Despite improved farming techniques, there is an ongoing food crisis around the world. That’s why I just bought this stock.
I’m not an alarmist by nature, but there’s no denying we’re in a food crisis.
How else would you explain angry demonstrations in Mexico protesting exorbitant corn tortilla prices or the fact that Pakistan called in the military to guard flour mills?[ad#Google Adsense 336×280-IA]The recent political uprisings in the Middle East can be linked to food inflation. So can rising interest rates in Europe, which are an attempt to temper inflation.
The story is simple to follow.
The world’s population is growing by tens of millions each year, but we have a fixed amount of space for crops. In fact, farmland is disappearing around the world thanks to urbanization and large-scale construction projects. That’s leading to scarcity… even with advancements in farming.
In fact, U.S. farms will churn out 13.2 billion bushels of corn this year, the most ever. But we’ll need every ear. Domestic corn inventories (relative to consumption) are forecast to fall to the second-thinnest level on record.
It’s the same in China, which will produce a record 178 million tons of corn and still fall short of projected consumption of 181 million tons. So even with bumper crops, global food supplies are still alarmingly low.
That leaves zero room for error. If there is any supply disruption (and there always is) or any increase in demand (count on it), grain prices will march higher.
Rising populations mean 75 million new mouths to feed each year. We also need mountains of grain to feed cows, chickens and other livestock. By some estimates, it takes seven pounds of grain to produce one pound of meat.
And rising incomes have led to a shift in dietary habits from starch to protein — in fact, China’s annual per-capita meat consumption has tripled since 1980.
And then there’s ethanol, which now swallows 40% of the United States’ corn crop. With millions of acres of farmland diverted to take advantage, there has been less room to plant other crops.
That means upward pressure on prices for wheat and soybeans, as well. This is not a temporary phenomenon. We can barely cover usage from domestic food processors, ethanol refiners, and meat producers — let alone satisfy demand from overseas.
Nobody has a large surplus to sell — and that can only push prices in one direction. There’s only one answer to this massive issue of scarcity… squeeze more bushels out of each acre of land. That’s where fertilizer comes in.
Fertilizers are not glamorous products. But they are indispensable, accounting for up to 60% of the world’s food production. That’s a big reason why investment returns in this sector have been spectacular — with a cumulative gain of 689% over the past decade.
You can see from my chart to the right the performance of shares of fertilizer company Mosaic (NYSE: MOS) — which I recently added to my $100,000 real-money Scarcity & Real Wealth portfolio.
Despite a strong bullish outlook in its sector, over the past few months the shares have sunk.
But we’ve seen this before, exactly a year ago. Beginning in early 2010 the stock started turning lower… until it bottomed in July. From there, the shares more than doubled.
Now, the exact same thing could be shaping up for 2011.
Of course, simply because a chart looks appealing doesn’t mean you should invest based on it alone. That’s where the fundamentals behind the company look special.
Mosaic is the world’s top producer of phosphorus-based fertilizer products such as diammonium phosphate (DAP). With annual production capacity of 10 million tons, the company controls 13% of the global market and ships more than its next two largest competitors combined.
The primary raw ingredients to make DAP are ammonia, sulfur, and phosphate rock. Other manufacturers have to buy their rock from third parties, at prices that can be volatile.[ad#article-bottom]But Mosaic has an internal supply of phosphate rock. That in-house source cuts out the middleman, boosts profit margins and gives the company an edge over the competition. And trust me, that’s just part of the company’s appeal.
Commodity futures for corn and other grains will fluctuate (if for no other reason than the shuffling of speculative hedge fund assets). But by and large, I believe high food prices are here to stay.
And it’s a safe bet that a large chunk of that cash earned by farmers from higher prices will be spent on fertilizer for next year’s harvest. That’s good news for the possibility of history repeating itself in shares of Mosaic.
— Nathan Slaughter[ad#jack p.s.]