Wednesday, April 30, 2008

Finally (A Year Late) Fertilizer Hits the Front Page of the NYTimes; and an Interview with Mosaic (MOS) CEO

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Just in time for a sell off... the mainstream press finally wakes up to one of the best investing stories of the past few years... much of this is old news for blog readers but it continues to build on my World of Shortages theme... note how when new factories are created to generate more fertilizer, it leads to more energy consumption which leads to more water usage, and pollution and....

... again, I state this planet is not well suited for 6.5 Billion people unless 4.5 Billion live in abject poverty. The more wealth in this world and the more people move from poverty to "middle class" (we wouldn't call it that necessarily in the US), the more strains on the globe. We will have crisis after crisis until/if/when technological breakthroughs happen... but I believe the next 1-10 years will be fraught with crisis after crisis as world governments (especially ours) are reactive, not anticipatory. Even in the longer run the technological breakthroughs are going to be like plugging holes in a dam waiting to burst...

The problems we are beginning to encounter are global in nature and require cross border cooperation. If I know human nature, we will turn into a much more protective and nationalistic globe, not cooperative as each nation serves to protect its own. We've already seen this in grains as country after country has restricted exports and/or slapped tariffs. Even mighty United States puts enormous tariffs on Brazilian sugar ethanol so it can protect its own corn producers. We're just in the pre game warm up of this thesis.... first pitch has yet to really be thrown out. And as for those 6.5 Billion humans? Well we are headed for 9 Billion by 2042. So we have to cram another 40%+ people onto this globe.... this is why the commodity cycle in my opinion is just beginning and these "strong dollar" selloffs are (while predictable) very laughable in the "big picture"... but I do realize Wall Street does not have a timeline longer than "next week" and I'm talking issues over the next 30 years. The U.S. is 5% of world population (creating 25% of the pollution and consumption) - and we are headed to 3% by the middle of this century. Just imagine when the Asians pollute and consume at a rate of 1/5th of us... and there are another 1-3 billion of them (think 2020 to 2040). I continue to believe productive farmland anywhere on the globe will be the best pure long term investment...
  • (In Vietnam)... the widespread use of inexpensive chemical fertilizer, coupled with market reforms, helped power an agricultural explosion here that had already occurred in other parts of the world. Yields of rice and corn rose, and diets grew richer.
  • Now those gains are threatened in many countries by spot shortages and soaring prices for fertilizer, the most essential ingredient of modern agriculture.
  • Some kinds of fertilizer have nearly tripled in price in the last year, keeping farmers from buying all they need. That is one of many factors contributing to a rise in food prices that, according to the United NationsWorld Food Program, threatens to push tens of millions of poor people into malnutrition.
  • The squeeze on the supply of fertilizer has been building for roughly five years. Rising demand for food and biofuels prompted farmers everywhere to plant more crops. As demand grew, the fertilizer mines and factories of the world proved unable to keep up.
  • Some dealers in the Midwest ran out of fertilizer last fall, and they continue to restrict sales this spring because of a limited supply. “If you want 10,000 tons, they’ll sell you 5,000 today, maybe 3,000,” said W. Scott Tinsman Jr., a fertilizer dealer in Davenport, Iowa. “The rubber band is stretched really far.”
  • Fertilizer companies are confident the shortage will be solved eventually, noting that they plan to build scores of new factories. But that will probably create fresh problems in the long run as the world grows more dependent on fossil fuels to produce chemical fertilizers. Intensified use of such fertilizers is certain to mean greater pollution of waterways, too. (this is why potash has the widest moat - you cannot build a factory to create more potash - nitrogen on the other hand will be at most risk as it is much more easily replicated)
  • Agriculture and development experts say the world has few alternatives to its growing dependence on fertilizer. As population increases and a rising global middle class demands more food, fertilizer is among the most effective strategies to increase crop yields.
  • “Putting fertilizer on the ground on a one-acre plot can, in typical cases, raise an extra ton of output,” said Jeffrey D. Sachs, the Columbia University economist who has focused on eradicating poverty. “That’s the difference between life and death.”
  • From 1900 to 2000, worldwide food production jumped by 600 percent. Scientists said that increase was the fundamental reason world population was able to rise to about 6.7 billion today from 1.7 billion in 1900.
  • Vaclav Smil, a professor at the University of Manitoba, calculates that without nitrogen fertilizer, there would be insufficient food for 40 percent of the world’s population, at least based on today’s diets.
  • Manufacturers are scrambling to increase supply. At least 50 plants to make nitrogen fertilizer are under construction, many in the Middle East where natural gas is abundant, and phosphorous and potassium mines are being expanded. But these projects are expensive and time-consuming, and supplies are expected to remain tight for years.
  • Environmental groups fear increased use, particularly of nitrogen fertilizer made using fossil fuels. Because plants do not absorb all the nitrogen, much of it leaches into streams and groundwater. That runoff has long been recognized as a major pollution problem, and it is growing.
  • “This is a basic problem, to feed 6.6 billion people,” said Norman Borlaug, an American scientist who was awarded a Nobel Peace Prize in 1970 for his role in spreading intensive agricultural practices to poor countries. “Without chemical fertilizer, forget it. The game is over.”
On to the Mosaic CEO interview (thanks for reader who sent this to me)
  • It's not every executive who can claim to have improved his company's margins from nearly zero to more than 30 percent in less than two years. But Jim Prokopanko, president and chief executive of the Mosaic Co. since January 2007, finds himself riding a rocket driven by growing global demand for his company's crop nutrients and strained supply.
  • And Mosaic, the world's largest producer of phosphate fertilizer and second-largest supplier of potash, another key crop nutrient, is in the enviable position of controlling nearly every step in the production process from mining the raw material to shipping the finished product.
  • Though Mosaic is based in Plymouth, Minn., outside Minneapolis, more than half its $5.8 billion in sales last year were tied to the phosphate rock they take out of five mines in Central Florida and process at three area plants in Polk and Hillsborough counties.
Q. You've been in the business, previously with Cargill, for 30 years. Did you ever think you'd see diammonium phosphate (DAP) fertilizer selling for more than $1,000 per metric ton?

