Revisiting an Old Ag Favorite

10/22/2008 10:15 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Roger Conrad and Yiannis G. Mostrous, editors of Vital Resource Investor, say a former agricultural high flyer is attractive again.

The global economic slowdown will only be responsible for a relative pause to the great commodities cycle. Prices will adjust, and the best companies will benefit.

The credit crisis has disturbed the commodities markets in ways that few thought possible before. Many big investment banks, for example, have held huge positions in commodities this year. Those that have failed have had to liquidate those massive holdings. That’s pushed prices lower as physical positions are sold. Furthermore, positions held against commodity indexes have also been liquidated on heavy volume because of counterparty risk.

The counter rally the dollar is staging has also been negative for commodities. But that’s not nearly as important as the market dysfunction stemming from the credit crisis. Simply, this isn’t a dollar strong/commodities weak scenario. The dollar had been due for a rally because the bearish sentiment on the currency had reached extreme levels.

Investing in agriculture-related companies has been one of our main themes for the past year, and we still favor it. We’re adding a new stock to the portfolio that should benefit from the increasingly higher global demand for fertilizer. See chart below.

Potash Corp. of Saskatchewan (NYSE: POT) is the world’s largest and lowest-cost publicly traded potash producer, the fastest-growing segment in the fertilizer business. Its potash reserves are sufficient for more than 100 years of production. The company controls about 70% of the world’s excess capacity. Potash is also the world’s third-largest phosphate producer and fourth-largest nitrogen producer. Current phosphate reserves should last more than 50 years.

The company’s low-cost production is an important asset as potash is the highest margin nutrient, and its production process has historically created higher barriers to entry for potential competitors. As a result, the company’s pricing leadership has remained one of its big assets.

Potash Corp has historically been a strong cash flow-generating company that used its cash to consolidate its position through outright acquisitions and by taking substantial stakes in other companies around the world.

As a result, Potash Corp owns 21% of Sinofert Holdings, the biggest producer and distributor of fertilizers in China, giving it even more access in this rapidly growing market.

It also owns 10% of Israel Chemicals—one of the global leaders in chemicals production used for the improvement of agricultural, industrial, and consumer and fertilizer products.

Potash Corp owns 28% of the Jordan-based Arab Potash Company (APC), which develops the minerals of the Dead Sea. APC produces potash for agriculture, industrial potash for the chemical industry, industrial salt, bromine and nitrogen, phosphorus, and potassium (NPK) fertilizers.

The company also owns 32% of Chile-based SQM, a worldwide leader in the production of specialty plant nutrition, iodine, and lithium.

Finally, Potash Corp is part owner of Canpotex—a distribution company and the world’s largest exporter of potash—together with Agrium(NYSE: AGU) and The Mosaic Company (NYSE: MOS).

(Potash stock closed above $73 Tuesday—Editor.)

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