Investing in a Resource-Constrained World (Part IV)

Originally published on author's blog on April 12.

Recent developments in the general market make it necessary for me to continue this serial article about investing in a resource constrained world. I will be talking about food, agriculture and energy related investment topics this time.

In the part three article, I debunked Mr. Epstein's commodity bubble burst theory. The market quickly proved me right in a strong return of the commodity bull. Oil price jumped to record breaking $118 a barrel. Retail gasoline price now almost $4 a gallon. Food prices worldwide, leading by rice, rocket up and there's panic buying and hoarding of rice and other essential food all over the world. I bought 10 bags of rice three weeks ago before they were all gone. My rice bags made it into national headline news, thanks to Mr. Josh Gerstein. It wasn't a matter of me trying to save a few bucks. It's a matter of availability. Folks holding FSLR stocks tried to argue with me that tellurium is still quite affordable to FSLR. They do not understand it's a matter of availability, not affordability. Why don't folks contact FSLR and demand a specific and quantitative answer on their tellurium supply?

The availability vs. affordability debate will always bring up a very unpleasant topic that must be told, Demand Destruction, and an even more unpleasant but absolutely true topic, Malthusian Catastrophe on population growth. I will talk about it in more details in later articles.

We are entering a phase of severe global economic recession, triggered by the global credit crisis. Normally an economic recession means reduced demand on commodities. But it's different this time. I mentioned that for the first time, we are hitting the natural limit of supply on many non-renewable natural resources. The current crisis is caused not just due to imbalance in the economy, but also due to depletion of natural resources like petroleum, precious metals and base metals. If you are unfamiliar with the topic of Peak Oil, I advise you to buy a copy of Twilight in the Desert and visit TheOilDrum.com. In simple language, when exactly half of a non-renewable natural resource has been consumed, trying to produce the remaining half becomes every increasingly difficult and the annual production will be ever declining, until it's all gone.

Not only oil has peaked, a lot of other natural resources have peaked, or will be peaking soon. Those include helium, which has peaked long ago. You might consider APD for helium play. Copper has peaked and there is only 27 years worth of identified copper reserves left. Nickel has peaked as well. Silver production has long peaked and now there is only 13 years worth of silver left to be mined, based on USGS data.

The PGM (platinum group metals), on the other hand, is no where near peak yet. But I happen to believe the PGM will be the best natural resource play in short and long term, due to rapidly expanding usages and price inelastic nature of both supply and demand. That's why I like the only two primary palladium mining company in the whole world, PAL and SWC, as my most favorite stocks. Please read VM Group's recent research paper on PGM metals.

I have now heavily invested my 401K account into just two stocks, mainly PAL, and then some SWC, as price of both have dropped to a very attractive level, and all the bullish factors remain intact. The South African electricity crisis is becoming worse as they approach winter now, greatly impacting PGM metals production. Not only regularly scheduled load shedding is carried out daily, but ESKOM now stopped releasing info on power alert indicator or the total amount of load shedding, probably for fear of disclosing bad news. Auto sales in China grows at 25% or higher pace, now reaching 10.32 million per annum while the sale in the US only dropped 0.4%. That's a great boost of auto catalyst demand on PGM metals. Year 2008 is a huge Chinese wedding year and lots of ladies will purchase platinum or palladium diamond wedding rings.

I don't understand why people sell off platinum and palladium, knowing there is an industry deficit for both metals. Why should the stock of PAL be pushed to near multi-year low, while the metal prices are near multi-year highs? Dirt cheap stock price of a company of bullish outlook is an excellent buying opportunity. Insiders of PAL, North American Palladium, are buying shares of their own company from open market, according to recent filings found on SEDI.CA. At a time when most company insiders are selling their stocks like crazy, it's refreshing to see PAL insiders buying from the open market with their own money.

Most market participants are incapable of doing quality due diligence research and can only blindly chase stock price momentums, at the end of day the mobs always lose and savvy investors who stick to fundamentals win big time. At this time I do not even own FSLR short positions and have nothing to gain if FSLR suddenly collapses tomorrow. But I must insist on telling the truth of my research on the global tellurium shortage. If you hold FSLR, it's in your own interest to do your own research to find out what's going on, or at least push for FSLR to reveal quantitative information on their tellurium supply and usage. I believe that insisting on objective discussions of facts and logic helps return the market to a healthy state where companies are more fairly priced to their real valuation, instead of being rigged by professional market manipulators on the Wall Street. Do we need more ENRONs or BSCs?

