John Chu: Investors can feast on fertilizer yields, food demand growth

Food demand

As the world grows ever larger, its people demand more and better food. This trend will continue to benefit investors in fertilizer companies, declares John Chu of AltaCorp Capital Inc. In this interview with The Mining Report, Chu explains that a near-term supply crunch is good news for juniors and highlights four companies with projects than can meet demand, as well as a revolutionary Canadian company that is pioneering agricultural streaming.

The Mining Report: Ding Xuedong, chairman of the $650-billion ($650B) China Investment Corp. (CIC),wrote in the Financial Times June 17 that the CIC is "keen to invest more across the entire value chain" of the agriculture sector. What does this mean for Chinese and world food supply?

John Chu: It could be very big, not just for China but for the world. We're going to see some significant investments from CIC in agriculture and into regions that have seriously lacked funding. China has already been investing in African farmland, which should increase food supply and alleviate some of the recent pressures we've seen. Last year, China bought Smithfield Foods, America's largest pork producer, and Chinese state-owned entities have invested in egg production as well.

In 7 of the last 12 years, crop demand has exceeded supply. This has led to higher food prices across the globe.

TMR: Can we expect food prices to continue to increase?

JC: Yes. Developing countries are becoming richer, which leads to greater demand for beef, chicken and pork, which in turn leads to greater demand for cereals and grains.

TMR: Ding Xuedong also said that the CIC is "keen to work with the right partners to invest in greenfield projects." Can we then expect major Chinese investment in the Western fertilizer sector, as we have seen with oil and gas and the purchase of Smithfield?

JC: I'm a little skeptical about that. China is now the world's number one nitrogen producer, with four times as much capacity as Russia. And China is also number one in phosphate fertilizer production. The only area where it's actually lacking is potash. It does have some domestic reserves in the Qinghai Salt Lake Potash Company Ltd. (000792:SZSE). Once that ramps up to full capacity, it can probably meet 40% of China's domestic needs.

CIC has just made investments in Uralkali (URKA:RTS; URKA:MCX; URKA:LSE), a Russian potash player, and has an equity stake in Potash Corp. (POT:TSX; POT:NYSE). But given how weak the markets are now, China is not likely in a big hurry to make any further major potash investments anytime soon.

TMR: What is the projected growth of the fertilizer sector, and can supply keep up with demand?

JC: Potash has the strongest growth. This is driven by China, India and Brazil, which have considerable upside potential in potash demand. Historically, 5-to-10-year projections for annual potash demand growth have been in the 3–5% range. But that growth will come from a lower base, given how weak demand was last year.

Phosphate comes next, with a 2–4% annual growth forecast. Nitrogen comes last, in the 1–3% range, but it's always had the most stable and predictable growth. Currently, we've probably got excess supply for most of the fertilizers, and demand has been a bit choppy considering the sharp run-up in prices over the last several years. Some of the major buyers are playing a cat-and-mouse game, not necessarily following through with what they've ordered in the past, to try to keep prices down a bit. So supply now meets demand, but over the longer-term we expect that demand should catch up and require new capacity coming on-line.


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