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How to Profit From the "Fertilizer Wars"

By Peter Krauth, Resource Specialist, Money Morning • March 9, 2010

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Peter KrauthPeter Krauth

There's nothing like scarcity and supply disruptions to fuel violent price spikes. And there's nothing like the basic human needs for food and water to light that fuse.

Today's world food supplies run on razor-thin inventories.

While the food riots of 2008 have all but disappeared from our short-term memories, the threat of them returning grows stronger with every passing day.

According to the World Bank, food prices increased 83% between February 2005 and February 2008. In April 2008, when the United Nation's World Food Programme warned that a "silent tsunami" of hunger was sweeping the globe because of soaring food prices, it was more than just a clever sound bite tossed off by a bureaucrat: It was a warning that the world's poor were being squeezed as increasingly higher portions of their family incomes were being spent on the food they required for their very survival.

Improved fertilizers will be a key to the solution of this problem. And they won't just promote crop growth - savvy investors who fertilize their portfolios will be pleased with their profit harvest.

Let me explain ...

Land Shortages + Demand Growth = Food Shortages

Although commodities - including the grains - entered a secular bull market about nine years ago, if you adjust for inflation back to 1980, soybeans, corn and wheat still remain among the cheapest natural resources around... for now.

More recently, the International Grains Council warned us that global grain supplies are expected to fall by 4.3% in the 2009-2010 growing season.

Right now, sugar prices are near their highest levels in 28 years, and corn prices are being bolstered by rising Asian consumption and supply pinching drought. The Philippines are about to become a net rice importer for the first time in 20 years.

And don't forget about China, which will once again prove to be the "swing vote" in the marketplace supply and demand tug-of-war that establishes agricultural inventories and prices.

Over the past 10 years, China has transitioned from a net producer of certain grains into a net importer. For instance, it's now importing corn for the first time in six years. That's a far cry from 2003, when the Red Dragon was the leading exporter of grains in Asia. The first four months of 2009 saw China's soybean imports rise a whopping 36%, helping push and sustain the price of that commodity to multi-year highs.

But if we look further out at 10-year projections, the supply/demand picture gets even more alarming. According to the U.S. Department of Agriculture's own forecast, "long-term growth in global demand for agricultural products - in combination with the continued presence of U.S. ethanol demand in the corn sector and EU biodiesel demand for vegetable oils - holds prices for corn, oilseeds, and many other crops well above their historical levels."

Meanwhile, current biofuel targets from the developed nations - as well as Brazil, China, and India - could divert more than 10% of the world's total arable land from food production into growth of crops for biofuels. Last year, for instance, more than 25% of the total U.S. grain crop was converted into ethanol to serve as fuel.

This new-and-growing challenge for the U.S. farming sector - which has already been watching arable land give way to development - is no small problem. The American Farmland Trust recently warned that here in the United States, every 60 seconds, two acres of agricultural land is lost to development. The Earth Policy Institute indicates that the U.S. area devoted to roads and parking lots covers roughly 16 million hectares, nearly as much as the 20 million hectares devoted to growing American wheat.

This growing scarcity of arable land isn't just a U.S. problem. This past June, China decided to halt a reforestation program for fears the initiative could help the country run short of marginal farmland needed to keep its people fed.

In less-developed nations, productivity is a major issue. That's because their farming methods only achieve a meager 10% of the industrialized world's productivity levels. And yet, developing nations are the main drivers of food-demand growth.

So what's the solution to the world's ongoing food shortages and impending crises?

Like anything this complex and geopolitically charged, there's no single answer.

But one thing is certain - fertilizers will have the biggest impact.

Fertilizers: Ag Panacea/Investor-Profit Catalyst

Until recently, most investors probably thought the word "potash" referred to something that got consumed at a college frat party.

The fact is, potash is a key agricultural ingredient - the unsung hero of food production.

Potash fertilizers increase crop yields, plants' water retention, and disease resistance.

And this staple of the food-growing process is about to move back into the limelight, along with agricultural resources.

Last fall I attended the Second McGill Conference on Global Food Security. One of the panelists, Dr. Hafez Ghanem, assistant director-general of the UN's Food and Agriculture Organization, said the world's population is likely to reach 9 billion people by 2050 - an increase of 2.3 billion. Most of that population growth will be centered on developing nations. The countries most successful at reducing hunger will do so via increased agriculture investments.

