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As a general
rule, the most successful man in life is the man who has the best information
Potash producer Agrium (AGU-TSX) just announced earnings of US$506-million in
Q2, or US$3.20 a share - a healthy 37% increase over Q2, 2009. AGU’s
revenue rose 7% to US$4.37 billion as sales volumes soared 860% year over
year (yoy). The company’s share price rose 3.6% after its second quarter
earnings sailed past expectations.
"We anticipate North American crop nutrient demand to be strong in
the second half at both the grower and retail level, due to firming crop
prices, weather-induced constraints on nutrient application this spring ...
and the current low inventory level of crop nutrients in the U.S. retail
system." Agrium Chief Executive Mike Wilson
Potash Corporation (POT-TSX) also announced bullish Q2 earnings of
$472-million, or $1.55 a share, a 253% increase over Q2, 2009. POT’s
share price rose four percent on the news.
“With growing demand for food and supportive crop economics
farmers have been motivated to begin addressing nutrient deficiencies in
their soils.” Potash Corp CEO Bill Doyle
Potash is a major source of potassium. Potassium is found in every plant
cell, it helps plants:
- Grow strong stalks
- Resist
stress - weeds, insects, disease and changes in temperature
- Improves water retention
- Strengthens roots and stems
- Assists in nutrient transfer
- Activates vital plant enzymes
- Ensures the
plant uses water efficiently
- Helps keep
the food you buy fresh
China, India,
Southeast Asia, Brazil and North America account for over 50 percent of the
world’s population and 70 percent of total fertilizer consumption -
over the past 20 years consumption has increased by 85 percent in these
countries.
Brazil is an agricultural superpower and accounts for seven percent of world
potash consumption. Brazil is the largest South American consumer of potash
(its fertilizer market represents 65% of all South American consumption) and
has a consumption growth rate of 7.6% per year. The countries soils are
potassium-deficient and require potash to remain productive - 90 percent of
their potash requirement is imported.
China's (28 percent of world fertilizer consumption, historically 75 percent
of potash is imported) current grain production is over 41 million tonnes. By
2030 grain demand is expected to triple to 156 million tonnes – meeting
this increased demand will have to be accomplished by huge potash rich
fertilizer applications. Domestic consumption of meat has risen nearly
seven-fold in 30 years, while fruit and vegetable consumption is 10 times
what it was just 30 years ago. China’s per capita water renewable
resources are well below the global average.
India has 17 percent of the world’s population and only 11 percent of
the world’s arable land. It’s renewable water resources are, per
capita, well below the global average. India has no potash of its own and is
the world’s biggest potash importer - the countries potash use is
increasing at over 5% yoy.
Southeast Asia has a combined population of 517 million and while they have
abundant water resources the countries making up this region all collectively
suffer from a shortage of arable land. Indonesia, Malaysia, Vietnam, Thailand
and the Philippines account for seven percent of world fertilizer consumption
and have no indigenous potash.
The US and Canada are major suppliers of food to the world and are among the
most efficient agricultural producers. They consume 14 percent of world
fertilizer production.
Potash demand is increasing yoy. To meet this increasing demand it’s
been estimated that two million new tonnes of potash are required each
and every year - the equivalent of one new mine being built every year.
And potash is still being significantly under-utilized in many countries.
It’s been estimated that the world's leading emerging economies Brazil,
Russia, India, and China (collectively known as the BRIC’s) will
require an additional 28 million tonnes of potash annually to maximize
fertilizer application rates - the equivalent of 14 new potash mines. Potash
inventories in June 2010 were reported to be 34 percent lower than June 2009.
Since 1950, the world’s population has gone from 2.5 billion people to
6.7 billion. No less than 75 million people a year are added to this number,
the world’s population is expected to exceed 9 billion by 2050 -
according to the United Nations. This will lead to an increased need for
staple crops for human and livestock consumption. The United Nations Food and
Agriculture Organization (FAO) projects that more than 85 percent of this
additional demand will come from densely populated, developing countries
– Asia and Africa.
