Food for thought and fertilizer for your portfolio
The world isn’t keeping up with the demand for food, says this U.S. advisory, but as it catches up, a group of Canadians stocks will grow.
An odd thing is happening with the most important commodity in the world — food. The laws of supply and demand aren’t quite working.
We aren’t growing enough food for growing populations around the world.
And we aren’t selling enough fertilizer to grow the food because farmers are resisting high fertilizer prices.
What’s more, it doesn’t look like this year’s crops are going to help get supply up to where it ought to be.
And we also know that the biggest fertilizer company in the world has just lowered its expectations dramatically for the next quarter.
Doesn’t look like a very fertile situation for investors. But look ahead, says a top U.S. advisory. Invest in fertilizer stocks, says Mr. David Dittman in Personal Finance — and in one agricultural equipment firm, too.
Mr. Dittman recommends four stocks, three of them Canadian. We should point out that he keeps a close eye on Canadian stocks as associate editor of Canadian Edge and co-editor of the weekly Maple Leaf Memo.
Most important crops
“A year ago, concerns over food shortages were headline news,” says Mr. Dittman. But as the world worked its way through twin economic and financial crises, little was done to ease the pressure on global food supply.
But the world’s population continues to grow. China, India and Brazil are showing signs of getting their economies back on track. New growth will generate more money to spend on food.
“Against this backdrop, agriculture supplies are at multi-decade lows,” says the analyst. “It’s one of the few sectors experiencing shortages.”
Stocks-to-use ratios measure how much is on hand versus how much gets used, he adds. High ratios mean satisfaction. Low ratios mean want.
For two of the world’s most important crops, these ratios are falling. The year-end forecast for corn is 9.1 per cent, well below a previous estimate of 13.2 per cent. The ratio for soybeans is the lowest since 1968.
And here in North America you may have noticed that it’s been a lousy year for planting. All that wet weather has pushed back the season in major corn and soybean regions (like Iowa).
Crops may now face extended periods of hot, dry weather. And of course the later the sowing, the later the reaping. “A long, hot summer could be followed by equally destructive exposure to frost.”
Down that long, hot road are better days for fertilizer stocks.
Hard to find
Farmers are using less fertilizer this season as they resist higher prices. That in turn means lower crop yields.
But that will lead to higher prices for food. That will create an incentive to plant more, and that will mean more fertilizer.
In short, the law of supply and demand will re-assert itself. By 2010, the picture should look much different than it does this year.
One thing hasn’t changed in that picture — the value of potassium as a fertilizer component. This hard-to-find element “provides cover against harsh weather and improves resistance to disease and insects.”
And potassium comes from potash deposits. Without it, growth is stunted and yields are reduced. In the U.S., two-thirds of all potash is used on corn, wheat and soybeans. Since the turn of this century, potash demand around the world has grown by 40 per cent.
But while potash prices have gone up, so have the costs of production. So the big companies are producing less.
The bottom line in the supply-and-demand chain is that the one place where hard-to-find potash is not as hard to find is Canada. We are the world’s leading producer.
Three companies get the biggest share of this agricultural manna.
For growth investors
The three giants of the industry are Canadian firms Potash Corp. of Saskatchewan (TSX/NYSE-POT) and Agrium Inc. (TSX/NYSE-AGU) and in the U.S., The Mosaic Company (NYSE-MOS).
Potash is number one in the world. It often seems to lead the stock market in volatility, too. After making a big run recently, it has slipped down following last week’s announcement that its second-quarter earnings should be much lower than previously expected.
But Potash “is still a great opportunity for growth investors,” says Mr. Dittman. Buy it up to US$130, he says. It’s $95.43 in New York, and $110.30 in Toronto.
Agrium is a buy up to US$56 — it’s $41.04 on the NYSE and $47.75 on the TSX. Buy Mosaic up to US$56, he says. It trades at $45.82.
And don’t forget farm equipment, adds this analyst. His pick is another Canadian firm, Ag Growth International (TSX-AFN; OTC-AGGZF). It has re-converted itself from an income trust to a corporation.
But by either name it makes the right kind of equipment for a weak economy — grain handling, conditioning and storage equipment as well as livestock feeding and penning equipment.
“All farms require much of this equipment at various stages throughout the crop cycle,” concludes Mr. Dittman, “and their low prices relative to other capital equipment such as tractors and combines means Ag Growth’s revenue stream is safe.” Buy up to US$30, he says. It trades at $23.49 over the counter in New York and $27.30 in Toronto.
The world needs more food on more tables. And when the law of supply and demand snaps back into play, this advisory suggests, fertilizer stocks will be growing faster than ever.
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