With the Ukraine war closing in on the 70th day, the global economy is decidedly in worse shape than it was before Russia decided to invade its neighbor to the west. According to the World Trade Organization, Russia’s war in Ukraine has created “immense human suffering,” with WTO economists having downgraded their expectations for 2022 trade volume growth from 4.7% to 3%. A ban on Russian gas is expected to plunge Europe into a recession, with the EU currently mulling a total ban on Russian energy imports.
As expected, Ukraine will bear the full brunt of the war, with the World Bank projecting that its economy will shrink a massive 45% in the current year. Russia’s economy is not much better off, with the World Bank estimating that output will contract by 11.2% this year.
Not everybody is complaining, though: the commodities sector, including oil, natural gas, metals, and agricultural produce are soaring thanks to severe supply chain disruptions wrought by Russia’s war on Ukraine.
Indeed, fertilizer makers are poised to record their biggest profits in years, following a massive supply squeeze of essential crop nutrients due to the Ukraine crisis.
The biggest fertilizer makers, Nutrien Ltd (NYSE:NTR), CF Industries (NYSE:CF) and the Mosaic Co (NYSE:MOS), are enjoying windfall profits thanks to sanctions on Russia and Belarus, the world's #2 and #3 producers of potash, sending prices of the key fertilizer nutrient to levels last seen during the 2008 food crisis. Not surprisingly, stocks of major fertilizer producers are soaring: NTR has gained 86.8% over the past 12 months; CF has gained 103.4% while MOS is up 87.9% over the timeframe.
To be fair, the potash rally pre-dates the Ukraine crisis, with prices already on an uptrend from last year on tight supplies after international sanctions were slapped on Belarus' state-owned producer Belaruskali in response to President Alexander Lukashenko's crackdown against political opponents. However, events in Ukraine have only served to exacerbate the supply squeeze and push prices to new highs since Russia is a key supplier of potash as well as several other critical crop nutrients such as nitrogen, phosphate, urea and ammonia.
"Nutrien, for sure, is going to raise their (earnings) guidance. I'd be shocked if they don't," Joel Jackson, senior analyst at BMO Capital Markets Equity Research, has told Reuters. Back in March, Nutrien, the world's biggest fertilizer maker, announced plans to ramp up its annual potash output by 1 million tonnes to nearly 15 million tonnes in response to the uncertainty of supply from Eastern Europe.
But not all fertilizer makers are as lucky as Nutrien. As Morningstar equity analyst Seth Goldstein has pointed out, some fertilizer producers, particularly those who specialize in nitrogen-based fertilizers such as CF Industries, are likely to find high fertilizer prices partially offset by soaring natural gas prices. However, more vertically integrated companies like Mosaic and Nutrien that mine their own potash are likely to feel the blow of cost inflation less.
Unfortunately, high fertilizer costs will negatively impact world food supplies, and almost inevitably lead to high food prices.
The availability of affordable commercial fertilizers is highly critical to the success of the global agricultural sector. The discovery of the Haber-Bosch method in the early 1900s, which is still used to make fertilizer today, has allowed farmers to vastly increase their yields, with the industry now largely hinging on man-made fertilizer. But skyrocketing fertilizer prices are now expected to take a heavy toll on fertilizer use and, consequently, yields: according to industry consultancy MB Agro, in Brazil, the world’s biggest soybean producer, a 20% cut in potash use is expected to lead to a 14% drop in soybean production in the current year. In West Africa, falling fertilizer use could shrink this year’s rice and corn harvest by a third, the International Fertilizer Development Center, a food security non-profit group, has reported.
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