National Bank: Looming Food Crisis To Benefit Fertilizers

National Bank analysts Pierre Fournier and Angelo Katsoras say that a looming food crisis will raise prices of agricultural commodities and challenge the world’s food production capacity. And the fertilizer sector could be one of the winners.

In a recent report, the analysts point out that the agriculture sector has proved far more recession-resistant than other sectors. Prices of agricultural commodities have dropped by much less than other commodity prices, and farmland values have outperformed other types of real estate — going up in spite of the recession.

The agriculture and food sectors are facing several challenges: increasing demand from a more populous and richer world; growing competition from biofuels; shrinking farmland reserves; growing water shortages; declining growth in crop yields; and tight global supplies of grain.

Fournier and Katsoras say these trends are squeezing both the demand and supply sides, and placing upward pressure on agricultural commodity prices.

The world’s population is growing by 70 million per year, while millions of people are becoming more affluent. They can afford to eat more meat, so more crops are diverted to animal feed. Meanwhile, countries are encouraging farmers to produce biofuels, diverting even more crops away from feeding people.

On the supply side, Fournier and Katsoras say that the recession has not altered the trajectory of a squeeze on supply as a result of a drop in the availability of farmland. This is caused by a growing population, increased urbanization, and water shortages. Climate change could also affect supply, since warmer weather might reduce crop yields in some regions. And all this pressure on supply occurs while global inventories of grains are low.

The analysts’ conclusion is clear: farmers must increase crop yields. But to achieve this, significant investments are necessary in all types of agricultural inputs. Typical steps will include the use of fertilizers, genetically modified seeds, and farm equipment.

There are many opportunities for investors, because the growing demand for agricultural commodities occurs against a backdrop of a pullback in prices from last year’s highs. Among investments recommended by the authors are fertilizers, genetically modified seeds, farm equipment, agrochemicals, farmland, food safety monitoring technology, sugar cane-based ethanol, and water equipment.