But to meet this expanding demand, we'll need to increase current food production by 70% from current levels - and that's before we redirect any agricultural production toward biofuels.

It sounds like a major challenge. But as most longtime investors understand, challenges breed opportunity.

It's estimated that fertilizers have such an impact on agricultural productivity that they're actually responsible for 40% to 60% of the global food supply.

Nutrients such as nitrogen, phosphorus and potassium are embedded in fertilizers. They replenish soils in harvest and add nutritional value to food - to such a degree that farmers can't do without them, at least not for long. Each year, the United States exports roughly 80 million tons of grain that contains nitrogen, phosphorus, and potassium. The only way to replenish these nutrients in the soil - ensuring its fertility - is to employ fertilizers, making them essential.

As countries modernize and their populations become increasingly affluent, they also tend to eat better-quality foods. That means that their diets start to include more fresh fruits and vegetables, which require growers to employ increasingly larger quantities of fertilizers. In fact, the International Fertilizer Development Center says that "no country has been able to expand agricultural growth rates and eliminate hunger without increasing fertilizer use."

The bottom line: Potash is back

"Fertilizer Wars"

Potash fertilizer prices have had a healthy run, climbing from 2003-2004 levels of about $100 per ton to eventually peak at roughly $1,000 a ton in 2008, when numerous crop prices were hitting all-time highs. But like most other basic foodstuffs, potash prices have fallen back to earth.

Last December, the Belarusian Potash Co. struck a deal with China at $350 a ton, setting a what some analysts described as a "price floor" for potash.

As it turns out, those analysts may have been right. In mid-February, North American manufacturers' potash inventories were reported to have fallen sharply in January. With spring planting around the corner, and overseas sales on the rise, potash dealers stepped up their supply restocking efforts. Farmers had cut back on consumption as a reaction to higher prices. But that hurt crop yields and crop quality. After nearly a full year of fertilizer underutilization, robust demand is returning.

Just recently, Canpotex - the fertilizer-sale consortium for North America's largest exporters [Potash Corp. (NYSE: POT), Agrium Inc. (NYSE: AGU), and The Mosaic Co. (NYSE: MOS)] - inked a deal with India at $370 per ton, fueling speculation that the previous $350 a ton European-Chinese deal marked a new bottom.

Not surprisingly, merger-and-acquisition (M&A) activity in this sector has been sizzling - so much so that some analysts are referring to the wheeling and dealing as the "fertilizer wars." CF Industries (NYSE: CF) has made a $4.1 billion bid for Terra Industries Inc. (NYSE: TRA). Agrium has been hunting CF for nearly a year. Recently, Vale (NYSE: VALE) acquired Bunge's Brazilian fertilizer operations.

And in the past several weeks, BHP Billiton Ltd. (NYSE ADR: BHP), the world's largest mining concern, bought Athabasca Potash Inc. (PINK: ABHPF). But considering BHP's desire to be either No. 1 or No. 2 in whichever fields it chooses to play in, the odds are good that it has one of the big North American potash producers within its sights.

Retail investors should do the same.

As the global economy normalizes and food demand rises, look for a supply shock to hit the grains complex - and, by direct extension, the potash-fertilizer market, too.

Remember, the food shortages that led to riots have not gone away. They're on hiatus -but only temporarily - and could potentially erupt anew at any time.

In my view, you still have a chance to get in near the ground floor in the last sector to join the secular-commodities smorgasbord.

Potash, Agrium or Mosaic could serve as the dessert to the ongoing commodities banquet.

News and Related Story Links:

