With populations rising in both developed and emerging markets, producing enough food to feed the world's citizens is becoming a paramount issue. The United Nations' Food and Agriculture Organization (FAO) estimates the world's population will grow to over 9 billion during the next 40 years. Increasing purchasing power and an expanding middle class in the emerging world are giving new consumers the ability to consume more meat, dairy and grains than ever before. Meanwhile, in the developed world, new advances in healthcare are allowing its populations to live longer. To feed our expanding world, food output will have to increase by roughly 70% over the next four decades just to keep up with demand. While all the links along the agricultural food chain will see gains, investors may want to focus on the first step in that chain for long-term gains.

TUTORIAL: Commodity Investing 101

More Than Just Manure

When most investors think about agriculture, high-tech seeds, irrigation equipment and pesticides come to mind. However, the very "unsexy" trio of potash, nitrogen and phosphate could be the home run for a portfolio. Forming the backbone of agriculture, the fertilizer market has been on a tear, as food prices have risen across the globe. As more food is required to feed expanding populations, growth in the fertilizer market is almost assured.

Global demand for fertilizer has grown at more than 3% annually over the past 15 years. Analysts expect that number to accelerate as populations in emerging markets grow. Asia and Latin America currently account for almost two-thirds of global fertilizer use. China and India together consume nearly 40% of the world's fertilizer. Grain yields in India are less than half of those in the U.S. The bulk of that gap is due to improper or insufficient fertilization, despite India's fertilizer imports. According to analysts at Scotiabank, worldwide potash shipments are expected to grow 11.5% this year. Meanwhile, overall demand is expected to rise to 200 million tons of fertilizer consumed by 2014.

This escalating demand is also having its way with prices. The average U.S. farm price of fertilizer has surged over the past 12 months, and in some subsectors it has exceeded price spikes recorded in 2008. Overall, the USDA reports that price inflation for fertilizers has far outstripped the rate of income increases U.S. farmers have experienced over the past two decades. The price increases help underscore the longer-term trends. Rising food prices and continued worldwide shortages, coupled with greater demand for new protein, will help underpin the fertilizer sector.

Betting On the First Step

As the amount of arable land continues to shrink in the face of growing populations, fertilizer consumption will undoubtedly increase. For investors, betting on this first vital step in the food chain could be the best way to play agriculture. Broad-based ag funds like the Jefferies TR/J CRB Global Agriculture Equities ETF (NYSE:CRBA) do have some exposure to fertilizer companies. However, the new Global X Fertilizers/Potash ETF (NYSE:SOIL) follows a basket of 29 different firms associated with the sector, including leaders Potash Corp. of Saskatchewan (NYSE:POT) and Agrium (NYSE:AGU). However, there are plenty of individual choices as well.

Chemical & Mining Co. of Chile (NYSE:SQM) offers an interesting play on two different themes: food production and alternative energy. The company is a leading producer of fertilizers as well as the world's largest lithium producer. The company is poised to see growth on these two avenues in both the emerging and developed world.

For investors looking for a dividend play in the fertilizer space, MLP Terra Nitrogen (NYSE:TNH) might do the trick. Terra is yielding 14.6%, but much of that is due to higher net earnings and a one-time working capital benefit associated with its new operating agreement with fellow fertilizer and general partner CF Industries (NYSE:CF). (Learn more about MLPs in Discover Master Limited Partnerships.)

Finally, potash producer Mosaic (NYSE:MOS) could be a buy. Earlier this month, the company notified Potash Corp. that it has satisfied its obligation to supply its rival with potash under a previous tolling agreement. Analysts estimate that this could free up a million tons of potash each year that could boost per-share profits by 50 cents for the company.

Bottom Line

As world populations continue to grow, the need for more food will grow as well. For investors, adding the backbone of the agriculture sector to a portfolio is a prudent move. The fertilizer sector will continue to see great gains as the world requires greater crop yields. The previously mentioned stocks, along with Intrepid Potash (NYSE:IPI), make ideal additions to play this trend. (For related reading, see Potash Profits Growing Like A Weed.)

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