Shares in fertilizer and ammonia manufacturers The Mosaic Company (MOS 1.51%), CF Industries (CF 2.21%), and Intrepid Potash (IPI -0.05%) all rose by double digits in the week by the close of trading on Thursday. CF Industries and Mosaic increased 12.7% and 14.8%, respectively, with Intrepid Potash up a whopping 27.2%, according to data provided by S&P Global Market Intelligence.
The move comes amid growing concerns over the impact of the war in Ukraine and the policy response to it coming from European countries. In addition, two interrelated issues have sent fertilizer prices soaring, given non-European producers an advantage in the marketplace.
First, Russia and Belarus are the second- and third-largest producers of potash (fertilizer potassium) in the world, and with many countries imposing sanctions on both countries as a result of the conflict, it's created a dislocation in the market resulting in higher prices. It's a shock to the system because, as Intrepid Potash management notes in SEC filings, historically, the larger potash producers "have managed production levels to approximate world demand." As such, it doesn't take much of a change in demand, or in this case, supply, to significantly impact prices. Moreover, this is not just a European issue because the U.S. tends to buy around 7% of its potash from Belarus.
Second, and perhaps more timely to the moves in these stocks' prices this week, Europe is facing soaring natural gas prices due to sanctions imposed on Russia. The country is retaliating by restricting gas supplies. It's an issue because natural gas is used for synthetic fertilizers. Consequently, soaring gas prices have caused fertilizer manufacturers to shut down production as it's no longer economically viable to produce. They include C.F. Industries, which permanently shut a plant in the U.K. and is restructuring its operations in that country. C.F.'s plant was the U.K.'s largest fertilizer producer.
Why Mosaic, CF Industries, and Intrepid Potash benefited
It's not hard to see why the situation favors all three companies -- they are all companies that primarily mine and/or produce outside of Europe. As such, they will benefit when global prices rise.
Intrepid Potash has three potash mining and production facilities, one in New Mexico and two in Utah, and generates "substantially all" of its potash sales in the U.S.
The Mosaic Company mines phosphates (used for crop nutrients and animal feed) in Florida, Brazil, and Peru, and sources the natural gas used for its production from Texas and Louisiana. Mosaic mines potash in Saskatchewan, New Mexico, and Brazil.
Finally, CF Industries has five nitrogen manufacturing facilities in the U.S., two in Canada, and two in the U.K. However, as noted above, one of the two U.K. plants is being permanently closed (Ince), and the other (Birmingham) has recently announced a halt to ammonia production. CF Industries' website noted, "At current natural gas and carbon prices, CF Fertilisers U.K.'s ammonia production is uneconomical," For reference, CF Industries has a supply agreement (ammonia) with Mosaic in the U.S.
Unfortunately, it's tough to know precisely what will happen with the natural gas situation in Europe, let alone the direction of fertilizer prices in the future. On the one hand, supply dislocations are suitable for prices. On the other, if fertilizer prices rise too much, there could be demand destruction down the line as it becomes uneconomical for farmers to plant. Indeed, the impact of high fertilizer prices on farming decisions is already being felt, with some electing to plant more soybean rather than corn as the former tends to require less fertilizer. Moreover, larger fertilizer producers can expand production over time to meet demand. However, those are longer-term considerations. For this week, at least, these three stocks are riding high.