Fertilize Your Portfolio

Consumers in emerging markets are clamoring for the “good life” that’s on conspicuous display in developed countries, driving greater consumption of grains, meat and processed foods. This burgeoning middle class is straining the productive capacities of farmers, who seek new methods to feed the world’s increasingly ambitious appetites.

North America and Asia-Pacific are the top two consumers of fertilizer in the world, together accounting for more than 60 percent of demand. The growth of fertilizer demand is especially high in the BRIC nations (Brazil, Russia, India and China), fueled by rising incomes and per capita meat consumption.

As the world population grows by about 75 million per year, mainly in countries such as China and India, the demand for food increases. Emerging market populations with growing incomes are mimicking their Western counterparts by embracing a more caloric diet based on meat. Livestock consumes 10 times the fertilizer used to produce its feed.

Underscoring the imperative for more grain were severe drought conditions this past summer throughout the Midwestern corn belt of the United States, most likely the result of inexorable climate change. The US Department of Agriculture estimates that US corn and soybean production this year will fall 13 percent and 12 percent, respectively.

Farmers desperately need to boost crop yields; the companies that help make this goal possible will greatly benefit. Chief among these yield-boosting products is potash, the generic name for various mined and manufactured salts that contain potassium fertilizers in water-soluble form. Approximately 95 percent of the potash produced worldwide is used as agricultural fertilizer, with no viable substitute.

The US Department of the Interior’s 2012 Mineral Commodity Summary projects that world potash consumption will increase 4 percent annually during the next five years, as lifestyles improve and the global economy eventually recovers.

US farms are on track to produce considerably smaller crops this year, but the consequent surge in agricultural commodity prices will more than compensate for volume losses, keeping US farm incomes afloat. As farmers prepare for another planting season, they possess the financial wherewithal to purchase the equipment and fertilizer they need.

Betting on American Supply

According to the Fertilizer Institute, potash is produced in only 12 countries in the world. Potash deposits are particularly abundant in Canada, accounting for about 40 percent of the world’s entire trade in the fertilizer. However, potash consumption is virtually universal and farmers yearn for alternative sources of supply. That’s especially true for American farmers, who tend to manage large-scale operations that are particularly well-suited to potash application.

Over 80 percent of the world’s potash production is exported; the US relies on foreign production for over 85 percent of its potash demand. The US currently has only limited potash development, but its push for greater potash self-sufficiency could prove a boon for investors.

Speculative investors should consider small-cap potash producers that are tapping into newly discovered potash fields in the US. A recent survey completed by the state of Arizona estimated that up to 2.58 billion tons of potash lie buried within the state’s Holbrook Basin, located in Navajo county. Considering that total US potash production reached only 1.1 billion tons in 2011, the Holbrook Basin could help America become competitive in world potash production.

Significant producers of potash with mines in the Holbrook Basin include two Denver-based companies, Intrepid Potash (NYSE: IPI) and Prospect Global Resources (NASDAQ: PGRX), and Dallas-based HNZ Potash LLC, an affiliate of Hunt Oil. However, another Holbrook-oriented mining company provides greater upside potential, for those willing to shoulder more risk.

Passport Potash (TSXV: PPI, OTCQX: PPRTF), based in Vancouver, is a fledgling natural resource company, focusing on the exploration, acquisition, and development of potash properties in the basin.

With a market cap of $34 million, Passport Potash holds a 100 interest in a rich potash field that covers 125,000 plus acres in the basin. The location, geology, accessibility, and availability of inexpensive local labor at the Holbrook deposits all pose significant positives for Passport Potash. Moreover, the company owns its acreage outright, with no royalty payment burdens. The ore deposits also are relatively shallow, requiring lower infrastructure expenditures.

There are several advantages to investing in potash mining within the US. Distributors to US-based end users of domestically produced potash can avoid the higher costs of importing foreign products, making the price more competitive.

In addition, companies with operations in Arizona such as Passport Potash can sell directly to California farmers, making the company’s potash cheaper and more convenient. And the close proximity of West Coast ports makes it easier and cheaper for the company to ship its potash to fertilizer-hungry buyers throughout the world, especially along Pacific Rim trade routes.

Recent developments underscore the growing success of Passport Potash’s Holbrook efforts.

The company on August 2 entered into an agreement with HNZ Potash to jointly explore and develop 21 basin parcels in which Passport holds Arizona State Land Department exploration permits. Under the terms of the joint exploration agreement, HNZ agreed to pay Passport 50 percent of costs in return for a 50 percent interest in the permit property.

Passport Potash’s drilling program revealed on September 27 that the Holbrook Basin contains vastly more and higher quality resource ore for potash production than initially thought.

Finally, on October 14, the company signed a deal with the basin’s indigenous Hopi Indians that allows the firm to conduct operations on their tribal land and should eventually lead to a joint exploration and mining agreement on these highly coveted, potash-rich tracts. The company also holds $2 million in cash, which is sufficient to fund working capital and capital expenditures for the rest of the year.

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John Persinos is managing director of Investing Daily and Personal Finance.