We put nearly 50 billion pounds of chemical fertilizer into US soil annually — that translates to over 2 trillion pounds of nitrates cumulatively in the last 50 years, with at least 100 billion pounds escaping into the natural environment in the form of leaching or runoff.[1] On average, a pound of fertilizer costs farmers 50c, and 25c of that is going to the natural gas industry, and consequently contributing to climate change.[2] How did we get into this scenario?

The Haber-Bosch process of converting gaseous nitrogen from the atmosphere into a form that holds the ability to integrate into soil and provide crops with nutrients and increased fertility has undoubtedly helped transform agriculture into its modern state. It has played a substantial role in lowering the overall costs of food by significantly increasing crop yields. Alongside this positive development, however, have come observable, negative consequences to the environment.

Issues induced, primarily as a result of nitrogen emissions into natural, and particularly marine ecosystems, include:

- Acidification

- Eutrophication

- Hypoxia in coastal and lake ecosystems

- Algae blooms

- Biodiversity loss

- Nitrate contamination in drinking water aquifers

Underscoring these undesirable effects is the hypoxic zone in the Gulf of Mexico, which is roughly the size of New Jersey. Hypoxia is defined as water containing less than 2 mg/L of oxygen, in other words, a dead zone. Although robust estimates of the costs associated with excess nitrogen runoff in our farm system are scant, some basic, annual figures help give us a sense of the magnitude:

- ~$500M of annual financial assistance from the EPA to Hypoxia Task Force (HTF) States[3]

- ~$1B in lost tourism revenues[4]

- ~$500M in estimated latent consumer demand (from private well owners who don’t want nitrates in their water systems)[5]

- ~$2B in water treatment costs (removing nitrates)[6]

With the US fertilizer industry commanding a profit pool of ~$5.5B from a revenue base of ~$23B[7], this ~$4B in unrealized costs, if internalized by companies who create and sell fertilizer, would put into question the economic viability of offering the product. For the other 25c that is not supporting the natural gas industry, 13c is tied to selling/SG&A costs, and ~8c/~4c goes to the fertilizer manufacturer/retailer in profits, respectively. Further, if government subsidies were realigned to discourage fertilizer use, this would strip ~5c of artificial demand.

If fertilizer companies internalized environmental costs (and farm subsidies were used to discourage chemical fertilizer use), the profit pool would be under pressure

What about crop yields! Estimates peg yields without fertilizer to fall by roughly ~40% depending on the crop.[8] This could be temporary, however, as farms transition towards the use of natural/organic fertilizer. Although this does cause short-term sacrifice, long-term benefits include healthier and stronger soil, in addition to reduced costs — farmers spend ~7–10% of their total expenditures on fertilizer.[9] Encouragingly, there are some options currently being developed that are free from nitrogen leaching. Fertilizer will always remain a critical component to agricultural production — it is thus important to emphasize and utilize available natural options.

The idea that reducing our reliance on chemical fertilizer would be an impossible transition, or that it would put at risk our ability to feed a massive population is misguided. This is particularly true in today’s global context, where 1 in 9 people suffer from chronic hunger and over half of food (measured in calories) is wasted from field to household — in the US, half of this waste occurs downstream (e.g. within the home). Further, the ~$20B+ in annual subsidies to farmers, which represents 1/3rd of their aggregate net income[10], could be tied to incentivizing a transition towards an agroecology approach.

The difficulty in transition primarily lies in long-term capital planning. For long-term investors focused on sustainability, financing this transition may involve a two-step process: 1) recalibrating valuations of companies to internalize the externalities of their products (e.g. environmental costs); and 2) long-duration funding to support farmer transitions.

Sources

[1] USDA. Snyder. Are Midwest Corn Farmers Over-Applying Fertilizer N? Better Crops. 2012

[2] JPM Research

[3] EPA

[4] EPA

[5] USDA

[6] USDA

[7] USDA & JPM Research

[8] Mosaic Crop Nutrition

[9] USDA

[10] USDA