The fundamental logic behind investing in fertilizer stocks is not the hardest value proposition in the world to understand: continued world population growth amid diminishing arable land inventory equals the requirement to maximize yields through nutrient application.
Fertilizers – the Nitrogen, Phosphate, and Potassium (NPK) are the three industrial fertilizers applied every day everywhere on everything from roses to strawberries to marijuana.
With the demand curve steadily rising, however, a correspondent rise in world supplies has had the effect of depressing the prices of potash and phosphates, and along with it, the stock prices of fertilizer companies.
Using the Global X Fertilizers/Potash ETF (NYSEARCA:SOIL) traded on the NYSE as a proxy for large cap fertilizer producers, it is evident that the halcyon days for the ETF came to a precipitous end at the beginning of 2013 in a rout that has seen it lose 22% since then. However, these muscular global players are subject to a macro-competitive environment that certain emerging country-specific producers are not likely to face. While the competitors on the global stage certainly set the price expectations of end users around the world, markets like Brazil are working hard to wean themselves off of expensive imports, and develop internal sources of Potash, Phosphate, Nitrogen, as well as other micro-nutrient sources that the country is apparently rich in.
Brazil is the World’s Fastest Growing Agricultural Producer
Brazil is already the world’s largest producer of coffee, cane sugar and oranges, and is the second largest producer of beef, ethanol, dry beans, soybeans, and papayas.
As the world’s sixth largest economy, Brazil ranks third among the world’s major agricultural exporters and fourth for food products. With 25 percent of global investment, the country is the principal recipient and source of foreign direct investment in Latin America and fifth recipient nation in the world. Thanks to its agricultural and oil resources, Brazil also ranks second worldwide for bioethanol production. Agriculture contributes 5.8 percent of Brazil’s GDP.
Brazil is also the country with the highest number of unexploited arable hectares in the world, which positions it perfectly to increase its share of the global agricultural commodity market, and increase its ranking over time.
That means one thing for Brazilian farmers: increasing fertilizer requirements.
Brazil Dependent on Fertilizer Imports
According to an article published in Bloomberg on June 6, 2014:
“Brazil, which imports about two-thirds of its fertilizer needs, is benefiting from lower international prices following supply increases in the U.S., Morocco, China and Russia, while strong demand keeps soybean prices high, said Lair Hanzen, who heads the Brazilian unit of Oslo-based Yara International ASA (YAR), which sells about 25 percent of fertilizers used in Brazil.
Brazilian farmers are expected to expand the area sown with soybeans by at least 4 percent in the planting season that starts in September to a record 31.2 million hectares (77 million acres), Andre Pessoa, head of crop forecaster Agroconsult, said in an event in Sao Paulo last month.
To say that Brazil is motivated to develop domestic supplies of key nutrients for expansion of its agricultural industry is an understatement.
Vale SA (NYSE:VALE) is currently the country’s largest producer of domestic fertilizers. Since acquiring Fosfertil in 2010 and the fertilizer assets of Bunge in Brazil, Vale has been seeking to grow its ability to supply the domestic agricultural industry through increased investment in domestic fertilizer sources. But Vale is global operation and has designs on becoming one of the world’s largest exporters of fertilizers from operations around the world including Canada.
Look for Brazilian Takeover Targets in Fertilizers
Yara International ASA (ADR) (OTCMKTS:YARIY), a Norwegian multi-national fertilizer producer and broker, announced this week an agreement to acquire 60 percent of Galvani Industria, Comercio e Serviços SA, for an enterprise value of $318 million, with an option to buy the remaining 40 percent.
This follows Yara’s acquisition of Bunge’s fertilizer business in Brazil for $750 million. Yara has a market cap of $12.7 billion, and has committed to becoming the largest phosphate producer in Brazil. “The Galvani acquisition will help secure phosphate fertilizer capacity in the centre of the country and in the attractive and fast-growing agri frontiers of Brazil,” Yara said in a statement.
DuSolo Fertilizers: Production Now, Acquisition Tomorrow
DuSolo Fertilizers Inc (TSX.V:DSF) expects to go into production on its Bomfim project in Goias State, Brazil by the fourth quarter of 2014.
“We anticipate to be in production in as early as this year, as early even as the next few weeks,” said CEO Eran Friedlander in a recent interview on the Midas Letter CEO Podcast. “our thinking as far as Direct Application Natural Fertilizer is concerned, that we can capture about 30% of the existing marketplace for this type of product and its alternatives so basically, somewhere around 300,000 tons a year. This product sells for around $100 per ton. So, we think that within two to three years, we can sell somewhere around 20 to $30 million a year of Direct Application Natural Fertilizer with the same profit margin that I mentioned before which is around 60 percent to 70 percent.”
At 300,000 tonnes per annum, on a 60 percent margin, that suggests DuSolo could be grossing $18 million per year in the near term. Considering the company’s market cap of ~$26 million, the attractiveness of DuSolo as a potential takeover target for either Vale or Yara should not be discounted. DuSolo reported a National Instrument 43-101 resource of 18.7Mt @ 6.45% P2O5 Incl. 4.4Mt @ 14.47% P2O5 recently on very limited drilling.
With DuSolo’s additional 10 targets on Bomfim, as well as its Ruth & Samba Agro-mineral Projects located within regions of high phosphate demand and close to existing infrastructure, DuSolo could be the next candidate for acquisition by one of the two majors discussed. Even without an acquisition, investors in DuSolo are in an excellent position to capitalize on Brazil’s rapidly expanding agricultural industry.