Currently, there are around seven billion hungry people inhabiting our planet, but that number is forecasted to rise to nine billion by 2040. With populations rising in both developed and emerging markets, producing enough food to feed the world's citizens is becoming a paramount issue and recent events have led to an unprecedented opportunity to play that rising food demand.
That opportunity lies within the potash, nitrogen and phosphate miners and producers.
As one of the largest cartels of potash producers have agreed to disband, the entire fertilizer sector has been thrown into turmoil. That’s caused share prices to plummet. For longer term investors, that drop could signal one of the best buying opportunities in decades.
SEE: Don't Dismiss Fertilizer
A Big Break-Up
The potash sector was hit with a bomb shell as the Belarusian Potash Company (BPC) -a joint venture between Belarus’s Belaruskali and Russia’s Uralkali- decided that they would end their mining cartel. The group- along with Canada’s Canpotex- were responsible for 70% of the world’s potash production and worked in tandem to help keep prices for the critical fertilizer from floating too much.
However, with the cartel now ending, potash prices will be subject to more market forces and could dramatically fall in the short term. Analysts now peg that the end of the BPC joint venture could send the price of potash down to the $300 per metric ton range. That’s about a $100 drop from current prices and about $540 lower than potash’s peak reached in 2009.
Needless to say, stocks within the sector didn’t take to the news quite kindly. Leading producers Mosaic (NYSE:MOS) and Potash of Saskatchewan (NYSE:POT) decreased 24.5% and 23%, respective on the news. While several non-potash based fertilizer stocks also saw huge declines as investor’s worried about spill-over price decreases in nitrogen and phosphates.
Opportunity Presents Itself
While lower prices for potash and other fertilizers aren’t necessarily bullish catalysts for sector, investors shouldn’t give up hope. The main reason being that production of the vital feed ingredient is still in the hands of just a few players. Post breakup, 50% of global potash capacity will be controlled by Canpotex- including producer Agrium (NYSE:AGU) -and Uralkali. Canpotex has already signaled that it has no desire to break-up its J.V. That’s still a hefty majority of the market controlled by just a few individuals.
Secondly, a tumble in potash prices could also halt several of the numerous global potash project currently on the docket like BHP Billiton’s (NYSE:BHP) $14 billion new mine in Saskatchewan. Meanwhile, Uralkali estimates that falling prices will to consolidation among the industry. Stalled projects and rising M&A will eventually help keep supplies low and raise prices.
All of this is in the face of rising long-term demand. Trade group the International Fertilizer Industry Association (IFA) predicts that fertilizer consumption will rise by 11% by 2016. Likewise, researcher Freedonia predicts similar findings. The group predicts that global demand for fertilizers will increase by 3.8% per year through 2014, with the Asia/Pacific region leading that demand.
Time To Buy
Given the longer term demand for fertilizer and just how beat-up stocks within the sector are, investors may want to take a look at some of the values now available. Potash of Saskatchewan for example is now sporting a 4.8% dividend yield and P/E of just 11. Likewise, CF Industries (NYSE:CF),which has nothing to do with potash and producers nitrogen/phosphate fertilizers- fell roughly 3% on the BCP break-up news.
Perhaps the best way to profit from all of this is through the Global X Fertilizers/Potash ETF (NASDAQ:SOIL). The ETF tracks 26 different fertilizer focused firms, including the Canpotex trio as well as global players such as Norway's Yara (OTCBB:YARIY). The fund sank roughly 9% the day the BCP news hit the wire. However, it represents the best all-in-one play on the sector given that it covers all areas of fertilizer production and could be the best way to capitalize on the sectors long term rebound. SOIL charges just 0.69% in expenses.
SEE: Choosing An Agriculture ETF
The Bottom Line
While the Belarusian Potash Company (BPC) cartel’s break-up shook the entire fertilizer industry, the long term picture is still rosy. That’s helping create some of the best values in the commodity sector today. The previous picks, along with beaten down producers like Terra Nitrogen (NYSE:TNH), make ideal ways to play the sector.
Disclosure: At the time of writing, the author did not own shares of any company mentioned in this article.