The invasion of Ukraine could be one of the most disruptive events in the food and agricultural supply chain in decades.
Louai Beshara/AFP via Getty Images
Russia’s invasion of Ukraine, its economic isolation, and the closure of Black Sea ports used to ship goods have created difficult conditions across the world in ways that many have yet to understand.
Russia is one of the world’s largest energy producers, and disruptions in the oil market have attracted intense attention. But less visibly, Russia is also a major producer of nitrogen and other chemicals that are critical to the world’s agricultural crops.
Russia and its ally Belarus represent about 35% of global potash supply and 40% of capacity, according to Goldman Sachs. Russia generates about 15% of global exports of various forms of nitrogen.
David Bertioli, a professor of crop and soil sciences at the University of Georgia, told Barron’s that nitrogen, phosphorus, and potassium affect how much food farmers can grow.
“If you don’t get the proper fertilizers, then agricultural yields will decline, especially in the corn belt in the U.S. and in the wheat belt of Europe,” Bertioli says. He estimated that nitrogen fertilizer supports about half of the world’s population.
Goldman analyst Adam Samuelson recently advised the bank’s clients that the invasion of Ukraine could be one of the most disruptive events in the food and agricultural supply chain in decades.
Some farmers have already complained about difficulty buying fertilizer for crops. A sharp rise in the price of diesel, the primary fuel for tractors and other farm equipment, exacerbates the problem.
Investors concerned by how the war has thrown the fertilizer markets into disarray should consider Mosaic (ticker: MOS). The phosphate and potash crop nutrient company’s price target was just increased by Goldman to $83 from $50, which also raised its rating on the stock to Buy from Neutral.
Samuelson, who follows the company for the bank, told clients that Mosaic is expected to generate “nearly 50% of its current market cap in FCF [free cash flow] over the next three years.” Mosaic’s market capitalization is about $21 billion. During the past 52 weeks, the stock has ranged from $28.26 to $64.71. It is up 47% so far this year and up some 70% over the past year.
Investors can use call options to bet on Mosaic without buying shares outright. With the stock at $57.57, investors could buy the June $60 call and sell the June $70 call to capture any gains before the expected July release of second-quarter earnings.
The call spread—that is, buying a call and selling another with a higher strike price but same expiration—expresses a view that the underlying stock will advance within a specified price range.
The spread costs $3 to implement and is worth a maximum of $7 if the stock is at $70 at expiration. The risk to the strategy is that the stock is below $60 at expiration. Also, if the stock surges far above the short call-strike price, investors won’t participate in those gains.
Of course, if the troubles in Ukraine are resolved, the concerns about fertilizers and the impact on crops that help feed the world should ease. Fertilizer stocks would likely decline, too.
Still, the shadows of Russia’s belligerence shouldn’t be forgotten. Investors should remember that what we eat, and the fuel that we use to power our cars and trucks, connects us to other countries that otherwise seem removed from our lives.
We noted last week that countries with meaningful positions in global commodities could weaponize resources to use to their advantage at a time when the balance of power among the great nations is shifting, and that trend is unlikely to fade even if Russia retreats from Ukraine.
Steven M. Sears is the president and chief operating officer of Options Solutions, a specialized asset-management firm. Neither he nor the firm has a position in the options or underlying securities mentioned in this column.
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