Fertilizer Wars Heat Up

By Aaron Levitt | September 27, 2011 AAA

As our global population continues to expand at a rapid pace, investors have taken a shine to commodities investing. Everything from steel to coal is expected to see higher future demand as the world continues to modernize and grow. Agriculture remains an interesting long-term bet. Overall, the United Nations' Food and Agriculture Organization (FAO) estimates that the world's population will grow to over 9 billion during the next 40 years. To feed that expanding world, food output must increase by roughly 70% over the next four decades just to keep up with demand. While high-tech solutions like GMO seeds and pesticides will be a major contributor to new supply, the unsexy trio of potash, nitrogen and phosphate could be more of a home run for a portfolio. (For more on the general population, read Demographic Trends And The Implications For Investment.)

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A Land Grab
Overall global demand for fertilizer continues to accelerate rapidly as populations in emerging markets grow. Fertilizer use has increased at more than 3% annually over the past 15 years, with Asia and Latin America currently accounting for almost two-thirds of global fertilizer use. According to analysts at Bank of Nova Scotia (NYSE:BNS), worldwide potash shipments are expected to grow 11.5% this year, with overall demand rising to 200 million tons of fertilizer by 2014.

Like most commodities, potash, nitrogen and the like are mined and have a finite supply. To that end, a variety of nations and firms have begun the race to gain access to the materials and secure a place at the table. Last year, mega-miner BHP Billiton (NYSE:BHP) made a $39 billion unsuccessful bid for major producer Potash Corp. of Saskatchewan (NYSE:POT). After the bid was rejected by both Potash shareholders and the Canadian government, BHP has taken to the task of buying a greenfield mine, which it calls the Jansen project, literally down the road from Potash's operations. This project would be the largest potash mine in the province and should produce nearly 8 million tons of fertilizer per year. However, BHP isn't resting on its laurels. The firm recently announced its intentions to build five new potash mines throughout Saskatchewan, with the first three churning out 16 million tons of fertilizer each year. (For more on failed takeover attempts, read Biggest Merger and Acquisition Disasters.)

The rest of the world is following BHP's example. Together, China and India consume nearly 40% of the world's fertilizer, and analysts expect the pair to start purchasing advanced greenfield projects rather than deal with high prices from the existing big players in the sector. China has already begun making investments in Ethiopia's Danakhil potash basin and the Republic of Congo. Elsewhere, Russian fertilizer maker OAO EuroChem has agreed to buy the fertilizer assets of BASF (OTCBB:BASFY) for $947 million, and Rio Tinto (NYSE:RIO) has entered into a joint venture to develop a greenfield potash mine in southeastern Saskatchewan.

Adding Exposure
With the long-term picture for agriculture still rosy, analysts expect these kinds of buyout deals to intensify. For investors, the fertilizer sector could be a great place to park some of their commodity dollars. The broad-based Market Vectors Agribusiness ETF (NYSE:MOO) has about 25% of its holdings in the fertilizer sector and can be a broad ag play. For targeted exposure, the Global X Fertilizers/Potash ETF (NYSE:SOIL) bets on 29 different global firms within the sector. Top holdings include Chemical & Mining Co. of Chile (NYSE:SQM) and Uralkali. Overall, the ETF should benefit from both the consolidation trend as well as the need for more food.

Finally, best plays for the growth in fertilizer could be the not-so-big, not-so-small duo of Intrepid Potash (NYSE:IPI) and Agrium (NYSE:AGU). Both have good quality assets as well as smaller market caps. The two could function as acquisition targets for a larger firm. Analysts expect Brazil's mega miner Vale (NYSE:VALE) to follow BHP's and Rio's lead into the fertilizer sector.

The Bottom Line
As our population continues to grow, increasing food production will be paramount. To that end, the historically boring fertilizer sector is attracting a lot of attention. A variety of firms and nations have begun the process of securing a steady supply of the materials. For investors, the sector offers a chance to participate in the real growth and building blocks of agriculture. The preceding picks are great way to do just that. (To help you take advantage of the expanding commodities market, check out How To Invest In Commodities.)

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