Potashcorp (POT), the largest fertilizer company in the world with dominant presence in potash fertilizer, is a winner riding the agriculture boom for years to come. There are at least half a dozen of reasons why it is a good play but three should suffice to make a case:
1. A surge in more protein-oriented diet in developing countries
This notion is not new. With substantial increase in income and wealth, meat consumption in China has increased by 600% in the last 30 years and there is no end to this growth in sight. According to a study from Purdue University, Chinese pork demand is projected to be 68 million metric tons in 2015. This is a large increase from 2003, when pork consumption was 45 million metric tons, and a 32% increase from 2010 levels.
The demand for a more protein-oriented diet and to a lesser extent, ethanol fuel has been and will be the driving force of a secular growth in agricultural industry. To increase the yield per acre, fertilizers are essential.
2. Barriers to entry means high margins
Other than nitrogen, soil nutrients such as phosphate and potash are scarce resources especially the latter. Only 12 countries have potash mine and about 50% of the world capacity is in the hands of three major players, namely Potashcorp (POT), Mosaic (MOS) and Belaruskali. New capacity takes years and billions of dollar to come in place, giving existing players plenty room to enjoy huge profit margins leveraging the economies of scale in face of heightened demand for the materials.
3. Hot money is favorable to commodity
With the US government printing money and tightening unlikely to be soon and severe, plenty of liquidity is left pursuing riskier assets especially commodity that is mostly denominated in US dollar. That includes agricultural products and thus providing incentives for farmers to apply fertilizers. Materials that go in these fertilizers are just as likely to enjoy the commodity fever. Currently, potash, phosphate fertilizers are priced at roughly half of its peak in 2008 when the crisis brought down everything. It is foreseeable for these commodities to go up by at least another 50% in the next 12 months.
In sum, POT with its overriding presence in fertilizers is set to ride the multi-year agriculture boom and the stock price is likely to go along with 50-100% upside (It is currently at $56). That said, these are not without risks. One of the near-term risks include hard landing in the US or China, drying up excess liquidity quickly once again. As I am writing, stock and commodity markets are going through a technical pull-back that may take a few more sessions to settle. For friends who shy volatility may want to wait till the dust is settled.
Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.
Disclosure: The blog author does not own positions in POT in her personal account as of April 14, 2011