  • Money Morning News Analysis:
    Six Ways to Protect Yourself - and Profit - From a Global Food Crisis That's Here to Stay
    .
  • Money Morning Special Investment Research Report:
    Commodities: The One Profit Play Investors Can't Afford to Ignore.
  • United Nations World Food Programme:
    Official Web Site.
  • International Grains Council:
    Official Web Site.
  • The World Bank:
    Official Web Site
    .
  • Money Morning News Analysis:
    Six Ways to Profit From Guru Jim Rogers' Prediction That Sugar is Sweeter Than Gold
    .
  • Reuters AlertNet:
    Philippines says may import rice as storms hit crop
    .
  • Wikipedia:
    Tug of War
    .
  • Earth Policy Institute:
    Official Web Site.
  • U.S. Department of Agriculture:
    Official Web Site
    .
  • Biodiesel.org:
    Biodiesel 101/Biodiesel Basics.
  • Wikipedia:
    Arable Land
    .
  • American Farmland Trust:
    Official Web Site.
  • Wikipedia: Potash.
  • CNNMoney.com:
    CF relaunches bid for Terra by topping Yara offer
    .
  • U.S. Geological Survey:
    Potash Statistics and Information
    .
  • International Fertilizer Industry Association (IFA):
    Official Web Site.
  • Wikipedia:
    Fertilizer.
  • Money Morning News Analysis:
    Agri-Biotech Giant Monsanto Moves into its Newest Venture: Biofuels From Prairie Grasses.
  • International Fertilizer Development Center:
    Official Web Site.
  • Second McGill Conference on Global Food Security:
    Official Web Site.
  • United Nations Food and Agriculture Organization:
    Official Web Site.
  • Money Morning News Analysis:
    Food Prices Soar as Farmers Bail on Corn.
  • United Nations Food and Agriculture Organization:
    2050 - A Third More Mouths to Feed; Food Production Will Have to Increase by 70%; FAO Convenes High-Level Expert Forum.
  • Belarusian Potash Co:
    Official Web Site.
  • Bloomberg News:
    Belarusian May Regret Chinese Potash Deal, Doyle Says.
  • Calgary Sun:
    Fertilizer firms say European deal stinks.
  • LegalDefinition.com:
    Mergers and Acquisitions.
  • BusinessWire.com:
    Terra Industries Board of Directors to Review CF Industries' Unsolicited Exchange Offer.
  • InvestorsPlace.com:
    Who Will Prevail in Fertilizer War? (CF, TRA, AGU, POT, MON, MOS).
  • Money Morning Special Report:
    The "Secret" Investing Strategy That's Your Best Bet For Commodity Profits.

Join the conversation. Click here to jump to comments…

Peter KrauthPeter Krauth

About the Author

Browse Peter's articles | View Peter's research services

Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.

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Billy T
Billy T
13 years ago

Brazil should not be included as part of the 10% of farm land growing energy crops. Brazil uses less than 2% of its farm land for sugar cane production. Approximately 10% of Brazil's farm land is now abandoned pasture. I.e. Brazil could increase alcohol production about five fold without displacing any land used for food crops. Get your facts straight .

0
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Ed Marchok
Ed Marchok
13 years ago

I read recently that increasied crop yield is related to reduced nutritional value of the crop. Is this accurate? If so, is there an equation like net energy (i.e. the energy used to produce energy – e.g. ethanol) present in the agricultural yeild world?

Thanks

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Reply
Leon
Leon
13 years ago
Reply to  Ed Marchok

What you read is not accurate for corn. Higher yields and fertilizer generally improve the nutritional value of the crop because without the nutrients the plant cannot effiiently fill the kernal to its potential. There are differences in genetics (varieties) that along with weather events have a big influence on the quality of the grain.
As to the energy in vs energy out corn based ethanol yields 1.67btu out for every 1 btu in. This ratio is continueing to get better as corn and ethanol production efficiencies continue to improve.

0
Reply
Bob Dickey
Bob Dickey
13 years ago

Billy T,

Brazil is not getting its biofuels from sugar cane. It's coming from soy beans…

Bob D

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Reply
Lou Elwell
Lou Elwell
13 years ago

There is no denying fertilizer is important to the world's food supply, but it is definitely NOT the panacea it is made out to be.

Synthetic fertilizers do not "replenish soils"; they reduce the soil's organic content which is harmful: http://www.grist.org/article/2010-02-23-new-research-synthetic-nitrogen-destroys-soil-carbon-undermines-

Synthetic fertilizers to not lead to "better quality foods," but rather to lower quality foods — i.e., fewer nutrients — see the section on Trace Mineral Depletion — http://en.wikipedia.org/wiki/Fertilizer

Synthetic fertilizers require significantly greater amounts of water which is critical since agriculture (in the U.S.) already uses 70-80% of the annual water supply and fertilizer run off is responsible for "dead zones" in numerous bodies of water around the world, such as the Gulf of Mexico and the Chesapeake Bay.

