Flying Above the Fray, It’s Mosaic

Freedom Financial Archive | Originally posted Nov 19, 2022

It’s an indelible memory for any first-time flyer.

“Seeing the world through God’s eyes” was how Meryl Streep’s Karen Blixen talked about it in Out of Africa.

Denys Finch-Hatton, the Old Etonian and Oxford graduate played by All-American Robert Redford, had taken Blixen on her first flight.

The view from above mesmerized her, as it does to all of us our first time in the air.

It’s quite thedate… if you’ve got a pilot’s license.

For the rest of us, perhaps it’s flying over the Rockies for the first time, or England’s glorious fields, or the Statue of Liberty that marks us for life.

I still love seeing the fields whenever I’m traveling.

Sure, the coastal snobs will pejoratively call them the “flyover states.”

But those amber waves of grain feed America and a good portion of the world, as well.

Between the corn, wheat, and vegetable fields, it seems like The Good Lord creates the most bountiful and beautiful mosaic of all.

The New Wheat Wars Are Here

I always want to pat these people on the head and comment on their naivety.

Who am I talking about?

Those Western liberals who think the “Arab Spring” was a cry for freedom.

It’s ludicrous.

Over there, they don’t even call it the Arab Spring. They call it the “Peasant Uprising” or “Wheat Wars.”

And that’s because a terrible drought caused the Peasant Uprising.

A drought means no water.

No water means a terrible crop.

A terrible crop means high food prices and a lower food supply.

And high food prices plus high youth unemployment equals revolution.

The Arab Spring had nothing to do with freedom.

Or the Peasant Uprising. Or the Wheat Wars.

It was about pita bread.

That’s what the Arabs eat every meal with.

And here we go again…

The world faces a global food shortage that rivals the 1930s and the “Dust Bowl.”

The World Bank said:

Even before COVID-19 reduced incomes and disrupted supply chains, chronic and acute hunger were on the rise due to various factors, including conflict, socio-economic conditions, natural hazards, climate change and pests. The impact of the war in Ukraine adds risk to global food security, with food prices likely to remain high for the foreseeable future and expected to push millions of additional people into acute food insecurity.

The UN Food and Agriculture World Food Price Index is still trending at the highest it’s been in the last 29 years.

Even when we look at other peak years (2011 and 2021), we’re still at a record setting pace.

The year 2011 saw the start of the Wheat Wars, which started on the back of food shortages and price spikes.

Food prices remain above this pivotal level from 2011, with more pressure coming. The planting in Ukraine – for obvious reasons – is non-existent and more countries withhold exports.

India has been the latest to put up “gates” around wheat and rice exports to ensure there is enough volume for their citizens.

Diesel and fertilizer prices remain near historic highs. As we head into a pivotal winter season, those prices will likely rise.

Making fertilizer is an energy-intensive process.

And as prices (such as natural gas and diesel) move higher, fertilizer facilities will either pass on the cost or cut utilization rates.

As you can see from the chart below, 2022’s food prices (the thick light blue line on top) are the highest we’ve seen since at least 1993.

 UN Food and Agriculture World Food Price Index 

In Europe, fertilizer production has been curtailed due to the huge spike in pricing as well as to preserve natural gas, so Ze Germans don’t freeze to death this winter.

Those Russian sanctions turned out to be European sanctions in general, and German sanctions in particular.

The U.S. is still one of the cheapest places to do business and local companies, such as this month’s recommendation, can capitalize on their advantaged position.

In comparison to previous supply shocks , our featured company’s price has underperformed the recent price increase.

The market in general is very different today versus previous price spikes , as weather patterns shift increasing drought in some areas and severe flooding in others.

This drives up the price of food and incentivizes farmers to do whatever is possible to increase yield.

Farmers can try to adjust crops or put down additional fertilizer to try to pump up yields.

The only problem is the fertilizer market is facing additional supply issues!

It’s the Potash, Silly!

Russia accounts for more than 80% of the currently forecasted expansion of potash production.

Fertilizer potassium is sometimes called “potash”, a term that comes from an early production technique where potassium was leached from wood ashes and concentrated by evaporating the leachate in large iron pots (“pot-ash”).