Now return to commodities. Oddly, none of the best performing commodities in recent times are near any geological peak. Food, of course, leads all commodities in recent rally, as well as fertilizers. Price of coal skyrocketed, although the world still has plenty of coal left. Thanks to the coal price rally, stocks like ACI, BTU, BUCY, CNX, JRCC and MEE boomed. JRCC rallied from $4, where I purchased some, to a recent high of $25.37. When I purchased JRCC I figured that coal price may soon start to go up and JRCC may start to turn profitable. It is my belief that when a company goes from not profitable to profitable, the stock price appreciates fastest during the transition period. I figured that JRCC could go to $40 and it would take three years to get there. But the strong coal rally took me by a big surprise. I sold JRCC way too early and was never able to buy JRCC back. A lost opportunity and lesson learned that when you locked onto a bullish stock, you should never be swayed into selling by some temporary corrections.

Related to the global food shortage and food price rally, agriculture stocks are also on fire. Particularly in the fertilizer sector, we see some incredible rally in stocks like POT, MOS, AGU. The rally do seems to be justified, as the global fertilizer prices skyrocketed. What is worth noting is POT, which is the the largest potash fertilizer producer in the world, at about 9 million tons per year production scale.

How high will the rice and other grain prices go? How high can prices of fertilizers like potash go? Even though my 10 bags rice hoarding went on national news, my opinion is the boom and burst cycle of food grain will be relatively short, as proven time and again by history. A great famine is always followed by a great harvest. Oddly, historic records rarely show skyhigh food prices during famines. The reason is food prices are very price elastic. Most foods are consumed by poor people, the majority of the global population. They have no choice but cut back in face of higher prices, because they have limited money to spend. Instead of paying more, which they can't, they buy less, eat something else more affordable, or worse, die off due to hungry and malnutrition. Demand destruction at its cruelest. The population thus is reduced to the level where the available food can sustain. If a global natural disaster destroys half of the world's harvest in one year, then the poorest half of the world's 6 billion population will die off. Next year a good harvest may bring the food production back to normal level but there is no longer 6 billion mouths to feed, and food prices may collapse.

Some argue that as living standard of China and India improves, people eat more meat, hence mandating more food consumption to feed the animals and hence food price must continue to go higher. But food grains are merely taken away from the mouths of the poorest people in order to feed the animals. Wealthy people always eat meat and poor people never have enough to eat. The world is never fair to begin with.

Food is both perishable and completely renewable. The world will never run out of food. The next harvest is always less than 6 months away. So the grain bull market can not last for much more than a year or so. The food price can not go up indefinitely, either. When the food prices exceed the level where the poorest people can afford, they stop going up further. Rich people have money but they only have one stomach. So although I agree with Jim Rogers who predicts many more years of commodity bull market despite of the coming recession, I disagree with his emphasis on agriculture as the most bullish of all commodities.

Relating to the booming food prices, is the booming fertilizer prices. Players in this sector includes POT, MOS, AGU, TRA and a recent IPI. What is particular worth noting is POT, Potash Corporation of Saskatchew, No. 1 of the world in potash fertilizers, No. 2 in nitrate and No. 3 in phosphorite. The skyrocketing stock price of POT is mainly due to skyrocketing potash price. As recent as in year 2002 potash price was as low as $75 per short ton, now the news just break that the Chinese are paying $355 per ton more, raising from last year's $270 to now $625 per metric ton, for a total of 0.75 million metric tons worth of potash. More recent news says $1000 per ton is possible for the second half of the year. Such stunning news of course pushed POT share price to all time high of $216. Michael Pentothere is no bubble here in POT.

I beg to opine differently. When every one is talking about fertilizers and what a great company POT is, it's already too late for late comers and there might be a bubble forming. The world's population has been growing and has been eating for decades. Artificial fertilizers have been used for many decades. Potash supply, demand and price has been flat for three decades. So what has been changed in recent three years? A flooded mine in Russia last year and POT took the monopoly advantage and suspended sale, causing panic amongst the unprepared fertilizer buyers in the third world countries. The global potash market is tightly controled by two entities, Canpotex and BPC, leaving the major fertilizer buyers of China, India and Brazil no bargaining power at all. It's a good lesson learned that major countries like China and India MUST establish national strategic stockpile of fertilizers worth at least 3 years consumption. It is not just a matter of food security, but gives these countries greater bargaining power. I notice that POT has 13.25 million tons9 million tons. This looks like they use their monopoly power to limit supply and price gauge the global potash market.

