We have focused on agriculture this week with the ongoing announcements of new ammonia projects and the commodity crop prices and the overall index shown below are some of the key drivers of the activity in fertilizers but also are helping Ag equipment demand and we discuss the Deere results in today's daily report. We do not see how the trends in the chart below correct quickly and the profit through the farming, fertilizer, ag chemicals, and equipment chain should remain high in the US, at the expense of the consumer-facing high food prices (second chart below). We would need some coordinated medium-term policy to encourage moving more land in the US into agriculture, and this is especially necessary if we also intend to pursue bio-based fuels and materials. There has been much discussion around energy security over the last couple of months, but we think it is a much broader security discussion than just energy. Governments need to become much more accommodative around many aspects of production, food, energy, materials, etc. This accommodation can come with tighter emissions standards and emissions costs, but the primary objective should be to encourage more local production of many different things.
Today's apparent exceptions are in sectors very focused on energy security and transition, as we noted in our most recent Sunday Thematic, and agriculture, where crop shortages are driving up prices and demand for yield-enhancing inputs. In the OCI results below, we see a company doing well, despite having impacted assets in Europe. Still, we also see some potential upside in methanol as we head into the European winter, with the possibility that methanol is used as a fuel, essentially as a carrier for methane, and a workaround for constrained LNG infrastructure. As a fuel, it is not directly substituted for methane in any application, as it is a liquid, but some energy users might be able to adapt, and a $30 per MMBTU natural gas price in Europe can cause you to be quite creative. Of course, the methanol export opportunity for the US will depend on the US natural gas price remaining well below the price in Europe. For more see today's daily report.
The pricing effect is very evident in the IFF results and projections, highlighted below. The company projected higher revenue expectations for the year but no increase in EBITDA with that higher revenue. We expect this trend to continue through at least the next couple of quarters, even if energy prices do not rise any further, as we believe that there is still some energy-related pass-through to come in many sectors. As the ammonia chart below shows, inputs in the agriculture/food industry keep rising.
In our Sunday Thematic to be published this weekend we are focused on business lines that will still look good in an economic turndown versus those that are more vulnerable, and ASIX may find itself spread across both buckets. The momentum in agriculture is very strong and even with a quick resolution in Ukraine, we could see high prices for crops and farm inputs for years as it will take a long time to correct recent imbalances and the Ag markets were already tightening before Russia invaded Ukraine. This and natural gas shortages (see today's daily report) should keep upward pressure on ammonia and ammonia derivatives pricing. On the other hand, any slowdown in consumer durable/discretionary spending will likely negatively impact nylon. A faster resolution in Ukraine would likely be negative for the Ag names as even if it takes a while to correct crop and fuel imbalances, the stock market will likely look through that and start focusing on eventual more normalized markets.
We reflect back on our BASF comments of last week and see Covestro falling into the same trap, by underestimating the potential slowdown in discretionary spending in Europe (and the US) and consequently putting too much hope into revised guidance. At the same time, we are not sure what would be gained by painting a picture of doom and gloom, but we would hedge much more overtly if we were offering guidance around the business outlook today.
We show the correlation between soy prices and crude oil in Exhibit 1 in today's daily report, but note all the higher prices in the Exhibit below for corn, soy, and canola. This is providing a good backdrop for the crop protection industry, as seen in Corteva’s numbers. Farmers can afford to spend more to improve yields. We expect this trend to continue as demand for food will continue to grow and we will see incremental demand for fuels and materials.