HardAssetsInvestor

Written by Amine Bouchentouf  |

December 19, 2011

The Commodity Investor: Cautious Outlook For Agriculture In 2012

Details

Sector facing oversupply in the market, but keep an eye on fertilizer markets.

Agribusiness is getting more and more investment attention. Traditionally the purview of a small cadre of specialists, a large number of mainstream investors have been looking at agribusiness as a fertile place to generate returns. While the prospect for agribusiness is bright due to strong fundamentals such as growing population and rising emerging markets incomes, expect significant volatility in the near future.

Two of the main agribusiness products I follow closely are fertilizer prices and the fertilizer markets. Why? Because fertilizer gives you indication of the health of the complete agribusiness sector in a way that other agro-commodities can’t. For example, analyzing the sugar markets won’t provide you with any meaningful information on the corn markets.

Similarly, analyzing soybeans yields very little information on livestock production. However, since all agricultural products require fertilizer, that is the primary feedstock that allows us to get a good understanding of the general state of the whole market.

Strong Fundamentals

The demand factor for fertilizer is strong. This year officially saw 7 billion people reside on the planet. The United Nations predicts that the world’s population will increase by another 1 billion between now and 2050; some in the UN also believe that the world’s population may hit 10 billion before the end of the century.

While this unprecedented population increase will be mainly responsible for rising demand for food products, another factor will play an equally important role: rising emerging market incomes. Indeed, population growth by itself only explains part of the food demand picture; rising incomes in China, India, Africa and Latin America mean that people are demanding higher-quality food products.

One of the first things that people do when they start earning more money is to switch their dietary trends; when folks move from rural incomes to urban incomes, they move up the dietary food chain, away from products such as rice and into high-protein food items such as chicken and beef. This move up the dietary food chain means increase in demand for fertilizer since these higher-fiber and higher-protein products require more fertilizer per unit to grow.

However, it’s important to note that this expected trend will take several decades to play out, and while the outlook is bright for fertilizer producers in the very long run, there may be setbacks in the near to medium term.