I think POT is abusing its dominance power for the short term gain, but will hurt itself in the long term, like killing a hen to retrieve all the eggs at once. Natural plantations grow without potash fertilizer, because dead plants decompose on the spot, releasing potash back to the soil. Traditional agriculture removes only a very small eatable portion of the grain plantations, and return the bulk of the plant bodies to the fields, after decomposition or burning as cooking fuel. So the fields remain fertile. In recent years, Chinese farmers abandoned the traditional methods in favor of the easier potash fertilizer, due to increased income and affordability. Excessive application of fertilizers do not always result in the expected result, as potash is quite solveable in water. Rain water washes off the excessive amount of fertilizers, polluting major rivers. Will the Chinese farmers return to more sustainable traditional husbandry methods, in face of skyrocketing potash.

The earth is plentiful in the potassium element. But rich, cheaply produceable potash resources concentrate in only a handful spots. At today's high potash price, many previous uneconomical potash resources all over the world can now be produced profitably. Many countries, including China, has been producing potash fertilizers from salty lakes. For decades, Israel and Jordan are producing a combined 3.77 million tons of potash from the Dead Sea, which is only 8 times saltier than the ocean. All of the salty lakes of the world provide great opportunities to expand potash production. If the price remain even at half of today's price, I don't see why can't any one start to produce potash from the ocean itself. I see a potash price bubble.

POT, a company which has limited room to increase either the production, or the unit price, currently at a high P/E reserved only for companies perceived to have unlimited growth potential, is a clearly over-priced bubble. I would NOT short it here yet because I know the giant inertia force of group mentality of investors. But watch closely for an opportunity to short after the harvest season.

Watch JRCC and other coal mining company for opportunities to buy on the dip, as coal price is still cheap and has some more room to go up. But I believe the PGM metals, my favorite, has way much bigger room for price gain. Just look at rhodium. Went up from $300 to $9000 per ounce in 4 short years. Is this a peak already? Hardly! That's what a commodity of extreme price inelasticity can do.

PGM metals are extremely price inelastic, because few places in the world produce these metals. Russia's Norilsk mine has been produced for decades and now is in steep decline. Largest PGM producer, South Africa, is crippled by a destructive electricity crisis. It can't even maintain current production, let alone expand capacity in the next few years. Outside Russia and South Africa, SWC and PAL are the only primary PGM metals producers. That's the price inelasticity on the supply side. On the demand side, the PGM demand in various applications are booming: auto catalyst; catalyst for oil refinery, chemical industry and fertilizer production; electronic application in MLCC (multi-layer ceramic capacitor), which see one trillion annual production and growing, and in LCD big screen TVs, etc.; Palladium dental fillings; palladium food inserts for preservation; fuel cell applications, etc. etc. PGM metals must be used in all these industries, there is virtually no replacement available, and quantity used per unit of product is usually small so the cost is not a big factor.

Take the dominant PGM metal usage, auto catalyst, for example. Some believe an economic recession may reduce automobile demand and hence auto-catalyst demand. But according to this article, China's auto sale is growing at 21% or higher annual growth rate and now reaches 10.32 million catalyst converter thefts, leading to increased demand on replacements.

Vehicles must have catalyst converters that comply to tightening environmental control regulations, for good reasons. Global air pollution causes more than 4 million unnatural deaths per year, far more than traffic accident deaths. Without catalyst converters reducing the air pollution, the air pollution related deaths could triple to 12 million per year. So the annual consumption of 8 million ounces of platinum and palladium in auto catalyst applications saved 8 million lives a year. One life saved per ounce of metal. How much is one human life worth? How much is once ounce of platinum or palladium worth? No wonder the 2007 Nobel Chemistry Prize was awarded to the work that leaded to the invention of PGM based auto catalyst converters. The scientist have saved a population several times the total deaths of WW II. I am humbled to say that is the most deserving Nobel Prize awarded to a noble research work on the noble metals.

Unlike food, which every one eats, rich or poor, automobiles are only for those wealthy enough to afford them. And unlike fertilizers, for which plants can grow with less or with alternatives, PGM metal usage in auto catalyst converters can not be reduced. Decades of research have already exhausted most thrifting opportunities. Tightening environment regulations probably mean more metals need to be used in order to improve efficiency. It's ridiculous for some industry insiders to spread unsubstantiated technology news, making claims like silver based catalyst converters replacing PGM metals. We all know silver readily reacts with sulphur dioxide in the exhaust gas, rendering it useless. People who can afford to buy a car surely can afford to pay for a few extra grams of noble PGM metals, for the noble cause of save some human lives from air pollution. We are supposed to believe that silver catalyst converters will go into commercial usage in 2012. By that time, every one will have forgotten the story.

