Following BHP Billiton's (NYSE:BHP) hostile bid for Potash Corp. of Saskatchewan (NYSE:POT), much attention has turned to speculation regarding the outcome of the deal. After Potash Corp's immediate rejection of the bid, the agricultural chemical industry has been filled with further merger talks, lawsuits and extensive forecasts trying to predict the direction of potash price movements.

IN PICTURES: 9 Simple Investing Ratios You Need To Know

Rising Demand
Potassium compounds such as potassium oxide, commonly referred to under the umbrella name "potash", are extensively used in manufacturing fertilizers. Potash improves crop yields by improving the water retention of soil, enhancing nutrient value and even increasing parasite resistance of crops. As of 2010, Canadian potash reserves amount to over 50% of the world's total supply, with Russia and Belarus coming in a distant second and third.

Potash prices have remained fairly stable, hovering around $345 a tonne through 2010. Research conducted by Patricia Mohr at Scotia, however, indicates that the sideways trend may soon change. Brazil has been buying potash for December and January delivery for $410; China has also been entering long term contract to purchase potash at well above current market prices.

There are numerous fundamental factors which can contribute to long term potash price increases. The primary long term driving factors such as a growing world population and a constantly increasing demand for nutritional diets in developing economies will continue to put demand pressures on the resource. As North American potash inventories drop, prices of the valuable resource are likely to increase over the short term due to the imbalance between supply and demand.

Canadian Plays
Canadian potash producers are in a position to capitalize off of short and long term trends in the industry. Smaller companies such as Western Potash (TSE:WPX.V) and Potash One (TSE:KCL.TO) have mining operations in Saskatchewan and both can be identified as either potential takeover targets or pure potash plays. Agrium (NYSE:AGU) has made 10 acquisitions within the last five years and intends to double retail EBITDA through acquisition driven market share expansion. After a failed hostile takeover attempt to acquire CF Industries (NYSE:CF), Agrium may turn to some of the smaller players in the field.

Potash One soared 19% on Tuesday shortly after announcing that its Legacy Project has the capacity to produce 2.86 million tonnes of potash annually for 47 years. Likewise, Western Potash indicated positive results - 40 year mine life, 7.3 year after-tax payback period and $5.22 billion project NPV - in late September from its assessment of its Milestone Property. The relatively cheap production costs associated with mining potash present another investing advantage.

Bottom Line
Peter Lynch suggests investing in what you know. Although most of us, myself included, have neither seen a potash mine nor been to an fertilizer manufacturing facility, we are familiar with our needs for nutritional foods. As millions of people in developing nations around Asia move above the poverty line, they will likely develop similar needs as well. (Options and futures didn't originate with Wall Street power brokers. In fact, it all started with rice. To learn more, see The History Of Options Contracts.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!