Extreme market volatility can be either a boon or bane for traders. I personally look to avoid trading in volatile and uncertain market conditions. Instead, I would prefer accumulating stocks, ETFs, commodities, bonds and other asset classes (which have strong fundamentals) in my long-term portfolio.
This article focuses on potash and its long-term fundamentals. Subsequently, the article also brings forward some investment options in the industry.
Potassium (potash) is the third major plant and crop nutrient after nitrogen and phosphorus. Potash is used during the cultivation of a wide variety of food crops owing to its properties, which improve water retention, yield and nutrient value in crops. Clearly, my fundamental base for putting forward a positive case for investment in potash is dependent on the agriculture sector.
Therefore, before I discuss more on the demand-supply scenario for potassium, I would like to discuss the long-term fundamentals of the agriculture sector.
Each year, the global population is increased by about 75 million and by 2020, almost 800 million are expected to be added to the current world population. In line with this population growth, the world crop consumption is expected to increase from 3.4 billion tonnes in the year 2000, to 4.9 billion tonnes by 2020 (according to the USDA).
However, the arable land per capita is on a gradual decline and the trend is expected to continue in the foreseeable future. At the same time, the pressure on water supply is enormous with growth in population and economies. It is estimated that in the developing world, the per capita renewable water resource has declined by 50% in the last four decades.
(Click charts to expand)
I emphasize both these critical factors here because it underscores the importance of increasing crop yield. As mentioned earlier, potash helps in improving yield and water retention. Therefore, the long-term demand is firmly in place for the fertilizer.
The yield in developing countries such as China, and India, is still significantly lower than the developed world. For the food security of nearly 2.6 billion people in these two countries, the agriculture sector needs to revamp itself. Not surprising, I expect the major demand and price drivers for potash to be emerging markets. Just to put things into perspective, the total fertilizer demand is expected to increase from 168 million tonnes in 2010, to 212 million tonnes by 2020.
The chart below summarizes the major demand drivers for potash in the long term.
The data below from FAO further underscores the fact that Asian demand will be robust for potash in the long term.
On the supply side, high quality and economically minable deposits of potash are largely concentrated in few countries. Potash is produced only in 12 countries with Canada, and Russia, accounting for 81% of the production. This effectively means that all the major potash consuming countries are heavily dependent on imports. This gives the major potash producers a better bargaining power and ensures that potash prices would remain relatively stable in the marketplace.
Moving forward to specific investment opportunities, I would consider the following options as good for long term.
Global X Fertilizers/Potash ETF (SOIL) - The investment seeks to replicate, net of expenses, the Solactive Global Fertilizers/Potash index, which tracks the performance of the largest and most liquid listed companies globally that are active in some aspect of the fertilizer industry
Potash Corp. (POT) – is the world’s largest producer of potash by capacity. The company is well positioned to cater to the growing demand for potash globally and is an excellent buy and hold for long term
Mosaic Co. (MOS) – is a relatively riskier bet than POT. However, it can be added to the long-term portfolio on any meaningful correction