When food prices rise, farmers can afford more fertiliser.
That, in turn, leads to higher prices for, and bigger sales of, fertiliser feedstock.
One of those, potash, is now showing signs of entering an upward part of the price cycle.
With signs that muriate of potash (MoP) prices are on the up, explorer Davenport Resources (ASX: DAV) is advancing its projects in the former Democratic Republic of Germany (or East Germany).
The location of the projects means cashed-up Davenport has the European market on its doorstep. And to cement its position in the region company has strengthened its management team.
Last year MoP contracts were typically being settled at around US$215 per tonne.
The latest market data indicates that potash miners are now able to lock in deals at around US$250/t.
With corn prices up 60% and wheat rising 40% over the past six months, its a positive signal for the agricultural sector.
The potash sector has had its fare share of hurdles in recent years. Going back as far as the 2008 global financial crisis US banks, as one of their response measures, stopped loans to farmers wanting to buy fertiliser.
Davenport in important potash region
Davenport’s projects are in the South Harz potash district of Germany, which was once one of the world’s most important MoP producing regions. It has mining history spanning more than 120 years.
For Davenport, it looks increasingly as “being in the right place at the right time” situation.
Potash mining there declined under communist rule due to overmanning and poor management.
But Davenport is reviving that once great potash centre.
In November, institutional and sophisticated investors along with existing shareholders injected a fresh $10 million into Davenport.
The company claimed the money would placed it “in its strongest financial position to date”.
This strengthened the balance sheet sufficiently to continue rapidly advancing its potash projects with their combined 5.3 billion tonnes of resources — the largest in Western Europe.
Signs that potash sales are in recovery mode
Because it is not a traded commodity, sometimes potash information is somewhat patchy.
But it seems from reports that latest research indicates the global potash market size is likely to grow about 4.5% a year through to 2027.
And it is the food industry that is generating this, with global food supply under pressure from increasing population and rapid urbanisation.
Adding to scenario is shrinking arable land areas (due to those very same rising populations and urban growth gobbling up acreage). This means that the world’s farmers have to grow more with less land — and fertilisers provide the only means of doing so.
The existing potash industry in Europe produces about €200 million (A$314 million) worth of potash a year, with mines found mainly in Germany, the United Kingdom and Spain.
But these mines between them produce only about 78% of the European Union’s potash needs — 4.3Mt per annum of the 5.5 Mt consumed.
Also markets outside Europe
Then there is the market outside Europe.
While European suppliers are up against competition the big three — Canada, Russia and Belarus (with Israel and Jordan also big in potash exports) — Davenport said recently it believes it can re-establish Germany as an international potash power.
Until 1914 Germany supplied almost all the world’s potash, its production rising from 2,293tpa in 1861 to more than 1.225Mtpa in 1925.
Germany remained the world’s only potash producer until the beginning of the 20th century.
The country now supplies only 4% of world potash and (as of 2016) is at number eight in world rankings (after China and Chile, but ahead of the US and UK).
Late last year Davenport announced it had a large JORC resource of the fertiliser nutrient magnesium sulphate at its Nohra-Elende project within Harz.
Reviews of 300 historical drill holes underpinned an inferred resource of 768Mt at an average magnesium sulphate grade of 8.1%.
The magnesium sulphate is contained within the mineral kieserite of which 72Mt has been identified.
Kieserite is marketed globally in three forms depending on the water content. The most common form, used predominantly in agriculture, is magnesium heptahydrate (also known as epsom salt).
Magnesium sulphate can be sold in pure form, blended with potash (to produce MoP), or reacted with MoP to manufacture potassium sulphate (or sulphate of potash).
Germany needs a replacement source
Germany is the sole producer of mined natural kieserite. However, ore reserves are being depleted and a replacement source is required.
The only other significant source is China — but that country produces magnesium sulphate synthetically in a process using hot acids.
While fertiliser is the driving end-use, potash is also used as feed for animal growth as well as in manufacturing of ceramics, soaps, and glass.