In the interest of full disclosure, I am founder and CEO of a potash start-up, Buffalo Potash Corp. A big part of my job is speaking to financial types about the importance of the potash sector.
At some point in all the discussions, and much to my suppressed frustration, someone on the finance side of the table says, “so….do your properties also contain lithium?”
Talk about a deflationary moment…
Maybe its just me, but I certainly hear enormous buzz and chatter about energy security, about the need to transition from a fossil fuel economy to an electric or hydrogen basis, and the need for new technology to eliminate energy impacts upon our planet.
I understand all this, but what about the importance of food security?
Perhaps the growing of the world’s food supply is not as pointed or as dramatic as wresting energy from the ground. It is a process and lifestyle hewn over millennia, and one which is intimately entwined in the great cycles of the earth itself. It is not as noticeable as energy production, because it is such a deep and intrinsic part of who we are.
Farmers understand this in a relatively straightforward way, as the crop cycle is cyclical, irrevocably tied to the changing of the seasons. Within the broad categories of winter, spring, summer, and fall, smaller cycles are tied to variations in specific climate elements such as heat, moisture, and the abundance of pests.
In the “old” years, the production and sale of fertilizer followed the grand agricultural sector, if only in the sense that suppliers matched their production to the needs of farmers. Farmers would order product in advance of the upcoming crop year to ensure supply, then took delivery about the time seeding equipment was in the field. It was the responsibility of producers to make the required product well in advance of the shipping season, perhaps building up inventories or prepositioning products in warehouses close to the market. Once deliveries were made, production could be scaled back until the next cycle approached.
In this way, there was no requirement to define “food security”, as how could such a natural order ever be challenged?
Yet it is being challenged, in a very real way.
Maybe I’m not the only one to notice that this natural order has changed. I especially sense this in my discussions with those in the potash sector. For decades, potash was somewhat predictable, and one could get a fair glimpse into the future by looking at the current crop season, future seeding plans, long-term weather forecasts, production adjustments of one’s peer group, and use these broad and relatively transparent markers to gauge one’s future actions.
Not so much any more…. forces beyond classic business economics seem to be shaping a different future.
How so?
One of my favourite sources is a 2018 study done by the University of Michigan[1] that examined the question of food productivity requirements to 2050. The study projects that the world’s population will be 9.2 billion by 2050, with eight billion of those people living in developing countries. This increase in population will require food production to rise 60 to 70 per cent from 2019 levels.
How will this increase in productivity occur? One way is to increase the amount of arable land available for food production. The same study states that in 2019 the world’s farmers tilled some 1,500 million hectares of land, which was down by a third over the previous 40 years. However, going forward, the study forecasts that the amount of arable land will increase by some 200 million hectares by 2050.
On the surface, this is good, no? Unfortunately, it does not solve the problem. The increase in arable land will largely come from sub-Saharan Africa and South American, and it will be gained at a significant environmental and ecological cost. Furthermore, such lands lack the “chemical, physical, biological, and infrastructure requirements for single crop species”. I take this to mean that to become effective producers of food, farmers using these lands will require technology and especially fertilizer to make them productive.
Even a 200-million-hectare increase is insufficient as the increase in the world’s population outstrips the per-capita food production gain. In 1960, the per-capital arable land amount was 0.42 hectares; however, this is forecast to drop to 0.19 hectares by 2050. In developing nations, the decrease is from 0.33 hectares in 1960 to 0.14 hectares by 2050.
The above analysis does not consider factors such as global climate change. Certain regions of the planet will see its arable land drop, due to climate-induced drought, while other areas will see a gain due to more temperate weather. Nevertheless, increasing the amount of arable land does not seem to be an option.
The answer, as many of you may have guessed, is to use genomics, agricultural technologies, and added nutrients to increase the productivity of each arable acre. So, for those in the potash sector, take some comfort in this: demand will continue to grow in the coming decades.
The above is enough for me to be fully invested in potash. The reasoning is this: nitrogen. In its various fertilizer forms, it can always be synthesized from natural gas, and last time I checked, there is an almost inexhaustible supply of this commodity. Phosphate cannot be synthesized; however, it has a reasonably widespread geographical distribution. The same cannot be said of potash, as well over 75 per cent of the world’s supply is concentrated in the hands of a few geographic regions: Russia, Belarus, and Canada.
Great about the long-term, but what about the next year? In the short-term, I expect a bumpy ride. This is clear to anyone who follows the broader fertilizer sector, especially the share prices of some of the fertilizer majors. One key to understanding why market value has not followed longer-term opportunity is that the 2022 market and pricing was severely distorted by Russia’s invasion of Ukraine, snarled supply chains, and the short-term effectiveness of sanctions.
To no one’s surprise, the high price led to an “oversold” position amongst potash producers. The peak mid-summer 2022 price did the same to global demand as it did back in 2008/2009 – farmers, most of whom are “small holdings” farmers, could not afford to buy fertilizers, especially potash. Furthermore, disregard for sanctions (real or implied) led to discount-priced potash from Russia and Belarus to enter the market.
The price curve is mimicked by the share price performance of almost all big agricultural commodity producers. They peaked about the time fertilizer prices peaked, then followed the curve down. Is this a marker that the food security argument is rubbish, or is it simply a reaction to short-sighted market makers and artificial distortions of market supply and demand? I think you know where I stand on this question.
For what its worth, here is my read of the potash tea-leaves:
- Despite Russian and Belarusian potash making its way into global markets, the reorganization of supply lines that I spoke of a year ago will continue, and in fact may speed up as dependability and sustainability gain equal weight with price as a buy determinant.
- The war in Ukraine remains one of the key drivers in terms of market instability. This is not only because of shipping difficulties from Black Sea ports, but also, a catastrophic loss of Ukraine’s arable land.
- Everything tells me that sanctions against Russian and Belarusian potash are ineffective; however, I am also hearing those shipments of potash from these regimes is down. The question should be, “how well are Russian and Belarusian mines keeping in good repair”?
- Lower prices will be the norm, and in my opinion, the key to long-term sustainable production. Potash demand is notoriously susceptible to price increases, so the trick is to vigorously decrease CAPEX and OPEX so that margins remain attractive despite price.
- Potash valuations tend to track movements in nitrogen and phosphate; however, we may soon see the day when there is a decoupling of potash from the other two, which will favour the development of smaller, potash-specific niche producers.
- Governments need to take food security more seriously. This means a clear declaration that food security is as vital to global stability and well-being as is energy security and its related “just transition”.
‘Nuff said … time for a nice cup of Darjeeling!
