Feeding a Growing World
The current world record for the men’s 100m sprint is 9.58 seconds by Usain Bolt. From the moment Mr.Bolt takes off until he crosses the finish line, approximately 2.6 people are born into this world. With the global population estimated to hit 9.8 billion in 2050, the world has a massive number of mouths to feed, with only a finite amount of resources. Despite past behaviour not being indicative of future performance, positive (and exponential) global population growth is one of the few certainties that exist.
Presently, the top three most populated nations are, in descending order, China, India and USA which make up 18.4%, 17.5% and 4.3% of the world respectively. Of these nations, India warrants a closer look, as it has the largest arable land as a proportion of total area, that is almost twice that of China and USA summed (Figure 1). It is also worth mentioning that agriculture as a proportion of GDP is highest for India (16.5%) compared to the others (8.6% for China and 1.1% for the USA). Furthermore, there is a significant disconnect in the supply-demand dynamics of the Indian fertilizer market. Fertilizer consumption outpaces local production, as seen in Figure 2 and 3.
India as a Case Study
Additionally, India has a much lower fertilizer consumption per hectare of arable land than China (165 kg/ha vs 565 kg/ha) which has a roughly similar agricultural produce portfolio. This underscores the potential for further growth in demand, a trend the Indian government has been striving to complement by spurring indigenous capacity growth. 67% of the operational holdings of arable land is below 1 hectare, indicating a large population of small farming businesses, and a very price elastic demand base.
Hence, fertilizers are tightly regulated and subsidized by the government. In fact, urea is roughly 70% subsidized whereas phosphates and potash are around 30% subsidized. Presently, there is much inefficiency in the subsidy scheme, leading to exploitation of the system by using the subsidized fertilizers for non-agricultural purposes. In response, the Indian government has started various initiatives to reform this subsidy system.
Starting from June, subsidy payments will be made to the manufacturers on a basis of actual sales via point of sale machines, thus improving the cash flow of manufacturers. The crackdown on the non-agricultural use of fertilizers is expected to save the government approximately 10% of the subsidy budget. Since this subsidy method is significantly faster than the post-sales distribution method, the manufacturers with have an improvement in liquidity which can then be utilized for expansion.
This article aims to provide a brief background into the opportunity for investing in a growing population. While there are numerous asset classes available to actualize this thesis, exchange-traded funds (ETFs) are probably the best option as they can track the performance of the entire fertilizer sector. However, there is a current supply glut of fertilizers in most places around the world, manifesting as the weak performance of the Global X Fertilizers/Potash ETF (NYSE ARCA: SOIL). Given this circumstance, the other alternative is to hold a basket of shares of fertilizer manufacturers whose markets still have under-supply, with India being the notable mention.