By Matt Badiali, editor, S&A Resource Report

Thursday, February 7, 2008

"I'm hot for pot."

I thought I misunderstood the words coming out of the telephone. After all, I was speaking to a buttoned-down broker friend of mine.

"I'm sorry," I said, "can you repeat that?" He just laughed.

He was talking about potash, the mineral form of potassium. My friend is a contrarian, but investing in potash seemed crazy even for him. Potash mining isn't exactly on the forefront of resource investing right now. Why would a gold bug like him be messing around with an obscure component of fertilizer? But my friend laid out a compelling investment argument...

Over the last two years, the price of soft wheat rose 163%, hard wheat rose 130%, corn rose 134%, barley rose 78%, soybeans rose 122%, and milling oats are up 56%. Not long into the New Year, corn futures maxed out the daily allowable rise at the Chicago Board of Trade. As you probably know, the ethanol boom created a corn boom, too.

Naturally, these soaring agriculture prices have spurred a boom in fertilizer demand... and this is where potash comes in...

Growing crops requires three key nutrients – nitrogen, phosphorous, and potassium (collectively known as NPK). You can call them "the green monopoly" because the three nutrients are absolutes: Without them, you can't grow crops, and there are no substitutes.

Potassium is the scarcest of the three essential nutrients for agriculture. It commonly occurs in the brine deposits of ancient seas or salt lakes. When these water bodies dried up and were buried, they left behind thick deposits of mineral salts like sodium chloride, gypsum (calcium sulphate), and potassium.

As a mining investor, I'm interested in all this detail because – like gold, uranium, and copper – potassium must be mined... and the activity taking place in potassium is likely the greatest mining boom you've never heard of.

Led by China, India, and Brazil, the emerging economies of the world are consuming more and more grain, which is driving up fertilizer prices. In 2004, a metric ton of potash sold for $200. By 2006, that price rose to $290 per ton. According to Belarusian Potash, which controls 30% of the world's fertilizer market, today that ton sells for $450 and will rise to $500 by March 2008.

The already revved-up demand went into overdrive when the U.S. set in place its harebrained ethanol mandates. This food-into-fuel frenzy has lent support to the potash bull market.

A new crop of junior potash companies is exploring all over the world: Iran, Congo, Thailand, and Russia. Unfortunately, most of these companies carry excessive political risks and lack transparency – not ideal for potential investments.

A more obvious stock to play potash is Potash Corp. But shares are up 330% in just the past two years. And Potash Corp's valuations have spiraled higher, too. Between June 2006 and June 2007, its price-to-earnings ratio shot from about 16 to 36. It sells for more than 42 times earnings today.

Mosaic, another big fertilizer company, saw its share price rise 400% in a little more than a year. Its earnings are on a tear, too. The company's second-quarter earnings rose 600%.

You'll probably make money buying the big fertilizer producers over the coming years... Potash and Mosaic are two of the largest and most well known to institutional investors (there are also several giant Russian producers who have done very well, if you're adventurous). These plays are a little "too obvious" for my taste, though – they've simply run too far to give investors hundreds of percent returns.

Instead, I'm interested in buying small exploration outfits focused on finding potash deposits for biggies like Potash Corp. Just as the majors are gobbling up promising gold deposits, I expect fertilizer deposits to become highly coveted assets over the next decade.

Yes, the world is "hot for pot"... and as 3 billion Asians put more strain on the world's agriculture supply, it's going to get a lot hotter.

Good investing,

Matt Badiali

Further Reading:

The Absolute Best Way to Buy Small Mining Stocks

Investors Can Now Buy Agriculture Through the Stock Market

Market Notes

GET READY TO PAY EVEN MORE FOR FOOD...

The grain markets are starting 2008 the same way they ended 2007... with a richer Asia putting huge strains on thin supplies. Wheat dominates this week's headlines, reaching all-time highs around $10 a bushel on Tuesday. This recent increase comes on the back of a 65% gain in 2007 and soaring corn, soybean, rice, and oat prices.

Like expensive crude oil pushes up prices at the gas station, higher crop prices lead to inflation in the checkout aisle. In its latest report, the Bureau of Labor Statistics says grocery store food prices increased 5.6% in 2007. Bread, beef, milk, cereal – you name it. If it's edible, expect to pay even more for it in 2008.

For a picture of the bull market in grains, we present the PowerShares Agriculture ETF. It's a one-click way to place sugar, corn, soybeans, and wheat into your brokerage account... And it's in an uptrend if we've ever seen one.

PS DB MultiSect Agr

The Greatest Mining Boom You've Never Heard Of

Market Notes

Recent Articles