Growing food is more about math and science than you might believe. That's why increasing meat consumption in China has such vast implications for the world. A little simple math shows that companies like Potash (NYSE:POT) and Mosaic (NYSE:MOS) are in the right business to take advantage of this Chinese trend, so long as the fertilizer industry is careful about supply and demand.
An example of China's impact
If you want to see how big Chinese demand for key materials can be, look no further than the coal industry. Between 2000 and 2012, China's use of coal increased from 1.5 billion tons to roughly 4 billion tons. Industrialization, economic development, and urbanization all backstopped that increase. That 2.5 billion tons, however, turned the coal market on its head, with rising prices drawing in new producers that eventually flooded the market with supply.
The big addition came from Indonesia, which more than doubled its coal exports in just five years. Some industry participants blame the archipelago for the price of thermal coal dropping from $130 a tonne in 2011 to more recent levels around $75, but China's renewed focus on environmental issues has helped, too. That said, it was Chinese demand that launched the price upward in the first place. Ah, supply and demand at work.
That's why agriculture is such an interesting area to look at. Chinese meat consumption has doubled since the 1990s. However, the average U.S. consumer still eats about twice as much meat as the average Chinese consumer. That means that there's still plenty of consumption growth ahead. Since China has roughly four times as many mouths to feed as the United States, there's a multiplier effect to consider, too.
Raising livestock requires that you feed them. This, in turn, means more demand for crops because it takes more grain to produce meat than it does to directly feed a human with grain. If you want more crops then you have to use more fertilizer, too; that's where Potash and Mosaic come in.
Why did the bottom fall out?
So if Potash and Mosaic are in such a good position, what's going on right now? Potash, for example, saw the sales price of its namesake fertilizer fall a massive 30% year over year in the first quarter. Mosaic, meanwhile, saw phosphates prices drop by around 15% year over year in the quarter. That's not a good sign and helps explain why both of these fertilizer companies have been laggards over the last year.
One thing worth noting from the chart above is Potash's quick price drop in August of last year. That was when a European potash consortium fell apart. This disrupted the supply side of the potash equation, which had historically been tightly controlled by a North American consortium (of which Potash and Mosaic are both members) and the now-troublesome European group.
However, fertilizer use is science, not art. Lower prices don't lead to higher sales; farmers need what they need and that's the end of it. Demand will wax and wane depending on the weather and crop choices, but the current fallout is more about a unique industry event than farming. That's why increasing meat consumption in China means that demand growth will still continue in the longer term. In fact, Potash sold slightly more potash year over year in the quarter and Mosaic's phosphate volumes were flat.
A buying opportunity?
Unlike coal, which faces environmental issues, no one is calling for a ban on food. This means that despite the disruption from the European potash consortium breakup, the long-term picture for fertilizers remains unchanged. As long as the industry's participants don't get caught up in a price war, Potash and Mosaic have bright futures ahead. Now could prove to be a good time to jump aboard what might be the next Chinese-led investment boom.
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Reuben Brewer has no position in any stocks mentioned. The Motley Fool owns shares of PotashCorp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.