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The Daily Reckoning

Silver prices rising, and a shortage of 'the other white rock' looms

Silver prices have been surging recently. But even as silver prices climb, another white rock, phosphate, is becoming increasingly precious.

By Chris MayerGuest blogger / April 25, 2011

Phosphate from a mine in Fort Lonesome, Fla., is shown in this March 2008 file photo. Silver prices have gotten much attention, but the "other white rock," phosphate, will soon be in high demand, too. Phosphate is important to fertilize food crops, and the world's phosphate mines are in decline, writes guest blogger Chris Mayer.

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The silver market has been on a tear, no doubt about it. The price of this shiny white rock has soared 50% in 2011, alone. There’s good reason for this huge move (Hint: His name is Ben Bernanke). But I want to tell you about a different white rock – one that’s also quite precious.

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The rock is called phosphate.

There is no substitute for it. It is crucial to the world’s food supply, for which it serves as a fertilizer. And most of the world’s mines are in decline. Foreign Policy magazine recently called it “the gravest resource shortage you’ve never heard of.”

Demand for the rock is growing as demand for food rises. As I write, food prices are surging. Wheat is up 110% over the last 12 months. Corn is up 87%; soybeans, 59%; and sugar, 22%. Soaring food prices helped set off protests in Tunisia and Egypt, toppling regimes and threatening to spread similar uprisings to other poor countries in the region.

There is no quick remedy. Many of the trends that created today’s situation have been long in the making. The world population continues to grow. The amount of arable land per person continues to fall. Gains in crop yields have slowed. And more people around the world are eating a more calorie-rich diet. Prosperity in China, India, Brazil and other places have added millions of middle-class consumers eating more meat and processed foods. Plus, let’s not forget biofuels, which place energy and food in direct competition.

These happenings are no secret. I’ve written about them for the last couple of years. Now these things are on the front pages of newspapers and magazines. And – not surprisingly – the stocks of many agricultural firms have soared.

But there is still one story that has gotten little play from investors so far. It’s about a rock called phosphate, a key ingredient in making fertilizers. It is one of the three main nutrients for crops (nitrogen and potash being the other two).

It’s hard to overstate the importance of these fertilizers right now. About 40% of the world’s food supply depends directly on the application of these three nutrients. Yet the world still applies far less than the scientifically recommended rates.

Phosphate itself is important for root development and water efficiency. But most critically, like all fertilizers, it boosts crop yields. You get more per acre using it than not. In a world where arable land per person is falling and food consumption per capita is rising, crop yields are key.

Plus, consider the path of phosphate prices.

In the last food crisis of 2008, the price of phosphate rock soared to nearly $400/tonne. Then it crashed, like everything else. But it’s been making its way back up. Today, it’s about $150/tonne.

With all that’s happening right now, doesn’t it seem reasonable to think we’ll see another test of that peak? I think so.

The price of many commodities spiked in 2008, and then crashed in 2009, only to subsequently recover. Oil was over $140 per barrel, and dropped below $30, only to rebound strongly. As with oil, long-term demand and supply issues created phosphate’s spike too, and remain unresolved.