Remember the 2012 droughts that ravaged a meaningful portion of the U.S. corn and soy bean crop? If you are expecting them to occur with more regularity in the future, then miners and marketers of the fertilizer component potassium, or potash, could benefit if you turn out to be a better forecaster than your local weatherman.
Taking that math into account, it’s hard to understand why farmers the world over would choose not to utilize this critical soil nutrient in some form or another. As the No. 1 producer of potash in the world, Potash Corp./Saskatchewan (USA) (NYSE:POT) is much more exposed to the ebbs and flows of global demand. It received a nice boost when China finally settled contract negotiations last December, and its spring purchases should be a record. Unfortunately, many forecasts estimate that potash supply should remain well ahead of demand for at least the next five years.
All of that could change, however, with a few more droughts like the one the U.S. experienced in 2012. Because the world depends so heavily on the production of U.S. farmers, it is critical that our yields keep growing in tandem with the worldwide population. If we can maintain a rate slightly ahead of that, it would provide a buffer in down years. As arable land continues to disappear, fertilizer demand is seemingly guaranteed to rise.
Investors who are still nervous about this oversupply weighing on prices could look to Agrium Inc. (USA) (NYSE:AGU) for some potash exposure without the same dependence. The company’s retail segment offers a revenue stream that isn’t solely reliant on fertilizer demand. Its other offerings among pesticides, fungicides, and various application services still benefit from the growth in agriculture but don’t necessarily play favorites between fertilizer nutrients.
For most farmers, one nutrient just isn’t enough. A nutrient that has paired well in the fields with Potash Corp./Saskatchewan (USA) (NYSE:POT) is nitrogen. Companies producing nitrogen-based fertilizers have been experiencing excellent margins over the last year thanks to cheap feedstocks provided by North American natural gas. With more than 80% of its revenue stemming from nitrogen fertilizers, CF Industries Holdings, Inc. (NYSE:CF) turned in a return of 32% in 2012, well above the 11.7% of the S&P 500. Unfortunately, natural gas prices have risen and likely pressured the stock a bit lower. Year to date, shares have underperformed a hot market by 18.6%. One thing investors should look for here is higher-than-expected demand because nitrogen’s supply and demand balance is much tighter than that of potash. If this takes place, prices and, in turn, nitrogen fertilizer producers’ stock will likely rise.
The article Expecting More Droughts? Invest Here originally appeared on Fool.com and is written by Taylor Muckerman.
Taylor Muckerman has no position in any stocks mentioned. The Motley Fool owns shares of CF Industries Holdings (NYSE:CF).
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