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.

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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.)

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