With such bullish outlook of the PGM metals price, how could I not get heavily invested in the only two PGM metals players in North America, PAL and SWC? Especially at such ridiculous low prices. I see nothing better to buy. I am a firm believer of Warren Buffett philosophy. He said if you really know what you are buying, there is no need for diversification.

Disclosure: The author is heavily invested in PAL and SWC at the time of writing.

Comments

[User 59050]

I just want to say thanks for your time and effort in writing such an interesting report. I thoroughly enjoyed reading it.

[scrog]

Resource scarcity is tricky. Statistics about having x years of resource left are not very helpful, because for some resources time, technology and price will increase reserves. For others, there are few lower grade resources and no magic of technology to be had.

Potash is, I think, an example where there is a fixed and well-identified supply of cheap resource, mostly in Saskatchewan. Evaporating sea water to get a PCl precipitate has to be a lot more expensive than just grabbing the precipitate where it accumulated millions of years ago. Other resources with an organic origin--oil--are ultimately similar.

For minerals like copper, iron and uranium, on the other hand, there is a relatively even distribution of ore grades and it is more a matter of learning how to make the best of lower-quality ores. Time, price and technology resolve "shortages" of that sort.

Success in investing for the long run in commodities depends on knowing the difference.

[Mark Anthony]

The one who made the so called "silver catalyst converter" SCAM two days ago to scare uninformed investors out of their platinum now back stepped from their initial claim. Read this Bloomberg news:

www.bloomberg.com/apps...

Quote "Mitsui said the silver-based technology is for use in farming and construction machinery, rather than car engines."

What a SCAM. Next week they may further back step from the audacious claim by saying that the so called silver catalyst converters is only used in laboratory testing equipments, can not be immitated by any one else, only works in a sulphur free environment, and that they won't be ready to demo it publically until year 2012.

It's amazing how corrupted corporations can become, over a few ounces of metals.

[Love toshort]

Mark,

Your long history of articles on FSLR is nothing short of lunacy. You have been obsessed with this tellerium shortage for so long, and have lost a lot of money betting on it. Although you have some merit in many of your points, and your research findings are pretty interesting, you regularly contradict yourself.

Here is the best part...

I remember in the many articles you have written previously that you were shorting FSLR, will continue to short FSLR until it goes to zero. You were convinced that FSLR was going to crash. And now you say in this post "At this time I do not even own FSLR short positions and have nothing to gain if FSLR suddenly collapses tomorrow." Why dont you own it now? Its because you first started shorting the stock around 140, which means you have probably gotten 100 margin calls, and your investment is now worth zero now that the stock has more than doubled.

So you have officially lost your right to write about FSLR in the future.

[dr.phd]

what a useless post and wast of time.
another low point for SeekingAlpha.
Many errors and false assumptions are printed as facts.
Someone should do background checks before allowing idiots the right to post.

[cmoher3]

Mark...in your bio you say you were a "PHD Physics student". What was your undergrad degree in ? What university did you attend ?

[strawtogold]

Your credibility as a knowledgeable and enlightened analyst and author are now permanently in disrepute from anyone following the fertilizer business. Your article presents unsupportable opinion as fact and demonstrates your ignorance and absolute bias.

You state, " think POT is abusing its dominance power for the short term gain, but will hurt itself in the long term, like killing a hen to retrieve all the eggs at once. Natural plantations grow without potash fertilizer, because dead plants decompose on the spot, releasing potash back to the soil. Traditional agriculture removes only a very small eatable portion of the grain plantations, and return the bulk of the plant bodies to the fields, after decomposition or burning as cooking fuel. So the fields remain fertile. In recent years, Chinese farmers abandoned the traditional methods in favor of the easier potash fertilizer, due to increased income and affordability. Excessive application of fertilizers do not always result in the expected result, as potash is quite solveable in water. Rain water washes off the excessive amount of fertilizers, polluting major rivers. Will the Chinese farmers return to more sustainable traditional husbandry methods, in face of skyrocketing potash.?

You make accusations and present them as fact. By doing so, you have embarassed yourself in the business community. The price of potash was raised to $1,000 per ton by the Russians. Consumers of potash will pay that price. By linking the meteoric rise in prices to POT, where are your facts to back up your accusation that "POT is abusing its dominance power for the short term gain." I call you out to present proof of your incendiary accusation. We all know the answer to that -you have no facts or credibility. I guess you are also calling Chinese, Indians, Brazilians, and US farmers morons - after all, they dont need to buy potash and obviously paying $1,000 per ton is absolutely non-economic. You are obviously more brilliant than millions of farmers that have spent generations farming or an idiot.

