TMR: Will the rapidly growing world population lead to the benefits of the green revolution topping out?
JC: Probably not. There's so much unused arable land in such places as Russia, Brazil and Africa. Significant new investment will be required, but technologies such as new seeds and GPS systems and techniques such as proper fertilizer balance cannot help but contribute to higher food yields and production growth. To give one example, U.S. corn yields are expected to potentially hit a new record high, and the U.S. is a mature corn growing region.
TMR: How much corn is used for biodiesel?
JC: Upward of 40% of U.S.-produced corn is used for ethanol. Some of the byproduct can be used for feed, so on a net basis it's probably around 25%.
TMR: Does this mean edible corn shortages and higher prices?
JC: It has led to shortages and higher prices, but typically in the agriculture sector, higher spot prices lead to a supply response. I mentioned the record U.S. corn harvest. The Chinese situation is similar, and Ukraine and Brazil are stepping up as well.
TMR: To what extent is phosphate production dominated by North African and Middle Eastern suppliers?
JC: Production of the fertilizers that farmers use is dominated by China, Russia and the U.S. Africa and the Middle East control about 75% of the production of phosphate rock, which is the raw material.
TMR: Could this be considered a strategic problem?
JC: Not quite yet. There is more than sufficient reserve out there. But that region is beginning to get into added value, and that could raise prices for phosphate rock.
TMR: Which phosphate project in that region most interests you?
JC: There is one company that we don't officially cover, so I can only give general observations. That company is Allana Potash Corp. (AAA:TSX; ALLRF:OTCQX), which has the Danakil project in Ethiopia. The company has published a bankable feasibility study, and now it's just a matter of securing funding. This is the biggest hurdle for junior fertilizer projects. Danakil's capital expenditures (capex) seem manageable at around $650 million ($650M). Allana has a key partner in Israel Chemicals Ltd. (ICL:TASE), a top-seven global potash producer, which has a 16% equity stake and an offtake agreement.
Allana also has support from some global development banks and foresees commercial production by the second half of 2016. We think the company is in a good spot, especially given the potential of supplying to India, a top-three potash importing country with a lot of upside demand. Allana is definitely seeing support from the Ethiopian government, and infrastructure is being built to support the project. This is a company investors should be looking at.
TMR: Danakil's infrastructure is dependent upon the construction of a port in Djibouti, correct?
JC: The Djibouti port and the rail lines to support it are part of the plan to get Danakil up to a million tons annually, and even expanding that. The Chinese are involved in this.