According to K+S , the leading German chemical company, “Even in the optimistic case, global potash supply will not return to the level of 2021 before 2026.”

They have the same base case that I have: “all current sanctions remain in force, but some ‘friendly countries’ (that Russia exports to) resume/continue partial trade with Russia.”

By base case, we simply mean the expected case using assumptions we think are most likely to occur.

As you can see from the chart below, potash supply will remain well below 2021.

Shifting crops profitability will allow farms some flexibility to increase purchases to increase struggling underlying yields.

The tailwinds on fertilizer consumption remainrobust as populations continue to fall and arable land per capita drops.

This is being complicated further as yields on the current land is also stagnating as the population rises at a steady rate.

The shift in crops and planting requires more potash over the coming years, which will support pricing around the world.

This is a positive tailwind for fertilizerproducers, but the U.S. and Canada are in the best positions given the rising costs in Europe.

China posted a big shift higher in food prices, and the government has already said they will do everything in their power to defend against food inflation.

This will support additional restrictions on exports of both food and fertilizer to bring prices lower and ensure farmers have availability of product.

  • High food prices continue to boost CPI:
  • Food prices jumped 7.0% year-on-year last month.
  • The price of pork spiked 51.8% year-on-year – the fastest this year.

China and the Emerging Markets

The below chart puts into perspective of the issues facing Emerging Markets, and China is facing very similar problems.

Emerging markets have already seen a bigger food price surge versus what they experienced during the Arab Spring (Peasant Uprising).

This will put more pressure on governments to try to maintain some semblance of normalcy through subsidies.

The World Bank has been issuing near-term loans and grants to help countries to pay farmers, and to finance fertilizer, food purchases, and other investments to increase yield.

Even as some of the below prices have fallen, they remain above the pricing regime that brought about the Arab Spring.

When we break this down into “real terms” when evaluating food prices, we’re right back to levels not seen since 1974.

Food prices will remain high as fertilizer prices recover back to their highs.

Everything from diesel to fertilizer are sitting at near record-highs that will keep farmer costs elevated. The cost increases will be passed on to the consumer.

As I have said before, food shortages don't happen suddenly.

They take time to work through storage and state reserves.

The imminent global food shortage startedout slow in the end of '19 but accelerated in '20-'21 with droughts/floods/pests/logistics…

Ukraine-Russia is just the topper to a situation that started several years ago.

The issues have been compounding since the end of 2019, and now the world is in a terrible position with another projected terrible year of crops before we even consider the impacts of Russia-Ukraine.

If you remember, Russia agreed to open a “grain corridor” for Ukrainian wheat for humanitarian purposes.

But now, that’s been called into question. Russia realized most of that grain wasn’t going to Africa. It was going to Europe.

So, the Russians “paused” their involvement initially. Then they followed the pause by saying they won’t renew the deal.

This prevents Ukraine’s wheat from reaching the global markets.

Not only are we losing flows of grains and food oils from the embattled countries, but fertilizer as well.

The below chart helps to put into context just how much the world has relied on Belarus and Russia (the yellow column) for the macro-nutrients our crops require.

As crop yields slip further around the world (especially in the U.S.), we will need more nutrients to push yields to their maximum.

The problem iswe have stretched our soil to the breaking point, and we will need to find solutions to address the weakening yields.

The Corn Issue

Corn yields have been flat since 2013, while the world’s population just crossed over 8 billion this week.

This puts stress on all forms of food production from fish to grain availability.

When we zoom in a bit closer, you can see the issues the U.S. has faced since 2013 with little to no uplift over that period.

It isn’t just corn, as winter wheat in the U.S. is off to its worst start in history.

There is still some time to make up for the shortfalls, but it’s unlikely we can even eek out a modest yield given the slow start.

The drought monitor in the U.S. shows the underlying problems facing the U.S:

The USDA world-ending stocks (see the chart below) have drifted lower and given the broad drought issues plaguing core growing regions across the U.S., Argentina, Europe, and in most parts of Asia.

By the way, I don’t mean world-ending as in the world’s going to end!

