Nutrient-rich soil is essential for farming. Without it, we wouldn’t be able to produce the food we need.
But as our society continues to modernize – and our food cycle changes to accommodate over seven billion people – the world’s soil is becoming depleted of crucial nutrients.
It’s why fertilizer is so important to our food security. But the cost of fertilizer is rising at an alarming rate.
The good news is, for the first time ever, retail investors are now able to trade this critical commodity…
It All Starts With Dirt
Fertilizer might not be the sexiest of commodities to talk about, but it certainly serves a very important role in the world’s economy.
Plants need nutrients – such as nitrogen, phosphorus, and potassium – to grow.
Historically, those nutrients have been found in soil – the foundation for everything on earth. Soil also regulates carbon and water cycles, in addition to growing food.
Before industrial and municipal recycling came about, most human waste went right back into the soil. So the nutrients used to grow food went right back into the ground.
Today that natural cycle has been replaced with what we hope is a more sanitary process, particularly when factoring in all of the prescription drugs and pathogens in our systems. As a result, human waste is now transported to bodies of water like oceans and rivers, particularly as the number and size of cities around the world grow.
Now, this doesn’t mean the cycle has been changed permanently. This waste can still make it back to the soil through the great process known as the circle of life. (Starting with fish that can eat human waste, and ending with a predator up the food chain placing the waste back into the earth.)
But that all takes way too much time.
In addition to routing of human waste to water sources, other factors are reducing the global supply of phosphorus and potassium, such as climate changes and food production.
Industrial farming methodologies, for instance, along with biomass burnings have had a significant impact on the supply of phosphorus and potassium.
There is a large body of research on how carbon sequestration – which captures fossil fuel emissions – can build up soil to a point of higher organic matter. But there’s a long way to go in that pursuit, both from an ecological and agronomic perspective.
Thus, as the world’s population grows and more resources are needed to keep society chugging along, the soil used for farming is quickly running out of nutrients.
Finding the Necessary Nutrients
Humans and plants can pull nitrogen from the air, but phosphorus and potassium must be mined or recycled.
Thus, mining for phosphorus (phosphate) and potassium (potash) has become a huge business. As farmers become more and more industrialized, their need for fertilizer increases along with the population they feed.
Unfortunately, phosphate and potash are becoming a depleted resource, like gold.
And, like most other mined commodities, they have seen extreme price volatility over the last decade.
Phosphate rock prices spiked in 2008 (along with the larger commodity complex) as China became a major consumer. After a recovery, prices are now in an upswing. Potash prices have performed quite similarly.
In terms of supply, the biggest U.S. phosphorus mine, the Aurora in North Carolina, will be depleted in 20 years. Meanwhile, nations are competing to take ownership of the world’s balance of phosphorus in places like Morocco and Bou Craa in the Western Sahara.
Finally Harvesting Future Fruit
Until we figure out how to put nutrients back into the soil, there’s the financial marketplace to take advantage of.
Up until recently, if one had a view on the fertilizer market, the only vehicles to trade or invest in were the physical commodity – or the equity of a fertilizer producer.
The former requires major infrastructure. For the latter, your choices are fairly limited as the fertilizer market is largely an oligopoly.
The Chicago Mercantile Exchange (CME) does offer a number of fertilizer swaps, but these are typically utilized by physical fertilizer traders rather than CTAs, hedge funds, or the retail market.
But this past Monday, this gap was finally filled.
The CME launched its first fertilizer futures contracts on the CME Europe exchange. And the timing couldn’t be more perfect.
CME Europe is the CME’s new London-based derivatives exchange and the CME Group’s first wholly-owned exchange outside of the United States.
The exchange offers not one but six different futures contracts. You can trade futures based on fertilizer in three different ports in the United States (Tampa, New Orleans, and the Gulf Coast) and internationally (Egypt, China, and Ukraine).
All contracts are financially settled, which means you don’t have to worry about having tons of fertilizer to deliver, or having piles of it dumped on your front door.
Additionally, they all trade in U.S. dollars. Each U.S.-based contract represent 25 short tons. Non-U.S. contracts are in 25 metric tonnes. Contracts trade at either six or 12 consecutive months forward.
Trades can be executed through ClearPort and CME Globex. Traders already registered with CME ClearPort for U.S. Clearing can have their registrations extended to include CME Europe upon approval.
And, if you really do your homework by following supply and demand fundamentals on a global basis, you may become savvy enough to arbitrage between contracts!