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Fertilizer Will Grow The Profits Of Your Portfolio

April 7, 2011 by  

Fertilizer Will Grow The Profits Of Your Portfolio

Which investments have outperformed gold and silver in the last five years? A lot of investors are currently investing in precious metals, and gold and silver are especially popular. While this is in our view certainly a smart move, we feel that investors need to look beyond gold and silver and broaden their investment horizon to look for investments that might even outperform precious metals in the years to come.

In my view, the fertilizer industry is one area where a lot of value is being built in coming years and where investors can find attractive long-term investment opportunities.

Among the most important things in investment research is to identify global structural changes and the value drivers created thereof. Of course, investors can also make profits by short-term trading, but during my investment career I have not seen many traders consistently making profits this way. While I certainly do think that investors have to look at short-term opportunities, I strongly believe that in order to generate superior returns, one has to identify global structural changes in the world economy.

That’s what our team is doing every day. We have a true passion for analyzing structural economic changes and positioning our investments so that they will benefit from such changes. That means that our investment allocation is usually centered on a few core themes and therefore is usually less diversified in terms of industry allocation.

However, our investment allocation is spread among many countries, currencies and among a broad based strategic asset allocation. Investments in fertilizer companies seem to offer compelling investment returns which are tied to a very powerful long-term industry cycle that is relatively unaffected by short-term volatility in global economic growth. Also this is an industry group which has been able to outperform gold and silver over the last five years.

We think because of a further increase of global population, and therefore the need to feed more and more people, the fertilizer industry is poised to benefit significantly in the years to come. A growing demand for food will continue to drive prices and farmers around the globe will have a strong incentive to increase production. The higher prices for agriculture commodities will allow producers to spend more on fertilizer and crop protection, which will support higher prices. This should result in high and sustainable business growth for the potash and fertilizer companies going forward and we believe this is currently one of the most interesting sectors in the market.

According to a recent study of The World Bank, global demand for food is expected to grow by up to 40 percent until 2030 while world population growth is expected to grow by 23 percent, from currently 6.9 billion to around 8.5 billion people. The large increase in projected food demand is primarily coming from increased demand from emerging markets where an increasing part of the population is moving up to middle class and, because of a better lifestyle and higher income, will be able to spend more on food and many other products.

The chart below shows the anticipated growth in world population, with the yellow line being the most realistic scenario. An increase of global population by another 2 billion in the next two decades will have a number of very significant impacts on the world economy and will also increase the potential for geopolitical tensions given the fact that food and commodities in general will be scarce.

The recent crisis in the Middle East and Northern Africa show that a rapid increase of basic goods like food and energy will increase the conflict potential significantly. People might be able to accept a weak and corrupt government or even a dictatorship, but when people are starving they are willing to stand up and take control. This has been a very important driver behind the recent problems in countries like Egypt, Tunisia and Libya.

World population
*Source United Nations
 

So if the assumptions and projections regarding population growth are more or less accurate, one of the biggest challenges for our planet will be to increase world food production by 40 percent in the next two decades.  This is challenging, but not impossible.

According to various studies, productivity growth in the agriculture sector has increased by about 150 percent in the last 40 years and it seems likely that this trend will continue in the future, but probably at a slower rate. Also, the world’s reserve for agriculture land is relatively limited. While there are still land reserves in Latin America and certain areas in Southern Africa, it’s going to be difficult to expand the amount of agriculture land significantly, especially when additional factors like climate change and scarcity of water supplies are taken into consideration.

This points to the obvious fact that the largest increase to the world’s food production has to come from increased productivity that can only be reached by additional use of fertilizer products, crop and seed protection and the further industrialization of farming. This is in the eyes of many a real horror scenario, but the fact is that by only growing fruits and vegetables organically, we will not be able to solve the problem of a possibly severe future food shortage.

It is obvious that this creates a true super cycle for companies that are doing business in this area, and fertilizer companies, especially, will be able to significantly benefit from this development. On top of the very promising outlook for the industry comes the fact that the global fertilizer market is dominated by a small number of companies. Eight companies make up more than 80 percent of annual production which will give these companies good pricing power going forward.

Since the barriers for entry in this sector are very high and the fact that potash, the base ingredient for fertilizer, can only be found in certain parts of the world, future price increases could be very significant. The chart below shows that potash production only takes place in a relatively small number of places.

Potash productions center around the world
 

Currently, annual production is about 60 million tons and is expected to reach about 75 million tons in 2016. Today’s production is currently high enough to cover demand, but this could change in the latter half of the current decade and it is estimated that by 2020 global production will just be enough to meet demand. The outlook for the declining production overhang—and with that for rising prices in the future—has also resulted in additional takeover activity in the sector.