As businessmen and investors, we require an ethical standard that is absolute. We also expect the truth and assertions based on fact. We all expect a retraction when you espoused unsustainable opinions or a presentation of facts. Here again, your editors and yourself should be ashamed of your unabashed bias and flagrant stupidity.

[Hod]

Sure Mark, one day several yrs ago Bill Doyle decided to mastermind a plot that involved spending huge sums of money to be able to harvest more potash while simultaneously forcasting to everyone he talked to that this market was coming. He then chose to not sell much of it until now, and even now when he could demand a higher price is telling customers that he has none that isn't already earmarked for delivery so he can hold on to it and sell it when?
I guess when the market goes down, which is the end-game for your logical chain.

According to Doyle, Canpotex did everything they could to get China to sign earlier. It didn't happen because the Chinese government was trying to play hardball. They had a stockpile and were not in any hurry to sign. This would be your advice I guess, judging from your article. It resulted in China having no stockpile and paying several hundred dollars more per ton.

There is absolutely no way anyone would make the statements they did on POT's conference call if what you said was true. They would all go to jail and they know that.

[cmoher3]

Here's the article today on POT's dealings and disputing biofuels as the reason for skyrocketing prices. Regrettably, they don't offer an explanation for the rise.
www.globeinvestor.com/.../

[cmoher3]

I'd have to concur with HappyRich's conclusion above but no where near as rabidly. There are big advantages to fertilizer !! For starters you can get two rice crops a year instead of one in Asia. Suggesting that farmers just have too much money in their pockets and are needlessly throwing it at fertilizer is a pretty rich suggestion that you should have known wouldn't pass your readers easily. I do think, however, POT's run has got to end soon. It will certainly be damaged if McCain gets in as he has vowed to end farm subsidies, but then again that would depend on ones assumption that biofuels is playing a part. POT's CEO swears its not. There are some smaller producers coming online now and some new IPO's. I think the governments ought to start busting up POT's holdings on account of antitrust laws. They (POT) have also moved on Chile's saltpeter deposits. Saltpeter being the only viable alternative to Nat Gas for supplying the nitrogen to the mix.

[Mark Anthony]

HappyRich:

I presented two evidences in my article. One, POT has 13.25M tons annual capacity, but is currently producing only 9M tons a year. That's a clear desire to limit production in order to hold up global potash price. Second evidence, POT decided to suspend sales temporarily right at the time news breaks out that a major Russian mine was flooded. That was a clear desire to take advantage of a crisis situation. The point is two global potash cartels were trying to limit supply to create a situation to pump up the potash price. This will soon backfire.

Hod:

Let me make it clear I do NO accuse any one or any organization of illegal acts. It's perfectly legal business behavior however POT decide their annual production should be. They do NOT need to produce at gun point. I don't know why any one need to go to jail just because POT did not produce at full capacity.

China's problem is it does not have enough stockpile so it thought it has some bargaining power but really didn't. The international potash cartels can hold off production longer than the Chinese could hold off the contract negotiation. If China had always maintained a three years of supply from decades ago, it would have a way much better bargaining power.

$1000 per ton potash is unacceptable. Farmers will adjust accordingly and the demand could collapse next year. China is rapidly expanding its own production capacity, so does other major potash consumer countries.

[User 125563]

Excellent article!
Thanks
CMGainz


On Apr 26 01:42 AM C.M. wrote:

> Here's the article today on POT's dealings and disputing biofuels
> as the reason for skyrocketing prices. Regrettably, they don't offer
> an explanation for the rise.
> www.globeinvestor.com/.../

[strawtogold]

Facts, not hyperbole and factual misrepresentations are the essence of analytical review. Mr. Anthony has failed in many respects. Not only is his representation that POT is abusing its worldwide leadership position to extract obscene pricing incorrect, POT took a hit on its share price by not matching currently the Russian price increase to $1,000 per ton.

When Don Carson of Merrill ($265 price target) asked Bill Doyle, the CEO of POT, about affordability issues at current price levels ($700/ton June 1, 2008 and $1,000/ton later in the year), Doyle replied "that affordability, while an issue, is not really a problem since US farmers make $3 for every $1 of fertilizer they purchase and in India that ratio is $7.60 for every dollar, in Indonesia it is $9 for every dollar of fertilizer purchased." As to the $1,000 price increase by the Russians, Doyle was unsupportive. Doyle just believes that Potash's customers need time to adjust and plan for the price increases to come compelled by demand vs supply issues. He said, " I want them to drink from a garden hose not a fire hose."

