Fundamental Thinking

How an Industry That Helps Feed an Increasingly Hungry Planet Proved Turbulent for Investors

If global demand for food is rising, why did producers of a key fertilizer falter?


Key Takeaways

  • The world’s population will reach 10 billion by 2050, but the amount of arable land will continue to decline. The planet’s growing appetite will not be satisfied without the help of potash and other fertilizers that boost agricultural yields. Given the rising demand for crops used for food, livestock feed, and biofuels, the potash industry might appear to be fertile ground for investors seeking durable and growing businesses. A closer look, however, reveals a nuanced competitive landscape.
  • Historically, potash producers found themselves in a strong position. There are high barriers for newcomers: natural reserves of the mineral are limited, and mine construction is costly and time consuming. Many farmers also consider potash an essential agricultural input for which there is no substitute. In addition, a cartel system maintained high prices by occasionally reducing supply.
  • In mid-2013, however, a major producer left one of two potash cartels and precipitated a price war, as potash companies abandoned agreed-upon production limits and sought to gain market share. Potash prices dropped 20% over the ensuing months. Potash company profits and share prices fell in tandem.
  • There is a lesson in this story. Cartels are fragile due to an ever-present incentive for members to cheat for short-term gain. The temptation increases when a participant believes there are also long-term benefits from defecting. Yet after gains are exhausted or a long-term go-it-alone strategy proves unsuccessful, cartels can re-emerge as quickly as they can break. Given this instability, investors in industries with a history of cartel activity should continually monitor all industry players—including private companies—for signs of impending shifts in competitive strategy.


Contributors

Harding Loevner Analyst Anix Vyas, CFA contributed research and viewpoints to this video.

Disclosures

The “Fundamental Thinking” series presents the perspectives of Harding Loevner’s analysts on a range of investment topics, highlighting our fundamental research and providing insight into how we approach quality growth investing. For more detailed information regarding particular investment strategies, please visit our website, www.hardingloevner.com. Any statements made by employees of Harding Loevner are solely their own and do not necessarily express or relate to the views or opinions of Harding Loevner.

Any discussion of specific securities is not a recommendation to purchase or sell a particular security. Non-performance based criteria have been used to select the securities identified. It should not be assumed that investment in the securities identified has been or will be profitable. To request a complete list of holdings for the past year, please contact Harding Loevner.

There is no guarantee that any investment strategy will meet its objective. Past performance does not guarantee future results.

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