The Motley Fool

Is the Commodities Boom Over? Let’s Discuss

Image source: Getty Images

Similar to many other commodity plays on the TSX, Nutrien (TSX:NTR)(NYSE:NTR) has made a strong recovery. After plummeting in March 2020, this company’s shares have surged more than 85%. Nevertheless, investors are increasingly becoming concerned that the commodities boom may be losing steam.

And rightfully so. Everything from lumber to copper and agricultural commodities have dipped of late. For top fertilizer producer Nutrien, investors are making a big bet on commodity prices with this play.

Let’s dive into what could drive commodity prices higher or lower, and how this might impact Nutrien investors.

Commodities quickly losing steam

It’s important to note the steepness of the decline we’re seeing in many commodities sectors. Indeed, the recent run-up we saw in commodities prices earlier this year baked in a tonne of growth. Since then, it appears inflation concerns are becoming less of a big deal. Bond yields have dropped alongside a view that inflation will likely be transitory. For commodities-focused producers, this hasn’t been a great thing of late.

Some sectors such as energy continue to surge, and potash prices have held relatively stable of late. So, that’s a positive for Nutrien investors. However, should this trajectory continue, this is a key risk investors need to factor into the price they’re willing to pay for NTR stock right now.

Some commodities sectors such as soybeans, sugar, and wheat have given up most, or all, of their gains this year in short order. These rapid moves suggest investors and traders are pricing in less demand and more robust supply than initially thought. While investors may have a better handle on the supply/demand fundamentals of the potash and fertilizer space, these concerns could bleed through into Nutrien’s stock price over the medium term.

Accordingly, it’s perhaps no surprise to see Nutrien trading approximately 10% below the highs set one month ago. This is a tricky place to invest in commodities players like Nutrien right now. However, there’s reason to own this stock right now.

Diversification the key with owning Nutrien stock

The primary reason that investors should consider Nutrien is the diversification this stock provides. Indeed, having some level of commodities exposure in a given portfolio provides more stable returns over time. These assets tend to be somewhat negatively correlated to other sectors of the economy. However, during an economic boom, these stocks also outperform. Thus, the returns commodities stocks see are typically higher in more volatile periods in the market.

For investors concerned about volatility, this is a very good thing. Indeed, Nutrien’s position as one of the largest global players in potash and fertilizer production (across the value chain) is bullish for long-term investors. This company’s moat is about as wide as it gets in the price-taking space it operates in.

One of Nutrien’s levers it has to pull is on the production side. And recently, the company has announced plans to increase production by up to 500,000 metric tonnes. Should supply prove to be as tight as the market predicts, this could be very good for Nutrien shareholders. Indeed, the company is taking the steps to grab market share at a profitable time — a move which should provide solid cash flow for Nutrien shareholders over the long run.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Chris MacDonald has no position in any stocks mentioned in this article. The Motley Fool recommends Nutrien Ltd.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.