Doyle further stated that POT will be spending $5 BILLION to increase production.

Doyle's comments on pricing were taken as "meek".

Credit Suisse analyst Mark Connelly suspected that rising raw material costs, compounded by Potash's meek pricing strategy compared with those of its main competitor, rattled investors.

"Hold what you own through this rough patch," Connelly advised Thursday. "While Potash may arguably be not moving as aggressively on pricing …the direction of prices is clear, the prices are moving up sharply. Global concern over food has finally become front-page news, which may end up speeding up farm commercialization in several regions of the world -- that process will lead to demand for even more fertilizer."

These are facts and not innuendo. There is no economic substitute for potash and the growing worldwide demand for increased yields is essential to meeting the growing shortfall of production. POT is in an eviable position as are the Saudis with crude. The US now accounts for one of the smallest percentages of potash usage in history. Farm reports in the US have no bearing on potash consumption since all companies are producing at 100% and unable to meet demands. The Chinese miscalculated in holding off negotiations on pricing while their inventory was depleted. They did not count on India and Brazil grabbing the last capacity, leaving them with only 1 million tons available for the remainder of the year. And they have been told by Doyle that they will have to pay more in subsequent contracts to tie up significant volume. They simply tried their usual powerplay with the producers and to their dismay, realized too late that they not only had no leverage but there was no supply to be had. Product is not being held off the market as you infer (that may have happened in the past), it simply isn't there. Mr. Anthony, please don't play the potash bubble card - the numbers aren't there. Demand exceeds supply by several million tons per year and the only increased production for several years is from POT. That is simply good business and they and their owners will reap the benefits.

[Mark Anthony]

HappyRich:

I agree with the very first sentence your said in your above comment. But you seemed to have a difficult time distinguishing OPINIONS from FACTS. Starting from the second paragraph you cited a bunch of various STATEMENTs from various mouthes (and hence OPINIONs), and then categorily summarized at the start of the last paragraph "These are facts and not innuendo...."

Those are NOT facts. Those are merely opinions expressed by the people you cited. You can't cite other people's opinions and statements and then call them facts. They may or may not reflect reality. You have to take whao those people say with grains of salt.

For example, Doyle stated that POT is going to spent $5B to expand production. Give me a break! That's worth almost 10 times the latest quarterly profit. Why would he throw money away to expand production, just to cause price to collapse and profit margin shrink? If $5B results in 1M tons per year capacity increase, that's $5000 per ton, a pretty hefty price tag way much higher than the fertilizer price itself. From POT's own SEC filings, POT currently ALREADY have 13.25M tons per year production capacity and is only producing 9M tons. They can already produce 13.25M tons if they want to, why would they need to spend any money to expand? Why would it cost them $5B to expand capacity? They just dig more faster. The stuff barely needs much processing to turn into final product. The mines are so rich in potash content that back when potash was only $75 a ton, POT was quite profitable. So the $5B to expand capacity is nothing but smoke mirror. And you can it FACT? Wait till they really spent the money and then you can call it a fact.

Mr. Doyle also expressed the opinion that $1 more spent on fertilizer gives US farmers $3 gain in coins. I remember that $3:$1 ratio from a few years at, at old cheap fertilizer price. It's no longer the case with potash at $600/ton and approaching $1000. Against it's just his personal opinion, you need to check some where else to see if that is the fact or not.

The two points I cited are facts, POT is producing 9M/year, far below its 13.25M tons/year existing capacity, that's from POT's SEC filings. POT also took advantage of last year's Russian flood and suspended sales at that time. Actions speak louder than words. Canpotex, as well as BPC, were limiting production to gauge up price. The strategy will result in rapid expansion of production globally and cause them to lose monopoly power and hurt themselves in the long term. That's why Doyle is not yet willing to follow the Russians and raise price to $1000 for now.

I see potash price collapse later this year. I see the PGM metals sector with a way much bigger growth potential due to the fact that price is inelastic both in PGM metals production and demand. This is a much narrower market in which the Russians can already make the price instantly double or triple if they want to today. So I am sticking to PAL and SWC stocks for best potential of gain in the next two years.

[Mark Anthony]

Read this interesting piece a few months ago:

www.mineweb.com/minewe...

My impression is just half a year ago, the global potash cartels were celebrating a way much modest price gain, breaking the $300 psychological barrier. They were only bargaining for a $50-$70/ton increase from the Chinese, based on what they thought China's inventory situation is.

Since then, the Chinese and the two international potash cartels played a delay tactics negotiation game. Eventually the Chinese looked like defeated and recently concessed to a $400/ton price increase for the 2008 contracts, way much higher than the potash cartels were bargaining for. But is that the whole story?

