The fertilizer stocks continue their strength, led by the Google of fertilizer - Potash (POT). Unfortunately, our fund has only has a 0.5% stake in Potash, so it's not helping too much, but I do have some holdings in some of its peers.
In fact, since fund inception the 5th best performing stock has been CF Industries (NYSE:CF) with a +$4,422 gain as of yesterday's close. However, I pulled back on these names prematurely... wish I had kept more as I had far larger positions in early-mid August.
I don't talk about these stocks much
because it's a pretty simple thesis - more demand for quality foods +
less farmers in this world + less land used for farming = more demand
for efficient use of current crop producing land.
Here is a Reuters news report for Potash out earlier this week - the hits keep coming:
- WINNIPEG, Manitoba, Sept 18 (Reuters) - Potash Corp of Saskatchewan the world's largest potash producer, sees tight supplies amid strong demand for the fertilizer in the coming year, its chief financial officer said on Tuesday.
- "Our customers right now are on allocation. We're having a hard time meeting demand in 2007," Wayne Brownlee told analysts at a Bank of America investment conference in San Francisco.
- "We expect that allocation process is going to continue in 2008, and even into 2009," Brownlee said, noting potash buyers currently have to wait about two months longer than usual to receive fertilizer because of strong demand.
- As the middle class grows in China, India and Brazil, so has meat consumption, boosting the need for crop fertilizer to improve grain yields for livestock feed, he said.
- The expanding biofuel sector has also raised demand for crops, Brownlee said. Tight world grain supplies have pushed grain prices to record levels, motivating farmers to apply more fertilizer, he said.
- Potash Corp owns more than 75 percent of the world's idled potash capacity, which the company is moving to bring on line.
- The company aims to produce 15.7 million tonnes of the fertilizer by 2015, up from about 10 million tonnes in 2006.
- Potash projects gross margins will more than double as it expands, Brownlee said.
- But competitors may shy away from building new mines because it costs more than $2 billion and takes seven years to see the returns, Brownlee said.
- "So when you're making a bet on a potash greenfield mine, you're really betting on what the prices of potash are going to be in years 8 through 15 to get your return on that investment of over $2 billion," he said.
Takeaway: Well what can I say; I am not sure if I have read a more bullish news item this year. Product is so in demand that customers are not only on allocation now, but in 2008 and potentially 2009 as well? Keep in mind that CFO's are usually a lot more conservative types than their glib CEO brothers.
For you economics majors out there, we all know what limited supply and more than healthy demand does for prices... Potash has the premium valuation in the group of peers, but also has far and away the most capacity to expand production in the long run. It's not cheap to expand but if you think these long term trends are intact you just have to be in this sector.
For those not sure where to start, think about MOOing...
Disclosure: Long Potash Corp of Saskatchewan, CF Industries in fund; no personal postions