A. Never. This is absolutely unseen in my generation. And it came about very quickly.

Q. Is it a bubble?

A. We've seen spikes in grain prices before, but those were supply-driven, caused by floods in Mississippi or droughts in Canada. This is demand-driven by an increase in consumption the world over.

I think we've hit a tipping point because while we have very steady population growth, at the same time we're having strong world economic growth.

Though there may be a slowdown in the U.S., the economy is strong in areas of the world like Asia and South America with the greatest population growth.

And at $4,000 to $5,000 per capita annual income, people look to improve their diets. That translates to demand for more grain.

The world's inventory is also dangerously low. We're emptying the cupboard.

Q. So when grain prices rise, farmers plant more acres and want more productivity, increasing the demand for fertilizer?

A. Farmers, of every size, can't afford not to maximize their production. Their costs are also up. For the last two decades, the agricultural industry has not had very favorable returns; the profit has not been there. So there's been consolidation throughout the industry, including in the fertilizer business.

Two years ago, we closed a mine and two plants in Florida (the Fort Green mine and the Green Bay and South Pierce fertilizer plants, all in southwest Polk), which were high-cost facilities.

Though demand has grown, you can't just turn on a dime to produce more phosphate. We're running 24/7, mining 17.5 million tons of phosphate rock each year, and we're working to expand our mining areas, both here and at our potash mines in Canada. But if you started permitting a plant today, it would take five years to get it up and operating.

Q. In addition to phosphate rock, you need ammonia and sulphur to make DAP. How have those costs increased?

A. The cost of ammonia, made from natural gas, has tripled over 10 years. Sulphur, a byproduct of oil refining, has gone from $55 a ton to $450 a ton in the past year.

Ocean transport for fertilizer, from Tampa to India, used to cost $35 a ton. Now it's $100 a ton.

The world price for DAP is set by Morocco, which is the Saudi Arabia of phosphate with a 300-year reserve. Last year, phosphate rock from Morocco was $55 a ton; today it's over $250 and for the second half of the year it's going to be $350 to $400.

That sets a floor price for fertilizer producers who don't own their own rock, who have no choice but to buy from Morocco. But we own our rock.

Q. How are world markets changing?

A. China used to be our largest customer. This year China was a net exporter, supplying 5 million tons to the world market.

But China's government is very concerned about food security, and they've just put a 135 percent tariff on fertilizer exports. That will have a major impact on world supplies.

India is now our biggest customer, but the government caps the price of fertilizer to the farmer at $200 a ton and subsidizes the difference. This year, the Indian government will end up spending more on fertilizer subsidies than on its military. It's an impossible situation.

Long Mosaic, Potash in fund; long Mosaic in personal account


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