Fournier: looming food crisis bullish for fertilizers

National Bank analysts Pierre Fournier and Angelo Katsoras say that a looming food crisis will raise prices of agricultural commodities and challenge the world’s food production capacity. And the fertilizer sector could be one of the winners.

In a report entitled “What the looming food crisis means for investors,” the analysts point out that the agriculture sector has proved far more recession-resistant than other sectors. Prices of agricultural commodities have dropped by much less than other commodity prices, and farmland values have outperformed other types or real estate.

The agriculture sector and the food sector are facing a number of challenges: increasing demand from a more populous and richer world; growing competition from biofuels; shrinking farmland reserves; growing water shortages; declining growth in crop yields; and tight global supplies of grain.

Fournier and Katsoras conclude that these trends are squeezing both the demand and supply sides, and placing upward pressure on agricultural commodity prices.

To improve crop yields, large investments are necessary, implying increased use of fertilizers, genetically modified seeds and farm equipment.

There are many opportunities for investors, because the growing demand for agricultural commodities occurs against a backdrop of a pullback in prices from last year’s highs. Among the investments recommended by the analysts are farmland, fertilizers, genetically modified seeds, sugar cane-based ethanol, and water equipment.

The analysts say that the world population is growing by 70 million people per year, while millions of people are becoming more affluent. Affluent people can afford meat, so more crops are diverted to animals. Meanwhile, countries are encouraging farmers to produce biofuels, diverting even more crops away from people.

Shifting their sights from the demand side to the supply side, Fournier and Katsoras say that the recession has not altered the trajectory of a squeeze on supply as a result of a drop in the availability of farmland caused by growing population, increased urbanization, and water shortages. Climate change could also affect supply, since warmer weather reduces crop yields in many regions. And all this pressure on supply occurs while global inventories of grains are low.

With this background, it is no surprise that prices of agricultural commodities fell by smaller percentages than those of other commodities, and that farmland values have held up. In fact, farmland prices have gone up despite the recession.

Fournier and Katsoras’ conclusion is clear: farmers must increase crop yields. But to achieve this, significant investments are necessary in all types of agricultural inputs. Typical responses will include the use of fertilizers, genetically-modified seeds, and farm equipment.

Among investments recommended by the authors are fertilizers, genetically-modified seeds, farm equipment, agrochemicals, farmland, food safety monitoring technology, sugar cane-based ethanol, and water equipment.