A Potash Stock That’s Set to Gain as Food Demand Rises

Potash Corp. of Saskatchewan (NYSE: POT) is the world’s largest fertilizer company by capacity. The potash stock accounts for roughly 20% of the world’s production of potash—a major crop nutrient—through its operations in Canada. The company also produces phosphate and nitrogen.

Market Dominance Puts This Potash Stock in Position for Gains

As we wrote in an October 2012 Investing Daily article, demand for more and better food is certain to keep rising in the coming years as the world’s population grows and becomes wealthier. Recent studies show that global food demand could soar by 100% to 110% between 2005 and 2050.

Global meat consumption continues to grow strongly, particularly in the developing world: 50 years ago, the world’s meat intake came in at 70 million metric tons a year. By 2007, that had soared to 268 million metric tons—an increase of more than 280%. China’s per capita meat consumption has risen 90% over the past decade, while dairy consumption has nearly tripled.

At the same time, urbanization is reducing the amount of farmland: according to figures from Potash Corp., the amount of growing area per person in 2020 will be half of what it was in 1950.

All this adds up to a pressing need to boost yields from existing farmlands by applying more fertilizer. That’s where this potash stock comes in: in addition to Canada, it has operations and business interests in seven countries, including in regions like South America, the Middle East and Asia.

A Potash Stock That Can Weather Volatile Prices

Potash prices have moved lower recently due to an oversupply that is expected to continue: according to a recent Bloomberg report, world production capacity will rise 38%, to 96.5 million metric tons, by 2017, while demand will increase 26%, to 66 million metric tons.

However, the potash market is dominated by a small number of producers, led by Potash Corp. That makes it easier to cut production in response to price declines. Indeed, the potash stock and Russia’s OAO Uralkali, the leading producer, continue to operate below capacity, as both continue to prefer higher potash prices over increased sales volumes. 

“On paper it seems like there is quite a bit of supply coming on line,” Allana Potash Corp. (TSX: AAA) CEO Farhad Abasov recently told Bloomberg. “In reality only a handful of them will hit production.”

Greater Competition Wouldn’t Hurt This Potash Stock

Potash Corp. was the target of a $40-billion hostile takeover attempt by mining giant BHP Billiton (NYSE: BHP) in 2010. However, the Canadian government blocked that deal under the Investment Canada Act, on grounds that it offered no net benefit to the country.

Now the potash stock may be facing more competition from BHP, which is developing its own mine right in Potash Corp.’s backyard. The company’s Jansen mine, also located in Saskatchewan, would be the world’s biggest potash project, with 8 million metric tons a year of production. However, costs are high, with some estimates saying construction and development would come in around $15 billion. BHP is currently reviewing the project.

Potash Corp.’s sales have risen strongly, from $3.98 billion in 2009 to $7.9 billion in 2012. Earnings more than doubled, to $2.37 a share from $1.08. The stock yields 3.6%.