Commodities Investing with Agriculture Stocks

Commodities Investing with Agriculture Stocks: Where to Find the
Best Value in Today’s Agriculture Boom
A Taipan Publishing Group Strategy Report
by Andrew Mickey, Editor, BreakAway Investor

Much has been said about emerging economies like Brazil, China, India, Russia and dozens of other countries getting wealthier. And it's true; the world is getting wealthier. There are hundreds of millions of new consumers with the financial capacity to buy cars, cell phones and computers.

All that’s well and good and there are investment opportunities there, but the world isn’t just getting wealthier…it’s getting bigger and fatter. And that’s where the biggest opportunity lies... in commodities investing with agriculture stocks.

For instance, more than 200 million Chinese are officially overweight. That’s 23% of the population. Nearly 60 million of those are officially classified as obese. The world is getting fatter and the global population is only getting bigger.

Right now the world population is about 6.6 billion. By 2030, there’s going to be 8.2 billion people.

And with everyone eating more and more, food demand is going to continue to rise. Currently, the average amount of food eaten per person in the world is about 2,600 calories per day. Those living in the developed Western world, like the U.S. and Europe, consume about 3,200 calories per day. In the east, the Japanese eat about as much.

But that’s just the start. The average daily food consumption is climbing from 2,600 calories to about 3,000 calories by 2030.

That growth is going to spark the world’s total caloric intake 17.1 trillion calories to 24.6 trillion per day. Normally, that kind of growth isn’t too much to get excited about, but the agriculture industry is already coming up short.

Commodities Investing with Agriculture Stocks: It’s the Agronomy, Stupid

The global agriculture market is already stretched to the limit. The problem is there aren’t too many new sources of agricultural land under development.

The only solution is to get more out of each acre of land. 90% of the world’s farmland is already being utilized. So the only way to get more production is with more fertilizer. That’s why we’ve seen potash prices, a critical element in making fertilizer, almost double in the past couple of years.

That’s right, doubled. But we’re still more than 40% away from the all-time high in potash prices and there’s plenty more to go after that.

It all comes down to basic supply and demand for potash. For instance, in the United States, the breadbasket of the world, grain production is up 300% in the past 50 years. Over that same period, potash consumption has soared more than 600%.

Farmers require exponentially more potash just to get an extra bushel of corn, wheat or barley. It’s the law of diminishing returns, and the only solution is more potash.

Subsistence farming, where farmers plant and harvest just enough to feed their families and livestock, was quickly becoming obsolete. Production had to be increased as the number of farmers was declining while the number of city dwellers was increasing.

A massive demographic shift was at hand. Farming was out. Manufacturing, technology, and other capital-intensive businesses were in. None of it would have been possible if farmers had not discovered chemical fertilizers. 

Chemical fertilizers allow farmers to produce vast quantities of whatever crop they want year in and year out without much worry. Advancements in soil analysis have made farming more of a science than anything else. Farmers have to take advantage of technology in order to meet the growing food requirements of increasing and wealthier world population.

Agriculture Stocks: Appetite for Profits in Commodities Stocks

Take China for instance. Although I don’t like the valuations of the Chinese stock market and foresee it all coming crashing down sooner, rather than later, the country’s economy is growing…fast. Even a stock market crash isn’t going to slow it down.

The country’s 1.1 billion residents are wealthier than they ever have been before. In 2004, China was home to a reported 236,000 millionaires. Now, there are more than 345,000 millionaires residing in the country, and that number is only going to grow.

But more importantly, that wealth is trickling down. China’s gross domestic product (GDP) per capita, the most accurate measure of how well wealth makes its way throughout all levels of a population and true health of an economy, is soaring. In 2004, China’s GDP per capita was a mere $1,000. In just three years that has more than doubled to about $2,200.

Remember, China has been through countless economic booms and busts, droughts and famine over the past 50 years, so when times are good, they really like to enjoy it. And when times are good, there’s nothing better than getting a good hearty meal.

But fewer and few Chinese are willing to farm for themselves.
Just like the United States went through 50 years ago, China’s going through the same urbanization. But China’s population is five times what the United States was in the 1950’s, and the same growing pains will be five times as big.