The recent bid of Australian based BHP Billiton for Canadian-based Potash Corporation and the acquisition of Potash One by Germany-based K+S are strong signs that the outlook for the industry is very promising.

Stocks of fertilizer companies have been doing well in the past two years, with many of them doubling or even tripling in price.  The chart below shows how some of the major companies in this sector have performed over the last five years. Most major markets have been flat over this period of time. In light of this, their performance is even more remarkable. Over this five-year time period, most of these companies have even outperformed gold and silver.

Potash performance compared to gold and silver
 

However, despite current valuations that look a bit rich based on commonly used ratios, the outlook for strong future profit growth, strong structural value drivers and the factors mentioned above should make investments in fertilizer companies an excellent option for years to come. Because of the growth prospects and as a way to protect the purchasing power of money, like gold and silver, investments in fertilizer are also linked to a commodity super cycle, which will not come to an end in the foreseeable future.

Daniel Zurbrügg

is the Managing Partner of Alpine Atlantic Global Asset Management, a Swiss-based independent investment management firm. The firm provides clients with independent investment management, asset protection and family office services and is the issuer of the global investment newsletter Echo From The Alps. With a global network of partners, Alpine Atlantic's aim is to provide clients with true "turnkey" solutions for global investing. Prior to setting up Alpine Atlantic, Daniel held various positions with other banks and financial companies. Daniel is a Chartered Financial Analyst and regular guest speaker at international investment conferences.

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  • Vigilant

    “While there are still land reserves in Latin America and certain areas in Southern Africa, it’s going to be difficult to expand the amount of agriculture land significantly, especially when additional factors like climate change and scarcity of water supplies are taken into consideration.”

    “Climate change?” Not only is this assessment made on the basis of junk science, any foreseeable climate change would take place over a period of time much more gradual than required for anyone to make a killing in the fertilizer market.

    • http://www.alpineatlantic.com DanielZurbrügg

      I agree, climate change is certainly a topic of debate, and only time will tell how things develop in the future. However, given the fact that climate change is something that has been going on forever, it needs to be taken into consideration since it is a risk factor here.

      • john j

        Anyone ever heard of HAARP? Weather is & has been manipulated for many years by the Gov & business. The natural forces of nature can be controlled & altered. Nothing is happenstance, all is done by design.
        Sadly, the forces that prevail today have only one motive…GREED!
        My thanks to everyone who has contributed as this has really opened my eyes on fertilizer & nutrition

    • Meteorlady

      While I know that there is junk science on climate change, I also know that the area where I used to live it getting hotter because of large scale logging. The Pacific Northwest used to have a lot of rain forests, but most are clear cut now. Because of this the temperatures have risen around where the forests used to be. It not science, it’s simple. On a hot day go to a national park or forest where there are still trees left. This struck us last year when we went to visit Gifford Pinchot National Forrest. The day was hot in the small town we passed through – in the 90′s which is hot for Washington state. When we got to the forest the temp dropped by 18 degrees.

      So, I have to believe that the forests clean the air and provide a means to cool the areas in and around them. I also believe that they trap rain when so that also adds to the cooling.

      • J. B.

        I want to back up what Meteorlady said. I live in west Texas where cotton is king(and so is govt. subsidy to the growers). We have already had several 98 degree days this year and it won’t be getting any cooler, unfortunately, until we get a rain, whenever that might be. All my life I’ve notice the heat just baking everything as you drive along and the wind is blowing across cotton fields but when you drive into an area where there is a good amount of pasture for that same wind to blow across, the temperature drops several degrees. I promise you no one has ever walked out of the pasture and into a cotton field to cool off.

        • Bruce D.

          I have often wondered when traveling across Texas why they do not plant more trees that are able to grow in that climate. You see some at the rest stops. It is always a blessing to be able to park underneath a tree. It even makes me feel grateful. I would think everyone in Texas would want to plant a dessert type tree or two. As for Metorlady I have read when land is logged it is always replanted with seedlings. I am not sure how much of that is in peoples heads. I know paper trees only take 3 to 5 years to grow. Statistics are now showing the planet cooling and many have complained about a very cold winter. One thing that is certain is that the weather changes all the time. Don’t expect the perfect climate.

      • Richard Pawley

        And the opposite is true too. Much study has been done for years on the climate around Kansas City. It’s mere existence affects the weather for 150 miles in every direction. The masses of concrete absorb heat during the day and give it back at night. All big cities do this and I have observed this in other places as well but I’m under the impression that Kansas City has been studied more than most. In some countries in Africa all trees have been cut down for firewood and they are basically now desert.

