The world is currently going through a fertilizer shortage. The fertilizer index has risen by almost 100 points since this time last year, going from 126 to 221. At its peak this year, the index was at 254 — double last year’s level. Since then, prices have given up some of their gains but remain high by historical standards.
Similar to what happened with oil stocks, the fertilizer shortage is leading to gains in fertilizer stocks. Nutrien (TSX: NTR)(NYSE: NTR) is up 5% for the year compared with a loss for the TSX index. Earlier in the year, NTR was up as much as 65%, but it gave up some of the gains when fertilizer prices moderated. Still, investors who bought at the beginning of the year are sitting on gains to this day.
Why there’s a fertilizer shortage
There are several reasons why a fertilizer shortage is occurring today.
One is the war in Ukraine. Much like its oil exports, Russia’s fertilizer exports were restricted by several countries after the invasion of Ukraine. Few countries banned Russian fertilizer outright, but many placed heavy tariffs on it. The result was higher prices. When countries place tariffs on other countries, the one being tariffed usually raises prices in response. The cost, ultimately, gets passed on to the consumer. This appears to have happened with Russia, which is now refusing to export fertilizer.
Another factor is supply chain issues. Supply chains have been hit by a number of challenges this year, including lockdowns in China and the war in Ukraine. China’s lockdowns resulted in many shipping delays, while the Ukraine crisis created issues with shipping goods around Europe. The result was supply chains that still hadn’t recovered from the COVID-19 crisis, getting walloped for a second time.
Is Nutrien a buy?
Having looked at the causes and consequences of the fertilizer crisis, it’s time to ask whether fertilizer stocks are buys. We can use Nutrien as the case study here, since it’s a Canadian fertilizer company that many Motley Fool readers are familiar with.
There is no doubt that rising fertilizer prices are good for Nutrien. In its most recent quarter, NTR reported the following:
- $7.45 billion in revenue, up 67%
- $1.38 billion in net income, up 985%
- $2.59 in EPS, up 1,031%
- A 110% increase in cash
It was a good quarter, largely thanks to rising fertilizer prices. When the price of a commodity goes up, suppliers make more money. So, naturally, NTR made more money in Q1 2022 than in the same quarter of 2021. However, this prosperity depends on fertilizer prices remaining high. If fertilizer prices fall, then NTR’s revenue will fall. So, it’s a double-edged sword.
Foolish takeaway
Having looked at all the relevant factors, it’s time to answer our question: Are fertilizer stocks buys?
Based on a quick look at the factors affecting the fertilizer industry, the answer seems to be “yes.” Prices are rising this year, and the political factors keeping prices high are still in place. In the long run, this situation could change, though, so don’t buy individual fertilizer stocks, unless you have particular industry expertise. You need to do a lot of research to make informed investments.