I think China may have lost a battle but it doesn't necessarily mean it will lose the war. The deliberate loss of a single battle could well be a necessary strategic tactics. The whole thing is based on estimate on China's inventory level. Read this quote: "We expect a return to strong sales demand in 2007, as distributors in China had built large stocks of potash in 2005 that have since become mostly depleted .... Swing producers now monitor global sales to AVOID large inventory buildups"

Read the last few words. They believe China has depleted. And they are careful not to allow a chance for China to build up inventory. What if China has mislead the whole world and indeed they still have large inventory, and is quietly building it up? With one fatal blow China could cause potash price to collapse later this year, if it were to just announce that it has a way much bigger inventory than originally thought. Even if that is simply a bluff it could be enough.

[Mark Anthony]

Another interesting piece to read:

The potash equilibrium - How China buys and Russia sells
www.mineweb.com/minewe...

[Mark Anthony]

Global potash fertilizer prospect, in 1994:

www.nrcan.gc.ca/ms/cmy...

I am surprised to read that in 1994 global potash fertilizer usage was 19.4M ton, China used 1.8M to 1.9M tons and the USA used 5.6M tons. In 1994, China was already comfortably feeding its population, 1/5 of the global, using arable land only 7% of the global, on less than 1/10 of global potash fertilizers.

Today, reports say the world consumes 30M tons of potash a year and China is consuming 12M while itself produces 3M tons. China is now consuming twice the potash that USA consumes, with half of USA's arable land. That is just ridiculous. I don't see why China can not cut back. Even if China cuts back to the USA level per acre, 3M tons per year should be sufficient, which means China's 3M tons production per year should be self-sufficient.

Potassium is the 7th most abundant element on earth. Without applying any potash fertilizer, the soil already contains lots of potassium elements. The potash price bubble must burst soon.

[cmoher3]

Mark...please don't quote anymore abundancies to support your arguments. You did that with Nitrogen a few posts ago and "
Potassium is the 7th most abundant element on earth." means absolutely nothing also. Did you know of far greater terrestrial abundance is iron and nickel...in fact I know of a fantastic concentrated stash of the stuff and you're welcome to invest in it. We just got to drill a 3,000 KM hole and try and figure out how to cap the molten geizer at 5,000 degrees C and 3 million atmospheres of pressure ! "the soil already contains lots of potassium elements " is also simply not true. Potassium is an element in the first place and if there was so much of it in the soil, it would beg the question as to why farmers are willing to pay so much for it. It also depends on what these elements are bonded to and whether the resultant molecules are usable by plants. You've already dismissed nitrogenous minerals as of little value because the earth's air is 80 % nitrogen. It all brings me to my original question, if you were a "Phd Physics student", what was your undergrad degree in ? Did you get any biology or chemistry along the way ?

[Mark Anthony]

C.M.:

I don't know what nitrogenous minerals you are refering to. The fixed nitrogen in nitrate fertilizers mostly come from the air and synthesized artificially using natural gas, where my favorite PGM metals act as catalyst. We do have a problem as natural gas cost goes up as the natural gas is running out. But I don't see how that can improve profit margin of nitrate fertilizer makers. Any one with adequate money and technology can set up shops and make nitrate fertilizers from the air and natural gas.

I probably shouldn't say potassium is the 7th most abundant on the earth. It's 7th most abundant in the earth crust, where it's accesible. Iron is the No. 1 abundant if you count in the earth core, but as you say the earth core is inaccessible.

Fact of matter is Isreal, as well as Jordan has been cooking the Dead Sea to produce potash for half a century, even during the long decades when potash price was cheap and flat. With higher price, any salty lakes on the earth, or even the ocean itself, could be used to extract potash. once you are talking about the ocean as a resource it becomes unlimited and completely renewable. So I am seeing potash price as a bubble which must burst in short term. I don't know when. Probably after the 2008 harvest. But the price is unsustainable. And I don't see why China should suddenly uses 6 times more potash today than as recent as 1994.

I came from a physics background but I have broad interest in a lot of different topics and I read a lot, learn a lot. I should feel comfortable talking about any topic with experts in a number of different dissiplines in science and technology.