World ending stocks are the amount of a commodity in inventory or expected to be in inventory worldwide at the end of a marketing year (for example, August 31,19XX).

India has put up gates limiting the export of wheat and rice with China purchasing as much food from the global market as possible.

Substitution Isn’t an Exact Science

Alternative foods to the corn (white line), soybeans (blue line), and wheat(white line) above continue to move lower as well limiting the replacement products for individuals who can’t afford expensive soybeans or the rising price of wheat.

Just now, there was a headline highlighting that barley prices have skyrocketed in Canada pulling more corn from the U.S. north.

“Barley prices in parts of Canada have soared 30% since August and are trading near the record highs of 2021 when the nation’s harvest was the second-smallest since 1967.” According to Bloomberg, “Sky-high barley prices are turning Canada’s rare buying-spree of US corn into a habit. The price of the grain used to feed cows has soared due to pent-up demand, driving cattle ranchers to turn to US corn as a cheaper substitute to domestic barley. The shift comes one year after a severe drought withered Canadian grain supplies, spurring a switch in trade flows that led the northern neighbor to become one of the biggest buyers of corn from the US Midwest. “We need corn to fill the hole,” said Jacob Bueckert, chair of the Alberta Cattle Feeders’ Association.”

Logistics and supply chains have been shifting in a major way to address the shortfalls.

There just isn’t enough product to plug all the holes that are forming, which is driving up food and fertilizer prices around the world.

The growing shortfall of fertilizer will be supportive of pricing and incentivize more activity out of North America.

The natural gas shortages have forced over 70% of fertilizer production in Europe to shutter.

“Around a third of European ammonia production which shut down over the summer has reportedly ramped up in October, although overall gas demand remained subdued, ICIS research shows. Other gas-intensive production lines, particularly in the petrochemicals sector, remain closed and unlikely to return online soon unless there is a substantial decline in feedstock costs and an improvement in economic factors. Overall daily average gas demand data for the EU and UK show that consumption increased some 11% in October ’22 compared to September ’22 but the uptick was lower compared to a 24% month-on-month rise over the same period last year.”

The shift in production is pulling more product from the U.S. into Europe while Canada exports more AMS (ammonia) to backfill what is flowing across the Atlantic.

Given the shortfalls in Europe and inherent profitability on exports, we’ll see these flows hold firm and create growing pockets of shortages.

Europe doesn’t have the ability to bring back a large part of these plants given the inherent cost of natural gas and broad shortfalls given the lack of piped natural gas.

Not only is there a shortfall from current production, but large parts of the region also relied on Russian imports of ammonia.

The loss of product from Russia plus what’s missing from current utilization cuts will absorb whatever is available in the market (that is, the U.S.) and keep the market tight.

Basic needs are the crux of survival

Or as we like to say at Freedom Financial: Necessity Equals Opportunity.

Economic expansion can’t begin until people not only have enough to live, but excess that can be stored or sold to allow for growth.

For example, if you are worried about your next meal, will you focus on growing a garden / foraging for food, or sitting at a library to study to become a doctor, engineer, writer, or another skilled job?

Food insecurity has become a big problem around the world, with Africa and Asia seeing a steady rise in basic needs not being met.

The below chart is from 2019, so when we factor in prices that are now back to highs, the pain is getting worse.

2009 was when global food insecurity really started.

Now that prices have pushed back to decade highs—alongside a global pandemic impacting salaries and subsidies—the pain is just beginning.

It’s important to note that even without COVID19, the world was already facing several “Biblical”-sized locust swarms, droughts, floods, swine and avian flu, army worm infestations, among other disruptions that were causing yield drops.

As the chart above shows, COVID19 was the straw that broke the camel’s back.

The government-mandated private sector shutdown limited the movement of migrant workers, delayed plantings and harvests, and created bottlenecks at ports.

We have seen an increase in acres planted, but weather hasn’t been cooperative, delaying key planting across places like Latin America.

Planted acres are now expected to fall as soils are depleted, and the cost to rejuvenate them becomes an insurmountable hurdle.

