Being in the commodity business (grain brokerage) we frequently see price fluctuations on our commodities - corn, wheat, canola, etc. I am going to highlight fertilizer, and more specifically one of the largest producers of fertilizer in North America. The Mosaic Co (NYSE:MOS).
The advantage of looking at a company like Mosaic is they are a publicly traded company and have published all of their financial data quarterly for decades. You can track their Earnings, Revenues, Operating Margins, CEO letters, what the CEO said on earnings calls, and so much more.
We have been having supply chain challenges on everything and this is creating shortages on fertilizers. With these shortages the North American Fertilizer Price Index is showing prices going from $370 in 2019 to a high of $1270 in 2022 (Link). For reference, the previous high was $930 in 2008.
In the news, we get sensationalized headlines stating a company has reached record revenues of unfathomable billions or revenues have grown by large double digit percentages. These headlines are formulated to cause an emotional response. The headline, and in most cases the article do not get down to the bone in details but rather stay superficial on purpose.
In 2009 Mosaic had revenues of $10.3 billion compared to 2021 of $12.3 billion (nearly 20% growth over a 11 year period for 1.6% annualized return). Earnings have shrunk from $2.35 billion to $1.63 billion (30% decrease or 3.3% annualized). Operating Margins in 2009 were 23.8% and in 2021 they have shrunk to 22.4%. Compared to 2020 Operating Margins have increased significantly from 8% to 22.4%. Operating margins in 2019 were 6.1% and 8% in 2020. This is a 4x increase on operating margins since 2019.
The increase in fertilizer price certainly helps their margins but it appears these returns diminish at certain prices. In this post I will not get into the reasons for these decreases but if readers are interested I can post a much deeper look into what is happening here.
One thing that is clear, Mosaic is a cyclical company who relies on prices swings to increase their margins and bolster profits. As a long term investment they may not be the most reliable place to sock your savings as we have pointed out earnings and cash flows have decreased slightly over a 11 year period.
Let me know do you think companies like Mosaic are taking advantage of the current market? Should we demand more regulation from governments to cap what these companies can earn when they have the upper hand? Or should we keep our markets free from the invisible hand?
India is reeling from the recent heat wave that ravished much of the country over the past couple weeks. They have announced a wheat export ban causing future prices to shoot up on the news (Link).
We are hearing spot elevator bids are approaching $17/bus in Alberta, however, some producers have said elevators aren't buying anymore old crop even though their spot prices are posted.
After the past couple years (COVID lockdowns, Russia invading Ukraine, and supply shortages) the health of globalization is starting to be questioned in the news.
Some are arguing it is stronger than ever because global trade keeps hitting new records ($28.5 trillion in 2021, up 25% from 2020 (Link)). I for one am curious to see how our world navigates the next 12 months in the face of 8% inflation and numerous questions in the Northern Hemisphere surrounding crop production and quality.
Inflation has been running red hot for a couple years now. Feds claimed the inflation was transitory due to COVID lockdowns while at the same time increasing the M2 money supply by record amounts (link).
I cannot fault the central banks of the world for their actions and many claim we would have seen a massive financial crisis if they did not (link to a very well written book on the subject).
As expected inflation has hit fiercely and the consumer price index (CPI) is showing over 8% inflation which has not been seen for 40 years (link). Other Black Swan events that have occurred in 2022 contributing are Russia invading Ukraine, and China's zero COVID policy locking down major industrial cities.
How are you handling the red hot inflation? Are you noticing changes in your lifestyle to cope with raising prices? Driving less, buying on sale items at the grocery store, changing summer vacation plans?
W A Grain went bankrupt just over two years ago and producers (126 according to the Grains Canada website (link)) have received their settlements. The Grains Commission states average payout was 80% however the producers we have talked to claim it was closer to 70%.
It is unfortunate when these things happen (since the year 2000 the average is just below 1 per year 20/22) not only for the producers who get shorted but it can be devastating on the employees and communities that relied on these businesses.
At Quality Grain we have looked into various ways to help protect our producers but have been shot down by multiple insurance companies. Through our research the best service we have found is Portfolio Credit Insurance through the EDC (link). They will insure 90% of your receivables.
If you would like more information do not hesitate to reach out to us. The purpose of this lecture is not to scare anyone into thinking we have the inside track onto companies that may or may not be failing but rather to highlight the importance of protecting yourself and the available options.
We have had some producers telling us they expect Rye and Wheat to have strong correlation in pricing. In my short time with Quality Grain I have not seen any conclusive evidence on this theory.
If you remember my New Years 2021 Newsletter I had provided a feed grain pricing chart for 2021 (link).
What is taking the Sanderson Farms $4.53 Billion take over from Continental Grain and Cargill?
The new subsidiary will become the third-largest USA poultry processor which has been raising the eyebrows of the Department of Justice (DOJ). This recent article (Link) suggests both sides (Continental/Cargill and Sanderson's) thought the deal would have been completed by the end of December 2021 but has been stalled by regulatory red tape.
Which brings us to the question should massive deals like this be allowed to happen potentially creating Oligopolies? Some of the largest meat packers are already in hot water for alleged price fixing charges (Link).
Here is another interesting article from March 2022 (Link). EPA in the USA has approved the use of imidacloprid, thiamethoxam, clothianidin, and dinotefuran for the next 15 years.
These chemicals have been banned in the European Union and restricted in Canada as they have been proven to be devastating on bees, butterflies, and other pollinating insects. They started being sold in the mid 90s and their usage has intensified since.
Is the drop in pollinators a valid concern or is it overblown noise in an ever noisy world?
Interesting article in the Wall Street Journal from April 30th (link) highlighting the hesitancy of producers to switch from the tried and true traditional fertilizers for cheaper unproven alternatives - the article highlights Pivot Bio microbes.
In the current inflationary environment producers have been more willing to try out small acre amounts on these new products. More information on Pivot Bio (WSJ article link + website link).
Do these alternatives fertilizers work? How do they stack up against popular synthetic fertilizers? Are Canadian producers interested in these alternatives, or are we afraid to make changes in fears of yield drops?