  • Vigilant

    “Since the barriers for entry in this sector are very high and the fact that potash, the base ingredient for fertilizer, can only be found in certain parts of the world, future price increases could be very significant. The chart below shows that potash production only takes place in a relatively small number of places.”

    Mr. Zurbrügg would have done well to put in a little time in the crop fields before he starts making assertions about fertilizer that are questionable.

    Potash is a source of potassium, not “the base ingredient for fertilizer” but one of three basic ingredients, nitrogen, phosphorus and potassium. The labeling on the fertilizer describes the basic proportions of each, N-P-K, e.g., 5-10-5. Potash alone does not a fertilizer make.

    To say that potash reserves are limited does not recognize that a number of other sources are available. According to http://depletedcranium.com/once-again-fertilizer-is-not-petroleum-based/ potassium “can also be produced from seaweed or wood ash. Potassium can also be extracted from potassium salts which are commonly found in ancient lakebeds as well as in salt lakes such as the Dead Sea. Several other minerals also contain easily extractable potassium. Significant amounts of potassium also can be found in seawater.”

    My ancestors made their fortune selling potash from the burning of wood from the cleared forest, and I use the ashes from my wood stove to add potassium to my garden plot.

    Bone meal is an excellent source of phosphorus. For fertilizers, phosphate minerals are the most abundant source of this element.

    Blood meal provides nitrogen. “Natural gas…is by far the most common source of the hydrogen used in modern nitrogen fertalizer production.” (Ibid.) Another source is fermented nitrogen-rich green matter, such as nettles.

    A “Chartered Financial Analyst” does not make one an agricultural expert.

    • http://www.alpineatlantic.com DanielZurbrügg

      The article is meant to give a broad overview of the topic and highlight the important points why the outlook for this industry is positive.

      Yes, I agree, a financial analyst does not make one an agriculture expert, but being born and raised on a farm gives me a pretty good understanding of what’s going on.

      Thank you for your feedback.

      • Al Sieber

        Good article, I agree with both of you. and being a miner I’m familiar with potash and have a friend in Arkansas that mines it. “Resource World” a magazine out of Vancouver B.C. has a excellent website on commodities.

  • James Johnson

    Since WWII, modern chemical farmers use N-P-K fertilizers and maybe some lime for its calcium content. These four elements grow large green plants that sell well in the marketplace yet the human body requires 60 minerals daily for sustainable health. Our plants, the animals who eat them, and we humans who eat both of them, are all slowly dying of malnutrition and degenerative diseases from today’s
    N-P-K chemical farming industry. We are all nutritionally starving from eating minerally deficient plants, which offer fiber and bulk, but little in the way of nutrition. The Organic movement has encouraged less use of chemical poisons in our soils but the foodstuffs they grow are rarely nutritious, are high priced, and are still without the highly diverse mineral content needed for humans and animals. The once heralded GMO farming movement offers little to us nutritionally speaking, but it sells well to the unwary and uneducated, anyway, by way of intense advertising and promotion. Increasing the trace mineral content in soil in plant available forms restores plant health and the health of those who eat them, and this issue is not being addressed by either chemical farming, the GMO industry, the organic movement, or the USDA. Farming the oceans for sea kelp used as fertilizers offers trace minerals, and would be a more profitable pursuit, if we are not willing to turn back to using the necessary soil microorganisms and beneficial soil fungi to regenerate the mineral content of our depleted soils. An investment in producing soil microorganisms and beneficial soil fungi has some possibilites, but in order to succeed this would require massive public education that few would agree to.

    Raw foods are sold by weight only, rather than by their inherant level of nutrition, so bringing about positive change in farming methods is fairly futile. Yet, until we consume wholesome food containing all the minerals we need, our bodies will continue to tear themselves down internally by pulling needed minerals out of our tissues and bones at the cellular level. Our once “living soil”, which was alive with trillions of soil microorganisms and beneficial fungi that processed soil into trace minerals, has been eliminated with strong chemical fertilizers, herbicides, and pesticides, so the diversity of minerals we need are not available to the plants or to us. Our soil is dead. We become what we eat. American chemical farming using N-P-K fertilizers, and little else for the last 60 years, has gone worldwide and is clearly a failure. Plant bulk and fiber is not nutrition for animals or humans, minerals are. A broader diversity of trace minerals in our diets is the only way to sustain ourselves nutritionally, and it must occur in our soil if we are to benefit. Man made or “chelated mineral supplements” purchased from stores are not the answer, as only 10%-15% of processed minerals will enter our bodies or plants at the cellular level, most being too large for absorption.

