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Commodity Investing: Profit from the global boom in agriculture

Posted December 27, 2007

A Today’s Financial News Research Report: 
Andrew Mickey reveals where to find the best value in today’s agriculture boom.

by Andrew Mickey, Editor, BreakAway Investor

Baltimore (TFN): As emerging-market nations are getting wealthier, their populations are getting fatter.

A case in point, 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 an estimated 8.2 billion people. And with everyone eating more and more, food demand is going to continue to rise.

No time to read? Just watch or listen to the video.

Currently, the average amount of food eaten per person globally is about 2,600 calories per day. Those living in the more developed nations consume about 3,200 calories per day.

But that’s just the start.

It is estimated that the average daily food consumption will increase about 400 calories by 2030. Taking the world’s total caloric intake from 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.

It’s the agronomy, Stupid.

The global agriculture market is already stretched to the limit. The main problem is there aren’t too many new sources of agricultural land under development. About 90% of farmland is already being utilized.

The only solution is to get more out of each acre and the best way is to optimize output 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.

Now, 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 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 to 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.

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 food requirements of growing and wealthier world population.

Appetite for profits

Take China… 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.

Just like the United States 50 years ago, China’s going through the same urbanization. But China’s population is five times that of the United States was in the 1950s and the growing pains will be five times as big.

And it’s not just China. All of the once “emerging” economies are now demanding more than the basic necessities of life. Brazil, Eastern Europe, Russia, all of Southeast Asia… their populations’ newly found wealth has led them to want a lot of things. But what they most is food.

The big difference is now they’re able to pay for it.

(Report continues below…)

 
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The N-K-P solution

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 but it’s potash that offers the biggest opportunity.

Saskatchewan Potash Corporation (POT:NYSE) is the unquestioned global leader. However, it doesn’t just produce potash. It also produces nitrogen and phosphate. 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 combined.

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.

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.

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 its price 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, many 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.

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,Saskatchewan Potash Corporation (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 premium investment advisory 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 already up 50% in the past month with plenty more upside to go.


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Posted by Andrew Mickey · Filed Under Gold and Resources 

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