The most important item to mention is synthetic fertilizer is simply not sustainable. Other methods of fertilizing, such as soil enhancement with microbes that extract nitrogen and other nutrients from the air and soil — http://www.popsci.com/environment/article/2009-07/8-farming-solution-help-stop-world-hunger?page=3 — hold much greater promise.

The argument for using fertilizer is the yield, however, natural fertilizers (such as the one mentioned in the Popular Science article) can actually increase yields beyond what synthetic fertilizers achieve.

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Reply
Tom Gulley
Tom Gulley
13 years ago
Reply to  Lou Elwell

I'm not sure where you are getting your information on "synthetic potash". Potash is a naturally occuring nutrient, with major deposits in Canada and New Mexico. The product in Canada is mined (near Saskatoon) from an old sea bed about a half mile underground. Being an old seabed, the mined product is very high in salt, which damages crops, so the salt is removed by seperating it out with water, basically floating it out.. The downside enviornmentally is the mountain of salt that is produced, but that does bring down the cost of salt as it is a "byproduct" of sepereating it from the potash… So, this naturally occuring potash product is not "synthetically " produced,, neither is phosphorus, which is also mined.. There are two major phosphorus mines, one on the coast of North Carolina and one in Florida.. You should see some of the artifacts recovered from those mines.. some giant sharks teeth and bones,(which I don't consider synthetically produced either.. ) "Building Potash in the soil" is also hard to do, and depends on the soil type, cation exhange capacity, and base saturation of the soil… Most soils in the US can hold only enough potash for a few high yielding crops, but soils in a natural state don't require "additional" potash because there is no "crop removal" I don't disagree with the fact that we can add nutrients by other means than the fertilizer bag, but not on a scale large enough to feed the increasing population with our decreasing land base. Why in some towns now, there are rules about keeping free range chickens and hogs in town, even if just ot provide "fertilizer" for the vegetable garden…There is no easy answer, but population control is going to be the next hot topic we'll be discussing…not where the potash to produce our food comes from.

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Reply
Daddy Paul
Daddy Paul
13 years ago

What a great read. We have come a long way from just dumping manure on our fields.

0
Reply
Richard
Richard
13 years ago
Reply to  Daddy Paul

Manure and other natural firtilizers didn't depleat soils as do the processed chemical type firtilizers. We might be in for a situation where we might be eating more and being nutritionally deficient.

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Reply
Cal Van Dyke
Cal Van Dyke
13 years ago

Your statement that NPK application increases yield and nutrients is only partially true. While yield is increased using chemicals, the nutrient levels actually decrease. I know that personally by testing the produce. The higher the yield using chemical fertilizers the lower the nutrient value. Proof of this is the fact that many dairy producers now require nutrient testing of forage and pay a premium for the higher nutrient valued alfalfa and corn. Human food is not tested as a rule. It is based on color, which is one of the advantages of using chemical fertilizers. Good color is not a true indication of nutrient levels. A better test is the rate of spoilage. High nutrient dense produce is extremely slow to spoil. Unlike the produce on the average supermarket shelves. Nutrient testing is almost nonexistent for produce.

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Reply
Frank Tu
Frank Tu
13 years ago

The only solution for balanced economy and implicitly balanced life can return in this society by eliminating the dangerous socially para-zit financial tyrants and market manipulators including this article. Yours people have ho human dignity to present the truth. For yours only valid option is the free money for foolish statements. Yours human senses are completely out of order yours are able to smell only the poisoned odor of the dirty money. Is extremely sad for the working people whom create real values not papers and scaring slogans as you do. Grab a hammer a saw go out do some valuable work instead of moral contamination as you do new with all your tendentious fabricated misleading statements. Yours people have to be compensated to do nothing instead to do social damages.

0
Reply
r4ds revolution for ds
r4ds revolution for ds
13 years ago

I think Robot may have more positive impact on agricultural.

0
Reply
Martin W
Martin W
13 years ago

Nothing new here.

You should really clarify what you mean by Brazil's bio-fuels. What you said is very misleading.

0
Reply
trackback
BHP Billiton's Bid for Potash Could Spark Surge of M&A Activity in Agribusiness Sector
12 years ago

[…] ground floor in the last sector to join the secular-commodities smorgasbord," he added. "Potash, Agrium or Mosaic could serve as the dessert to the ongoing commodities banquet." The surge in agribusiness activity is symptomatic of a worldwide upward trend supporting […]

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