Commodities in 2013: 2 Ways to Cash in on the Increasing Food Demand

Mosaic’s planned expansions, which should boost sales and cash flow steadily in coming years, is just one catalyst for this stock. Shares should also get a lift in the summer of 2013 when the company will no longer be restricted in what it can do with a current $3.2 billion cash pile sitting on its balance sheet. That should set the stage for a robust hike in its dividend, or a major stock buyback program.

Yet in the near-term, this remains as an out-of-favor stock, as key trading partners such as India and China have been slow to sign new contracts in order to gain leverage in pricing conditions. The delays are expected to end this winter as these countries seek fresh long-term supply agreements.

The share price pullback has left Mosaic trading at very appealing levels. Shares trade for around 6.5 times projected 2013 EBITDA, on an enterprise value basis. This multiple shrinks below six if you look out to 2014 and beyond, when Mosaic’s output begins to rise meaningfully.

A broader fertilizer play
If you would rather exposure to more than just potash and phosphate, then check out Sociedad Quimica y Minera (NYSE:SQM). Not only is the company a major producer of phosphate and potash, but Chemical Mining also is a leading miner of lithium, which is used in today’s hybrid and electric car batteries. The company is also a leading global producer of iodine and sodium nitrate, which have myriad end-market uses.

That exposure to a broad number of markets has led to steady growth in operating profits, which have almost tripled from about $250 million in 2007 to $730 million in 2011. Merrill Lynch’s analysts predict operating profits will surge 20% this year and another 10% in 2013. Equally important, this high level of profitability can be maintained because Chemical Mining has some of the youngest (and largely untapped) mines in the industry.

Risks to Consider: The Chinese government negotiates potash and phosphate prices on behalf of its domestic farmers and could seek new contracts at lower prices. This would negatively affect Mosaic’srevenue from that country.

Action to Take –> With fertilizer stocks, it’s important to heed the long-term global trend in farming. Many countries are boosting their agricultural production capacity to feed an ever-hungrier population that consumes a rising amount of food with each passing year. This makes farm inputs such as phosphate and potash an essential long-term commodity, which should help Mosaic and Chemical Mining to post solid annual results year-after-year.

This article was originally written by David Sterman, and posted on StreetAuthority.