These adjustments take seasons, and with China absorbing massive amounts of grains in the market and dealing with a new round of swine flu driving up prices, poor countries will be left paying up for goods to feed their people.

Nationalism will also become a bigger issue as countries withhold exports, managing volumes and pricing, to make sure their citizens have enough to eat.

We saw evidence of this at the outset of the pandemic, and restrictions remain in place with export quotas and rising tariffs.

Many countries are out of inventory and are relying on shipments to keep their population fed.

Every crop is facing a unique problem and the farmers are desperate… more fertilizer application is the only near term solution.

This Month’s Opportunity: The Mosaic Company

For all the above reasons, from fertilizer shortages to food insecurity, we are recommending the Mosaic Company (NYSE: MOS).

The Mosaic Company is a Fortune 500 company based in Tampa, Florida, which mines phosphate, potash, and collects urea for fertilizer, through various international distribution networks, and Mosaic Fertilizantes.

It’s also the largest U.S. producer of potash and phosphate fertilizer.

Agricultural prices are at multi-year highs with demand increasing rapidly.

Thanks to the war in Ukraine constricting global fertilizer supply, stocks like MOS will advance.

When we look at the global market, Mosaic made some great observations regarding the dynamics underpinning the supply/demand of food:

Global grain and oilseed stock-to-use ratios remain at 20-year lows and early data continues to suggest there may be further downside to total production once the fall harvest is complete. It is important to remember that the market was tight when the year began well before the start of the war and issues over the last several months that further exacerbated the situation.

Mosaic operates in North and South America, which provides it an amount of geopolitical stability.

These locations enable Mosaic to increase total production to about 25 million tons of finished product by the end of 2023.

They have taken the initiative to expand production in key areas at only a step up of about $100 million in new project costs.

That’s a clear double-digit return, even if fertilizer prices fall.

Mosaic Stock Price vs UN Food Price vs North America Fertilizer Prices

There is concern around the world about the availability of fertilizer, which is causing some countries to horde and others to source product ahead of schedule.

The current hoardingand “excess buying” is prematurely tightening the fertilizer supply and providing support for pricing well into 2023.

Mosaic’s strategic position in the Americas means they are the viable and well-placed option for farmers looking to replace Russian volumes and grow yield.

When we look at how Mosaic uses their capital, we see they’re reducing leverage, keeping CAPEX flat, and returning cash to shareholders.

Finally, I want to reiterate that we remain committed to our capital allocation strategy. Later this month, we expect to retire the remaining $550 million of long-term debt that completes our goal of $1 billion of long-term debt reduction. Our Capex expenditures expectation this year remains unchanged at $1.3 billion, and all remaining free cash flow after these commitments will be returned to shareholders through dividends and share buybacks.

The company’s sensitivity to price will provide upside potential for its revenue and strength of earnings in 2023.

Given the market shortages, mixed with Chinese export controls and limited Russian/Belarus exports, Mosaic will be the beneficiary of price appreciation in North America, Brazil, and India.

As described by Mosaic management:

With the strong demand in Q4 and getting into 2023, we continue to see the supply constraints for both Phosphate and Potash. On phosphate, we expect that Chinese export control will continue as we get into 2023 as the Chinese government to ensure the domestic supply availability and their farmers to be able to get fertilizers for their food production. And there's very little new capacities coming online in Phosphate production in 2023. Similarly, to Potash, we envision Belarus and Russia's supply will remain constrained in 2023. And the alternatives as well [ph] will not be able to ramp up quickly to offset the continued constraints from that part of the world.

They see an uplift to margin of about $40-$50 a ton in a flat pricing environment, which is unlikely to occur given the broad shortfalls in the market.

This comes from some of their costs improving while shortfalls persist providing a floor in prices with clear upside that falls directly to the bottom line.

This puts a lot of upside potential to earnings as the price of fertilizer rises over the planting season.

Prices have come down a bit, but it’s driven more by seasonality than by a drop in demand.


Buy Mosaic (MOS) between $45 and $50. We’re looking for at least a 50% upside to a target level of $75 over the next 6 to 9 months.

All the best,

Freedom Financial News