Commodity Investments: Fertilizer Stocks and Potash Stocks That Will Profit from Rising Food Demand

The prices of several agricultural commodities continue to strengthen. For example, wheat prices are moving higher on continued dry weather in the U.S. Meanwhile, heavy rains are hurting wheat production in Germany.

Sugar prices are up on lower production in Brazil and higher imports from China. Rice prices are at their highest level since October 2008, a period when high prices caused rioting in some developing nations.

As well, corn prices may regain the highs they hit in June 2011 if forecasts of lower U.S. corn production prove correct.

One of the main reasons why prices of many agricultural commodities are rising is that consumers in developing countries are eating more and higher quality food.

For example, rising meat consumption (especially pork) in developing nations like China puts pressure on grain prices through the use of grain for animal feed; it takes an average of five kilograms of grain to produce one kilogram of meat.

As they grow wealthier, developing-world consumers also buy more processed foods. Like meat production, making processed foods calls for crop-consuming livestock, as well as increased dairy production.

While the trend to higher crop prices appears inevitable, it’s more likely that crop prices will continue to fluctuate—both from year to year, due to unpredictable factors, such as weather, pests, disease or even speculative trading—or over the longer term, due to swings in supply and demand.

While it’s not a certainty that food prices will rise, it’s a safe bet to say that overall food production and consumption will continue to increase.

The best way to profit from that trend is by investing in well-established companies with a broad base of operations that can offset the wide swings of commodity prices.

On the following pages, you’ll find our latest analysis, including buy/sell/hold advice, on four agriculture-related investments. We’ve also analyzed two other agricultural stocks (one Canadian and one U.S.), and an exchange-traded fund that’s made up of agricultural companies from around the world.

Toronto symbol POT, produces potash, phosphate and nitrogen for use in fertilizers. Saskatchewan has the world’s largest potash deposits.
Potash Corp. is a recommendation of our Successful Investor newsletter.

Farmers will likely try to take advantage of higher agricultural prices by increasing their crop yields. That would result in higher fertilizer use and a continued rise in potash prices. In addition, India’s potash inventories are low, and Chinese inventories are expected to fall by early 2012. That should further increase potash prices.

For all of 2011, the company expects to ship 9.6 million to 10.0 million tonnes of potash, up from 8.6 million tonnes in 2010.

Potash Corp. is a worthwhile hold.

Toronto symbol AGU, makes fertilizers at plants in North America and Argentina. It also produces other fertilizers, such as potash and phosphate, from mines in Ontario, Alberta, Saskatchewan and Idaho.
Agrium is a recommendation of our Successful Investor newsletter.

The company sells its products to industrial users and individual farmers through over 900 retail stores in Canada, the U.S., Argentina, Uruguay and Chile. Right now, the company gets 60% of its sales and earnings from its retail stores. That cuts its reliance on bulk fertilizer sales.

Agrium produces most of its fertilizer from natural gas, and today’s lower natural-gas prices should continue to boost the fertilizer stock’s profit margins.

Agrium continues to expand its retail operations. In May 2008, it bought UAP Holding Corp. for $2.7 billion. That doubled its retail division to over 900 stores in North and South America (all amounts except share price and market cap in U.S. dollars).

In December 2010, it paid $1.2 billion for AWB Ltd., which operates 340 farm-supply stores in Australia. AWB gives Agrium a base from which to expand further in the Asia-Pacific region. Agrium later sold AWB’s grain-marketing and trading businesses for $694 million.

The company is also using acquisitions to expand its fertilizer business. For example, it recently paid an undisclosed sum for Nebraska-based Tetra Micronutrients, a private company whose additives make fertilizers and plant nutrients more effective, particularly in poor-quality soil. Unlike competing products, Tetra’s additives are completely water soluble, so more of the nutrients reach plant roots.

Agrium is a buy.

New York symbol ADM, processes corn, wheat, soybeans and other crops into a wide variety of food ingredients, such as flour, oils and sweeteners. The company mainly sells its products to firms that make and process food.
Archer Daniels is also the largest maker of ethanol from corn in the U.S. Ethanol is a gasoline additive that lowers harmful emissions.

The company is a recommendation of our Wall Street Stock Forecaster newsletter.

Political opposition to subsidies (including subsidies for ethanol) is rising as governments struggle with high budget deficits. However, ethanol from corn accounts for less than 10% of Archer Daniels’ earnings, so lower subsidies would have little impact on its prospects. Moreover, the global outlook for ethanol and other biofuels still looks bright.

The company is also well positioned to profit as increasing economic growth in developing countries continues to spur food demand.

Archer Daniels Midland is a buy.

Symbol MOO on the American Stock Exchange, aims to track the DAXglobal Agribusiness Index, after trust expenses. The index includes agricultural companies from around the world.
To be included in the index, a company must be publicly traded, have a market cap over $150 million U.S. and meet certain minimum trading volume rules. The index contains five major subsectors: agriculture chemicals and fertilizers (46.1%), agricultural product operations (27.5%), agricultural equipment (16.2%), livestock operations (7.9%) and biofuels (including ethanol and biodiesel) (2.3%).

The country breakdown of stocks in the DAXglobal Agribusiness Index is as follows: U.S. (47.9%), Singapore (10.5%), Canada (10.0%), Switzerland (7.5%), Germany (4.4%), Norway (3.8%), Malaysia (3.4%), Japan (3.2%), and other countries (9.3%).

Market Vectors Global Agribusiness ETF was launched on August 31, 2007. The fund holds 46 stocks, and has a 0.59% expense ratio. The ETF yields 0.7%.

The fund’s top 10 holdings are Potash Corp. of Saskatchewan (8.5%), Monsanto Co. (8.1%), Deere & Co. (6.8%), Wilmar International Ltd. (6.2%), Syngenta AG (ADR) (6.2%), BRF Brazil Foods (5.4%), Archer Daniels Midland (5.0%), The Mosaic Co. (4.7%), Monsanto Co. (4.7%), CF Industries Holdings (4.0%) and Agrium (4.0%).

The Market Vectors Global Agribusiness ETF is a buy if you want to own an agricultural ETF.