    • Tom from Idaho

      Mr. Johnson, as an independent agronomist and soil scientist who studies soil chemistry-soil fertility on a daily basis, there only seven major (N-P-K), four secondary elements and six trace elements that make up the “plant available” nutrients in the soil. Since the beginning of life on this earth, these have been the only elements needed by all organisms. Yes, we are, in many cases being malnourished, but that is a matter of not eating the right foods (i. e. a balanced diet). I do have to say, however, that modern agriculture has gotten away from the basics when it comes to sustaining productive soils that will feed many crops for years, even generations, to come.

      • Tom from Idaho

        I meant to say three major elements (N-P-K)

  • Moonsi

    Good article. We all need to eat.

  • Polski

    The danger here is Monsanto. They are ruining the world’s food crop deliberately, with GMOs, Genetically Molested Organisms.

    • Laurie B

      Hear, hear, Polski!

      The instant I started reading this article, I said to myself, I would NEVER invest in anything that profited Monsanto – they are the devil incarnate and have done more to damage food, growing environments and countries (read about the effect Monsanto has had on India), than any other company/individual in history.

      • granny mae

        I don’t know much about investing but I do know some about gardens. I have not been happy with the big farmers and their growing methods for a long time. They can grow things to look pretty and grow big but that doesn’t mean it is good for you. I am all for people growing your own back yard food and doing it with natural methods! Compost and mulch and good old chicken and rabbit pooh! Since I moved to the country I have noticed a big drop in bees and it all started with my local farmers airiel spraying of their fields! I also heard about the same time , of a new product out by Monsanto to be used on crops and it was banned in Great Britton. I don’t know if this is a part of the problem for sure but it sure looks suspicious! Folks, instead of cutting grass all summer in your back yard why not pick tomatoes? Feed yourself and your family and maybe even a unfortunate neighbor or two. By the way it is a good way to teach your children responsibility and the value of good hard work! Not always a fun job but it can be made into a worthwhile task !
        God Bless !

  • DaveR

    Question for those who believe that modern agricultural methods and foods are destroying our health: How do you explain the fact that people who are consuming these food products are living longer on average than their ancestors?

    I have no disagreement with the basic article except for the technical error in stating that Potash is THE BASE ingredient in manufactured fertilizer. As other respondents have pointed out, there are three basic ingredients, and natural gas is commonly used as a key source for production of ammonia which is commonly a key reactant used to create the nitrogen component of commercial pelletized fertilizers.

    My background is chemical engineering.

    • DaveH

      While I agree with you, Dave, that modern food raising techniques are largely responsible for our longevity, it is a fact that Government is aiding the demise of smaller organic farms, and other natural sources of food (such as unpasteurized milk) through their onerous regulations. The consumers should decide which foods to stake their lives on. The Government should butt out.
      For those who would like to investigate further:
      http://www.healthfreedomusa.org/

    • granny mae

      Dave R.

      First we must make sure that it is the eating of these foods that is making people to live longer and not the medicine man has to combat the diseases created by this food ! And the residue clinging to the food we eat!

      • granny mae

        However, getting back to the article, If you can keep your finances separate from your personal ideal, then perhaps one should look into this investment. As for me I will have to keep looking !

      • Isaac Davis

        There is much out there to pick and choose from that will make a thinking person start to question exactly what it is they are buying and consuming. We were buying the “boxed” milk for it’s unrefrigerated condition, but upon further research found that it’s UHT labeling–which is NOT defined anywhere on the label–renders this “milk” basically nothing more than some white colored liquid that resembles milk in color only. Then, further serendipity found a Fox news station in Florida that halted the broadcast of an investigative report about the hazards of treating cattle with hormones to produce more milk when the reporters were threatened with termination. The reporters still went on web video to lay out their case of being bullied into never presenting the report. My hat is off to you for your Self-Reliance and suggestion that families quit mowing and start planting and harvesting.

    • Marcia Kirschbaum

      Maybe you should get a bit of education in nutrition before you think your chemical engineering career makes you any kind of an expert on what eating chemicals does to our neurotransmitters. We may be living longer, but look how much chronic illness is everywhere. Please watch this video ~ http://www.youtube.com/watch?v=rixyrCNVVGA&feature=player_embedded

  • Lou

    People may be living longer for a bunch of reasons. Better medical care, Knowledge of causes, sanitation etc. I think some controlled studies are needed before you can back up a statement such as DaveR makes. No degree, just common sense.

    • granny mae

      Lou,
      I agree !

  • DaveH
  • Marcia Kirschbaum
    • DaveH

      What would we do without all those market-stifling regulations? Be free maybe?

  • John

    Have to say that there is no debate among scientists over global climate change. The only people debating it are nonscientists. Get up to speed on the topic before making sweeping generalizations. Go the National Academies website if you want to learn about it.

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