But its defensive characteristics in the current context aren't the only appeal of this investment — in fact a momentum trade rather than a long term commitment. Analysts also bank on a lifting momentum that is taking shape as a result of a thoughtful restructuring, higher agricultural commodities prices, solid fertilizer demand and the tightest supply the industry has experienced over the last decade.
On the demand side, an edifying stat to start with — due to population growth, the planet will need to produce more food in the next four decades than in the past 8,000 years. On the supply side, the war in Eastern Europe led to a double shock as both Ukraine and Russia are major wheat exporters, while the latter also is one of the largest producer of fertilizers.
Spot market prices actually started to rise a year ago when the International Trade Commission ruled against Russian and Moroccan producers, arguing that they engaged in unfair practices harming the U.S. phosphate industry. Countervailing duties were issued on these foreign products, giving a first boost to domestic producers.
Mosaic produces concentrated phosphate, potash crop nutrients and various fertilizers with a customer base essentially located in the Americas. It used to be the best-performing listed fertilizer play in the U.S. versus peers such as Corteva, FMC or CF Industries who maintain global footprints. The reason is that Mosaic has all its capacity in Canada, the U.S. and Brazil, where input costs are among the lowest.
European producers, for instance, bear the most expensive production costs of the industry because they deal with a major handicap — the price of natural gas, an essential feedstock, is higher than elsewhere. The uncontrollable surge that followed tensions and then sanctions on Russia has made production in the Old Continent uneconomic.
Prospects are grim and Europe-based producers can’t operate in the black anymore. In response, Norwegian group Yara has suspended between a third and a half of its operations on the continent, preferring to keep the curtain down rather than selling at a loss. CF has taken a similar path with its assets in the UK.
Beyond nat gas prices, returns and margins fertilizer producers can achieve depend on a series of ever-changing parameters. Prices of agricultural commodities fluctuate like fossil energies’. When they’re high, farmers plant more and therefore use more fertilizers. On top of these parameters, there are various seasonal and meteorological effects likely to have a very significant impact on demand.
Unlike the other fertilizer sectors, the phosphate and potash sectors have consolidated. The largest producers have achieved considerable scale, with the bulk of capacity investments now behind them. There are reasons to hope that their bottom lines will regain colors after what industry specialists often describe as a lost decade.
Analysts are particularly bullish on Mosaic, which according to them is finding itself in the sweetest spot to be. Demand on the domestic market is sky-high and that trend shows no sign of abating given the suppression of supply from Europe. Meanwhile, natural gas prices remain lower in North America than anywhere in the world — barring Russia, but the latter is off the market now.
The combination of these factors should turbocharge margins. It is in a bid to take advantage of this momentum that MarketScreener — which probes analysts’ consensus in real time via its quantitative tools — has added Mosaic’s shares to its U.S. portfolio.
These considerations set aside, it is necessary to repeat that this investment must be regarded as an hedge against peak geopolitical instability. In effect, on a fundamental assessment, Mosaic and its peers have limited appeal. Too many moving parts, weak returns, leveraged capital structures and margins that have steadily compressed over the last cycle somewhat cloud the picture.
Meanwhile, excluding big acquisitions — and hence big risks — or exceptional pricing dynamics, growth prospects remain capped.