[cmoher3]

Sure Mark but nothing is free in this world as we know. Atmospheric Nitrogen is a pretty far cry from something plants can use unless it is one of the small handful of leguminous plants that can "fix" N from the atmosphere. I think the Haber process of making ammonia from N2 is a pretty onerous and expensive proposition, so saying "oh well the air is 80% N so don't worry about getting lots of it for fertilizer. It's blowing around in the wind". Its a pretty disingenuous statement. As far as Potassium is concerned, like any other mined resource, you need it in a high grade, concentrated form to make it economical to mine. Obviously POT has the best deposits in the world. They also, as I said, have apparently moved to lock up the saltpeter deposits in Chile as a second source of N. That should insulate it from any spikes in Nat Gas. In fact I'd love to get in on any new saltpeter discoveries being that the ratio in fertilizer is something like 10 to 1 , N to K. I thought POT was dangerously overpriced too....when it was $70 a share !! China now apparently eats twice as much meat as the USA so I guess a lot of their grain is lost to feedstock now. I don't see Potash dropping in price as much as the whole world would like to think it should. In the end, people need to eat and fertilizer is indisputably effective at growing food.

[Camden]

The few minutes I spent reading half the post was a total wast of time.

[RobertKronenberg]

Mr. Anthony - There are some interesting opinions and some good information in this article. Presentation of opinion often provides the impetus for useful thought and debate. If everyone agreed on things, the markets would provide no opportunity for profit. Presentation of opinions and ideas should be actively debated, but never criticized for having been stated.

Unfortunately, neither side in this debate has presented adequate facts to support their opinion. After reading the commentary on both sides, as a holder of large positions in POT, MOS, CF, and TRA, I will still need to research on my own the economic feasibility in the long term of capturing KCL from the sea.

Stating as fact that it is economically unfeasible is not better than stating that Israel has been doing it from the Dead Sea. I don't know the concentration of KCL in the Dead Sea, but I do know there is only one Dead Sea, and there is no basis for the assumption that economically evaporating KCL from the Dead Sea extends to the ocean or any salt lake either. I do, however, appreciate the opinions on both sides that provided me with the question that I now must research.

The problem with this article is not the statement of opinion. Rather, Mr. Anthony, you should examine the following:
1. Your security and sector analysis does not appear to be objective. It is interspersed with political opinion that simply does not belong in security analysis.
2. You draw conclusions based on faulty and unsupported assumptions.

As an example of both problems, you state:
"Food is both perishable and completely renewable. The world will never run out of food. The next harvest is always less than 6 months away. So the grain bull market can not last for much more than a year or so. The food price can not go up indefinitely, either. When the food prices exceed the level where the poorest people can afford, they stop going up further. Rich people have money but they only have one stomach. So although I agree with Jim Rogers who predicts many more years of commodity bull market despite of the coming recession, I disagree with his emphasis on agriculture as the most bullish of all commodities."

The conclusion is colored by your politico-social beliefs. My only thought when I read it was, "Really?" The argument for increasing food prices is increasing demand. The argument for increasing demand is that the industrialization of countries such as China and India are creating more "rich" people with their "one stomach" to feed. More stomachs that can afford food = higher demand. Further, prices are not limited by what the poor can afford. Presumably the poor can afford some food or they will starve to death. If they are dying in droves, presumably the government or some charitable aid organization will step in and buy food to feed the poor. Larger populations always create larger demand for food, and larger populations of "rich" people also create larger demand for food. Your conclusion is based on the erroneous assumption that the numbers and ratios of rich and poor are staying static.

You state a conspiracy theory about China hording fertilizer and keeping it a secret. This is not based on any actual fact-based analysis of the amount of fertilizer purchased over the years, the amount used and any left for storage. I suspect that POT has a much better handle on those numbers than you do, and if they believe that China has depleted in its reserves it carries a great deal more credibility.

Sure. China may in our imagination have some sort of secret horde that they release on the market and kill fertilizer prices, but French Canadian dissidents from Quebec may also decide to bomb the Saskatchewan mine for failure to post enough signs in French. I am not about to invest on either of those far-fetched "maybe's."

Indeed, the argument about releasing reserves on a market is better placed where we actually know such a reserve exists -- the US Oil Reserve for example. Nevertheless, even where it does exist, it is unlikely that the US is going to manipulate the oil market with it at this point. They accumulated the reserve for security reasons that override. In the case of fertilizer, we have no evidence of a reserve let alone any inclination for China to use it to manipulate prices.

[terrapin]

On a purely technical level, healthy bull markets do not develop parabolically. POT undoubtedly is. Also, making comparisons with Nortel and Cisco during the dot com bubble is absolutely apt. Bubbles don't just depend on supply/demand relations, but involve positive feedback loops, herd psychology and the grater fool theory--all of which can be applied regardless off the underlying issue.

Look at the charts, they tell the whole story.