It's been tough going for the various makers of critical agricultural nutrients over the second half of the year. At the beginning of the year, fertilizer producers were riding high as global growth continued to rise and food demand increased. Potash prices soared and the companies were big growth stories. However, as potash and phosphate prices have weakened, fertilizers makers seem to be out of favor with investors. Share prices have fallen and earnings have dipped. While growth has certainly slowed in recent months, the long-term promise of the sector is still there. The current market and sector malaise offers a great opportunity for investors to load up on the sector.

Guide To Oil And Gas Plays: We've got your comprehensive guide to oil and gas shales in North America.

China and India Weigh in
The story in the potash, phosphate and nitrogen sector over the last six months or so has been the lack of demand stemming from the world's key drivers - China and India. Despite their robust and growing populations, the recent weakness in the global economy has taken the bite out of fertilizer demand in the two nations. Both are the leading users of potash as the two BRIC countries try to feed their people.
China and India have bought little potash from North American producers Potash Corp (NYSE:POT), Agrium (NYSE:AGU) and Mosaic (NYSE:MOS) through their Canpotex joint venture in the second half of the year as supply contracts expired. China has postponed purchases due to large domestic supplies, while weakness in India's currency (the rupee) as well as recent cuts to government subsidies has curbed buying.

That has caused other big buyers to postpone their purchases of fertilizer as they expect prices for crop nutrients to decline even further. Needless to say, the recent lack of demand from the two nations has hurt earnings from a plethora of fertilizer producers.

Yet, there's hope on the horizon. The new year promises to hold more global demand for fertilizer. Potash Corp. estimates that its global shipments of potash will rebound in 2013 to between 57 million and 58 million tons. That's an approximate 14% increase versus 2012 numbers. Likewise, the firm estimates that 2014 will see a similar increase as food shortages and wonky weather will increase overall demand for plant nutrients. This echoes similar statements from other analysts.

Pushing the line out further, the growth in potash, nitrogen and phosphate demand is almost assured. Asia and Latin America currently account for almost two-thirds of global fertilizer use. As populations in these emerging markets grow, more food will be required. Demand for the backbone of agriculture will undoubtedly grow.

SEE: A Primer For Investing In Agriculture

Betting on Dirt
For investors, betting on this first vital step in the food chain could be the best way to play agriculture. Broad-based agriculture funds like the iShares MSCI Global Agriculture Producers ETF (ARCA:VEGI) do have some exposure to fertilizer companies. However, the Global X Fertilizers/Potash ETF (ARCA:SOIL) offers a direct way to play the sector. The exchange traded fund tracks 23 different fertilizer giants including the Canpotex members along with CF Industries (NYSE:CF) and charges just 0.69% in expenses. Overall, the fund makes a great single ticker bet on the need for more fertilizer and growing food production.

Investors looking for big dividends may want to consider the fertilizer plays as well. There are several that are structured as master limited partnerships (MLPs) and throw off some serious distribution payments. More importantly, many of these plays are heavy into nitrogen - the one sector of the fertilizer market that hasn't seen big price declines. Rentech Nitrogen Partners (NYSE:RNF), CVR Partners (NYSE:UAN) and sector stalwart Terra Nitrogen (NYSE:TNH) yield 8.7, 7.6 and 7.7%, respectively. All in all, the nitrogen MLPs offer a great way to profit while the broad fertilizer sector works out its China and India issues.

SEE: A Guide To MLP ETFs (And ETNs)

The 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 and now could be a great time to do just that. The previously mentioned fertilizer stocks, along with Intrepid Potash (NYSE:IPI), make ideal additions to play the sector.

At the time of writing, Aaron Levitt did not own any shares in any company mentioned in this article.

Related Articles
  1. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  2. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  3. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  4. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  5. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  6. Mutual Funds & ETFs

    Buying Vanguard Mutual Funds Vs. ETFs

    Learn about the differences between Vanguard's mutual fund and ETF products, and discover which may be more appropriate for investors.
  7. Mutual Funds & ETFs

    ETFs Vs. Mutual Funds: Choosing For Your Retirement

    Learn about the difference between using mutual funds versus ETFs for retirement, including which investment strategies and goals are best served by each.
  8. Mutual Funds & ETFs

    How to Reinvest Dividends from ETFs

    Learn about reinvesting ETF dividends, including the benefits and drawbacks of dividend reinvestment plans (DRIPs) and manual reinvestment.
  9. Stock Analysis

    What Exactly Does Warren Buffett Own?

    Learn about large changes to Berkshire Hathaway's portfolio. See why Warren Buffett has invested in a commodity company even though he does not usually do so.
  10. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  3. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  4. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  5. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  6. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>

You May Also Like

Trading Center