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Tickers in this Article: POT, MOS
Commodity prices have skyrocketed in the past few years, something investors certainly need to be aware of. Many investors may be wondering if the run is just getting started, or if there is actually a commodity bubble looming? We're going to look at the trend in more detail, and show that agriculture commodities are one area where demand can be counted on for years to come.

Growing Up Big and Strong
It's truly amazing to see the performance results in many commodities over the past year. Fact is, higher oil prices, combined with soaring demand globally has spurred the greatest runs in the history of commodities. Take a moment to look at the performance results of a few of the industry groups.

Name Performance*
CRB Index +32%
GSCI Agriculture +87%
GSCI Energy +45%
GSCI Industrial Metals +47%
GSCI Livestock -8%
GSCI Precious Metals +2%
* Numbers rounded - May 2007 to March 2008

Commodity Catalysts
While energy and metals have certainly seen great results, the true story is within agricultural markets. It's hard to pinpoint exactly what the pure catalyst for the gains is, but there are a few known causes.

  • Catalyst No.1 - More mouths
    Global demand for food is, quite simply, growing every day. There are currently about 6.6 billion people walking the Earth. However, by 2025, that number will be crowding 8 billion, and by 2050, UN estimates predict a global population as more than 9 billion, an almost 40% increase from today's level. The point is simple - more mouths to feed means greater demand and higher prices for food.

  • Catalyst No.2 - More biofuel
    Elevated crude prices and a global move toward biofuels have displaced grains that previously made it to the mouths of consumers. The U.N.'s Food and Agriculture Organization recently said, "100 million tons of cereals are being diverted to the production of biofuels each year. Nearly all of that is corn - 12 percent of all the corn consumed around the globe," according to the Associated Press story "UN Says Soaring Prices Leave Poor Hungry" (2008).

  • Catalyst No.3 - More hoarding
    Many foreign nations are experiencing food shortages and are now doing everything possible to hoard crops. In the story "China Tightens Grip On Grain" (2008) Asia Times said China has an insatiable demand for grains, and it consumed 517 million tons of grain last year. The publication stated, "China also imposed export tariffs ranging from 5% to 25% on 57 categories of major grains and powder products from January 1 [2008]." But China's not the only one imposing tariffs on outgoing agricultural commodities. India and Russia have also imposed higher agricultural tariffs this year too. (To learn more about tariffs and protectionism, see What Is International Trade?)

With all of the aforementioned in mind, it's hard to believe that agricultural prices will stop rising anytime soon, at least, not unless the price of crude cools to a point where biofuels become less attractive - something that is not likely going to happen.

Past Performance is no Guarantee
When we look at overall global grain consumption, it's clear that demand will remain strong for years to come. However, one way farmers are attempting to tackle the problem is to "super charge" crops to increase output.

What it all comes down to is fertilizer. In 2007, global fertilizer prices surged over 200%, according to the International Center for Soil Fertility and Agricultural Development (IFDC). However, the run in fertilizer prices isn't just due to blistering global demand; input price increases are also suspect. Natural gas is a major component in fertilizer production, and given that prices per BTU are trading near 52-week highs, fertilizer makers are passing the costs through to consumers.

Companies like Potash Corp. of Saskatchewan (NYSE:POT) are raking in the bucks hand over fist. Since 2003, the Canadian company's stock is up over 1,500%. Surely, with the incredible results seen over the past few years, investors are champing at the bit to see this stock ride higher. However, trading at just over 10-times sales and 8-times book value, the risk of overvaluation is a key concern here. The company is solid and demand is only going to grow in the years to come, but waiting for a pullback before jumping in would be prudent for cautious investors.

Another company with bold performance results is Mosaic (NYSE:MOS), which is up almost 570% since the beginning of 2005 alone. Mosaic also shows elevated price-to-sales and price-to-book ratios of 6.7 and 9.3 respectively. Patience here is most likely the best bet as well, as buying the dips is usually a better strategy than chasing highs. (To learn more about these numbers, see Analyze Investments Quickly With Ratios.)

The Bottom Line
Overall, the global agriculture and fertilizer stories are just heating up. Mosaic and Potash Corp. of Saskatchewan will continue to benefit in the years to come. For now though, it may be a good idea to wait for a little bit of the dust to settle.

For added insight on turning headlines into investment ideas, see Where Top Down Meets Bottom Up and Taking Global Macro Trends To The Bank.

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