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03/12/2012 7:15 am EST
Granted potash may be as sexy as it sounds, but without it, your supermarket wouldn't have very much in the produce section. With rising populations and standards of income, we need all the food we can produce, says Nathan Slaughter of Scarcity & Real Wealth.
There has been some temporary softness in the fertilizer market, but I expect demand to return vigorously by the end of the year.
Mosaic (MOS) is scaling back potash production over the next three months. But that isn't a reflection of the market's supply-demand fundamentals—it's a cautious move made in response to dealers that are tapping existing inventories and holding off on new purchases.
Mosaic is expecting sales volumes to pick up noticeably in the near future. In fact, management believes we'll see "record-setting" global potash shipments in 2012. The company is actually in the middle of a major expansion that will boost annual potash production capacity from ten to 15 million tons.
You don't spend $5 billion to expand output without a pretty bullish view of future demand. And Mosaic certainly isn't the only optimistic voice.
The International Fertilizer Industry Association recently issued a bullish forecast calling for global fertilizer consumption to hit 178.3 million tons in the 2011-2012 crop year. That would mark an increase of more than five million tons from last year.
US farm income cracked the $100 billion umark for the first time in 2011. So there's plenty of cash on hand for critical inputs such as crop nutrients.
Actions speak louder than words. So while I like Mosaic's expectations for robust fertilizer applications this season, I love the fact that management is already raising dividends in anticipation of stronger cash flow.
This isn't your token 5% or 10% hike. The annual distribution has been raised from 20 to 50 cents per share, an increase of 150%.
The potash market isn't at full strength. But this investment thesis is more about what's happening over the next few years, not the next few weeks. Plus, it's usually more rewarding to buy in anticipation of stronger commodity demand, rather than after the fact.
This dividend hike is a good reason to reiterate my positive outlook for MOS shares. I remain an enthusiastic buyer of Mosaic, and believe the shares are headed back into the $70s.
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