foremost, I want to extend best wishes to everyone in the tri-state area affected by last night's storm. I managed to get caught in Manhattan last night and it took all my faculties to get back home to Queens in one piece. There was a bittersweet symphony from so many flash flood warnings hitting cellphones last night, and hopefully RM readers heeded the repeated messages.
Mother Nature is a fickle mistress, but extreme weather events are part and parcel of life on planet earth. We can try and manage them as best as we can, and science can help. That brings me to my new favorite - I often have more than one - sector: fertilizers. It's easy to say "people need to eat," and one of the analysts I patterned myself after in my early Wall Street days at DLJ was Charlie LoCastro, the dean of the fertilizer analysts. He had heard all the jokes, and there are some good ones, but what we are talking about now are highly engineered compounds rich in nitrogen and phosphates, not animal effluents.
Based on Global Market Insights's most recent report, the global Fertilizer Market was estimated at $171.759 billion in 2020 and is slated to exceed $210 billion by 2027, registering a CAGR of 2.4% from 2021 to 2027. So, that's what we are dealing with here. Not hyper-growth, but enough growth to produce growth in cash flows, plus companies that are responsible stewards of that cash flow - they give it back to shareholders in the form of dividends and buybacks.
There is a green play here. In fact, CF industries (CF) is working with Itochu (ITOCF) to develop ammonia (NH3) as a maritime fuel, while LNG (CH4) also gains acceptance. Reading investor presentations from CF, Mosaic (MOS) and others, also, brings repeated references to Brazil, a country I've mentioned many times in my (RM) columns and where I have a growing foothold with my firm, Excelsior Capital Partners. Brazil has extraordinary resources in agriculture, just as it does in hydrocarbons and minerals, and farmers there need help from the fertilizer companies to improve yields, especially with the drought conditions that have prevailed in Brazil in 2021.
The final piece of the puzzle is to buy the stocks when the economics are improving. Fertilizers like diammonium phosphate and urea are, of course, commodities. And prices are jumping.
According to Progressive Farmer: Retail fertilizer prices compared to a year ago show all fertilizers have increased significantly. 10-34-0 is now 34% more expensive, potash is 36% higher, urea is 52% more expensive, both anhydrous and UAN28 are 59% higher, UAN32 is 55% more expensive, DAP is 70% higher and MAP is 71% more expensive compared to last year.
So, there you have it. The fertilizer industry meets all my investment criteria. Strong end user demand. Check. Increasing penetration in LatAm, especially Brazil. Check. Increasing end-user pricing. Check. A possible green/ESG angle. Check.
Global X has a fertilizer/potash ETF with the catchy symbol of SOIL, but, as is my wont, I went my own way. This week I purchased call options on CF, Corteva (CTVA) , MOS, and Nutrien (NTR) . If you would like details on expiration date/strike prices, please contact me via RM.
I will spare RM's editors the fertilizer-related dad joke to end the column. These are solid companies that produce extremely strong cash flows and pay them out at attractive points in the cycle, and we are certainly in one now. Add some fertilizer names to your portfolio.