But it’s not just China. All of the once “emerging” economies are now demanding the basic necessities of life. China, Brazil, Eastern Europe, Russia, all of Southeast Asia. It’s happening all over the world. And everybody’s newly found wealth has led to the desire for more things.

And what they want more of -- and absolutely need -- is food. The big difference is now they’re able to pay for it, whatever the price may be.

Chemical fertilizers are the only solution to feed the world’s urbanizing population and growing appetites.

Commodities Investing with Agriculture Stocks : The N-K-P Solution with Saskatchewan Potash

Standard chemical fertilizers are made up of Nitrogen (N), Phosphate (P), and Potash (technically potassium, K). Of course the world’s growing appetite is going to boost demand for all three of these ingredients. However, potash offers the biggest opportunity. Just take a look at the numbers.

Potash Corporation of Saskatchewan (POT:NYSE) is the unquestioned global leader in the industry. However, it just doesn’t produce potash, it also produces nitrogen and phosphate too. So, we just have to take a look at where its profits are coming from to get the most focused and best opportunity in this industry.

Over the past five years, Saskatchewan Potash’s cash cow has been its potash production. Each year since 2002, potash sales have contributed more profits than nitrogen and phosphate put together.

In 2005, Saskatchewan Potash booked gross profits of about $1.1 billion. $700 million of those profits came directly from potash sales. Nitrogen and Phosphate accounted for the other $400 million. That’s more than 63% of gross profits coming from 1/3 of its product line-up. And that proves where their big money is to be made.

Despite booming demand and soaring potash profits, we’ve still only watched the price for potash rise from about $80 per ton to $180 per ton. But when you consider potash is absolutely essential to feeding a growing global population, along with sky-high crop prices, potash could easily rise to $300 or $400 per ton and still be easily affordable for farmers.

Commodities Stocks: Agriculture Prices Soar…Who Cares

Corn prices are up more than 50% in the past two years and show no signs of coming back down. Wheat prices are up more than 200%. Oats and barley too. Chances are, if it’s grown on a farm, the price of it is way up. It’s all from the growing world appetite and limited supply.

Of course higher agriculture product prices that have been increasing your grocery bill month after month aren’t tough on everyone. Farmers that were just scraping by a few years ago, or were forced to parcel off pieces of their farms to ravenous developers for extra money, are now enjoying every trip to the granary to sell their harvest.

If they have to take a little greater expense up front from higher fertilizer costs, they won’t be worried. We’re still in the early stages of a global agriculture boom, and current and future crop prices will make the added expenses more than worthwhile. Potash has highly inelastic demand and prices just don’t matter.

Commodities Investing with Agriculture Stocks: The Biggest Winners

Overall, potash demand is soaring just to keep food supplies in line with demand growth. Clearly, we’re still at the very beginning of the bull run in potash. And the world’s leading potash producer, the Potash Corporation of Saskatchewan (POT:NYSE), is continuing to soar.

POT has already climbed more than 300% in the past two years, but the run isn’t over. Over the next couple of years, POT is set to double again.

In my investment service, BreakAway Investor, we took a look at two much smaller potash plays that are still flying under the radar and haven’t got caught up in the potash bull market…yet. One is up 50% in the past month with plenty more upside to go.

To learn more about this BreakAway Investor opportunity and the other fantastic opportunities Andrew Mickey has discovered in the world of commodities, click here.

Originally published December 21 , 2007.

More articles on Commodities Investing with Agriculture Stocks from Taipan Publishing Group

Profit From the Global Economy's Sea Change

Take Advantage of Global Belt-Loosening

Why the Commodities Supercycle Just Got Longer

Useful Links on Commodities Investing with Agriculture Stocks

Agriculture Commodities are a great investment prospect; be a ...

Agricultural Commodities :: The Market Oracle :: Financial Markets ...

Investing In Soft Commodities Stocks The Global Guru -

Copyright 2007-2008, The Taipan Publishing Group, Taipan Daily and Chart of the Day, 808 St. Paul St., Baltimore, MD 21202. All rights reserved. No part of this report may be reproduced or placed on any electronic medium without written permission from the publisher. Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed.

Back to Taipan Publishing Group's Home Page