From the peak of 1.814 billion acres in 1981 total harvested area of world
grains is down 6.8 percent. Arable land covers just 3% of the world's
surface. Based on historical data arable land decreases by 25 million
acres annually - it is estimated that one hectare (one hectare equals 2.47
acres) of productive land is lost every 7.67 seconds.
This shortfall between grain demand and supply has led to a significant
decline in global grain inventories.
Major droughts in the world’s bread baskets (major crop growing
regions) are exacerbating this problem and causing serious crop failures,
prices for wheat on the Chicago Board of Trade in the last month have risen
by 20% - concerns about the condition of wheat crops in Europe and
drought (the worst drought in more than 30 years, highest temperatures
in 130 years and raging wildfires) in Russia has led to a significant increase
in wheat prices in July – Russia is one of the world’s top
exporters of grain responsible for 10% of global output.
Kazakhstan is one of the world’s top five grain producers and the
countries production will be cut by a third, seven million tonnes, because of
the same drought that effects Russia.
The Ukraine is
the world’s third largest grain exporter and has also been hard hit by
the drought. Production and exports are forecast to be down by 20 percent in
2010 with possible more downward revisions coming.
Needless to say
all these considerable challenges are causing some strain on world food
markets. Commodity analysts are predicting sharp price hikes for essentials
such as bread, pasta and grain-fed poultry.
The world's options for increasing food production are limited by the supply
of land and water. Either we must a) place more of the world’s land
under cultivation or b) increase yields on existing acres, or, much more
likely, both of the above.
It seems to this author that a huge increase in the application of
potash-rich fertilizers will have to happen - the increased use of plant
nutrients is the most effective way to increase crop yields in the face of:
- An increasing global population
- Water shortages
- Decreasing arable land
- Improved and diversified diets
Conclusion
Fertilizers replenish the nutrients in our soil after harvest. These
nutrients are mostly taken up by and removed with the harvested crop. These
nutrients must be replaced, given back to the soil, in order to ensure next
year’s crop. This replacement of nutrients is not an option, sure
farmers might skip a year, even two, but…
“Failure to feed the fields is a trend that can’t last for long.
While the global recession severely impacted fertilizer demand, the science
of food production has not changed. The significant volumes of potash and
phosphate that have been mined for crop production must be replaced to
sustain the productivity of the soil.” Potash Corp.
Today fertilizers are responsible for between 40 and 60 percent of the
world’s food supply. The United Nations Food and Agriculture
Organization estimates that the total world demand for agricultural products
will be 60 percent higher in 2030 than it is today.
"They key to really understanding what's driving this globally is the
pressure on food production and the shifting diets that you're starting to
see in China and other areas in southeast Asia. In terms of what's driving
our business, that is it. The volumes, I think, reflect the fact that there's
tremendous pressure on potash globally. It's a very tight market and it
really all comes back to the intense pressure on food production around the
world. Farmers are trying to bring their yields up and really, fertilizer is
a critical part of that." Denita Stann, Potash Corp's director of
investor relations
Unlike many resources, potash markets are never disrupted by political
interference. Food shortages trigger social and political instability and all
governments fear a hungry populace. So the future for potash giants like
Agrium and Potash Corp. looks good. But these are mature companies (combined
market cap: $43 billion) which have already experienced major growth spurts.
An investor would almost have to think a massive surge in earnings by POT and
AGU bodes well for the few small junior companies with big potash resources.
Potash should be on every investors radar screens.
Is it on yours?
Richard Mills
Aheadoftheherd.com
Richard is host of www.aheadoftheherd.com and invests in the
junior resource sector. His articles have been published on over 60 websites
including - Wall Street Journal, 24hGold, Kitco, USAToday, Safehaven,
SeekingAlpha, The Gold/Energy Reports, Gold-Eagle and Financial Sense. If
you're interested in learning more about specific junior gold/silver stocks
and the junior resource market in general please come and visit his site at
www.aheadoftheherd.com
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