On the surface, peak phosphorus seems very disconcerting.
Along with nitrogen and potassium, phosphorus is an essential ingredient for fertilizers. Fertilizers have played a key part in the Green Revolution, which has helped feed an extra 4.2 billion people since 1950.
Unlike nitrogen, which can be synthesized from air by the Haber process, potassium and phosphorus cannot be synthesized or substituted.
The scarcity of potash, which is a source of soluble potassium, is not as big of a concern as the scarcity of phosphorus. According to the U.S. Geological survey, the world has at least 200 years of reserves of potash.
Some experts predict that the high-grade reserves of phosphorus will be depleted anywhere from 50 to 100 years and peak phosphorus could occur as soon as 2030. Despite the dour projections, there are a few reasons not to be overly concerned.
We can change our diet
First, we can change our diets. Eating less meat and more vegetables would help. Diets heavy with meat and dairy typically require up to three times as much phosphorus as a vegetarian diet.
We can improve the food chain
Second, we can improve our food chain. In developed countries, as much as 50% of food production is lost from farm to fork. As it stands today, the world doesn't really have a food production problem, it has a food distribution problem. In the future, if we improve food distribution, we could still feed everyone while maintaining our current levels of food production.
We can recycle
Third, we can extract phosphorus from the things that we throw away today. We can extract phosphorus from manure, crop residues, food waste, and human excreta. We can also get phosphorus from algae, seaweed, and ash.
Those extraction methods are currently uneconomical now, but could reasonably be expected to become economical in the future.
The bottom line
Right now, weak macro outlooks in developing nations and weak potash prices are holding back demand for fertilizer companies such as Agrium (NYSE: AGU), PotashCorp (NYSE:POT), and Mosaic Co (NYSE:MOS).
On a long-term time horizon, however, it makes a lot of sense to invest in fertilizer companies.
The world's population is projected to increase from 7 billion today to 9 billion people by 2050. The Food and Agricultural Organization of the United Nations predicts that in order to feed those 9 billion people, food production will need to increase by 70% to 100%.
Fertilizers and fertilizer companies will make up a big part of the equation.
As for peak phosphorus, I think the problem is too far away for the market to be concerned. While some countries are no doubt building inventories in preparation for the event, most market participants look at 10 year timelines or less.
If and when peak phosphorus does occur, and because fertilizer is such an essential ingredient in food production, fertilizer companies will likely have the pricing power to pass on the added costs to the consumer. Because there are ways to compensate for phosphorus shortages, we will still be able to produce enough food -- the food will just be more expensive.