“‘The Big One’ … The Single Greatest Way to Play the Next Agricultural Boom”

Looking at another "Investing with Michael" teaser from Lombardi

By Travis Johnson, Stock Gumshoe, January 24, 2012

As I promised yesterday, there’s a second “special report” being teased by Michael Lombardi as an enticement to new subscribers to his Investing with Michael newsletter …

… the first one was that “New Swiss Bank” teaser that told us we could get 5% yields, growth and safety on par with the Swiss banks (or on par with how the Swiss banks used to be, at least), if you missed that note you can see it here.

But the other pitch from Lombardi for his “safe, big company investment plays” is a whole different kettle of fish — here’s how he teases it:

The Single Greatest Way to Play the Next Agricultural Boom….

“Why are average farmers making so much money? You can thank high prices for crops, livestock and farmland, strong global demand for corn used in making ethanol, and growing demand for food from India and China.

“In fact, farm profits are expected to spike by 28% this year to $100.9 billion, according to the U.S. Department of Agriculture. ‘We’re just experiencing the best of times,’ said Bruce Johnson, an agricultural economist at the University of Nebraska in Lincoln. ‘It’s a story to tell.'”

So it’s a play on agriculture, and we’ve certainly seen plenty of those teased over the years (and bought some of them) — so what is it? Farmland? John Deere tractors? Grain elevators? Seed companies? Fertilizer companies? Let’s see what clues Lombardi gives us:

“I have the name of one company that is supplying a substance essential for modern agricultural production.

“This company is super-safe, with a market cap exceeding $36 billion. It also currently pays an annual dividend of $0.28 per share. But more importantly—because of the unique product this company supplies—I believe this company is the best way to play the coming global boom in agriculture.

“Based on my analysis, I’m forecasting this company will easily surpass the 25% average returns I’ve made in Investing With Michael since 2009…indeed, this stock could be ‘the big one.'”

So … not exactly a shakedown cruise for the Thinkolator this time, it takes barely a few moments to generate our answers …though we appreciate an easier one every now and then — there just aren’t that many $36 billion agriculture companies out there, and this one is … Potash Corp (POT)

Yep, remember them? No one had heard of Potash in 2004, then suddenly it became clear that the Chinese wanted to eat chicken instead of beans, at a time when corn production started moving aggressively into our gas tanks, and the demand for fertilizer went through the roof for a few years. The stock went up from the single digits to almost $80 over the next few years, peaking out in 2008 along with everything else, and the lust for agricultural investing was born.

The market adjusts, of course, and the crash in the global markets and in the global economy cratered the stock, from $80 back down (briefly) below $20 at the bottom of the market, back when we all thought the world was going to end and we’d all end up living in yurts and collecting mouse dung to make our own fertilizer. Remember that? Hard to believe it was less than three years ago.

Since then, POT has recovered some and then, when it became clear that fertilizer capacity had gotten a bit ahead of itself due to overinvestment, the shares came back in in recent months — along with most of the big competitors like Mosaic (MOS) and Agrium (AGU). Shares have come back off the lows, but POT has at least temporarily shut down production at three of their potash mining operations this year in order to stave off oversupply and lower prices (sound familiar? Chesapeake is doing the same thing with natural gas this year, though more aggressively), so analyst estimates have come down a bit over the last few months and POT is now trading at a forward PE of about 11 on those lowered estimates.

POT produces the raw material for fertilizers — potash and phosphates, for the most part, so they are the very essence of a “commodity” company, they’re not adding much to the mix, or creating something unique, their advantage lies in the fact that they have massive high-quality deposits and economies of scale. So really, it’s about global demand for potash salts and phosphates — and to a lesser extent, it’s about new production coming online thanks to big investment in the sector during that 2005-2008 huge investor bull run in fertilizer explorers and producers. In general a slightly weakening market should work in favor of the huge low cost producers like POT and MOS, since it’s almost impossible for new producers to compete on margins or production costs, but that’s more of a long-term picture. In the short run, new producers are going to produce even if they don’t do so very profitably, and any sagging demand puts pressure on leading operators and, as in this case, sometimes causes them to have to try to manage the market by cutting off supply and investment a bit.

I can’t claim to have any brilliant insight into the fertilizer markets, though with the undercurrent of potential political unrest in Morocco and the general lack of big supply I do still like the little phosphorous subsector of the fertilizer market. I don’t happen to have any direct fertilizer investments right now, but phosphates are probably the most underappreciated and critical crop nutrients that face eventual supply problems. I just don’t know where the balance tips for any fertilizer supplier versus constantly fluctuating demand for different types of nutrients (and just to emphasize that I don’t know anything about short-term market forces in agriculture, Mosaic has been cutting phosphate production this winter because of weak short-term demand).

Still, in the big picture it’s hard to argue against the huge players if you think they’ve got the long-term wind at their backs — POT is far more expensive than the more diversified Agrium (AGU), and trades at substantially higher price/sales and price/book numbers than Mosaic (MOS), which are probably the two most similar large companies to consider, but the firms are not really directly comparable and Potash Corp has far better margins than these competitors (much higher profit margin, much better return on equity, etc.). Mosaic is interesting in part because the Cargill spinoff of shares didn’t bring the price spike and takeover speculation that folks thought we’d see in the second half of 2011, so it’s possible that MOS will be more leveraged to any kind of big recovery in fertilizer pricing in 2012 than is Potash if takeover chatter comes back into the big ag space, but POT is still the leader and the largest player in the best potash region around.

If you like the fertilizer space in general, but don’t like these huge raw material names that pay small dividends (POT does pay an annual 28 cent per share dividend, but, like MOS, their yield works out to be around 0.5% — a token dividend if ever there was one, and they haven’t tended to grow the dividends much even in good years), there are also the nitrogen fertilizer companies — a couple of these are high-yielding MLPs, CVR Partners (UAN) and Terra Nitrogen (TNH), both of which are spinning of distributions that provide investors with a yield of about eight percent.

And if you’re looking for contrarian ideas, the last few months have certainly been depressing for ag investors, or at least for fertilizer-focused investors … so maybe there will be a turnaround if farmers start to place larger-than-expected orders later in the Spring growing season after the lower demand that we’ve seen reported in recent months. After all, you gotta eat, right?

If POT is your pick for an ag stock resurgence in 2012, or if you’ve got another fave to share, just let us know with a comment below. Thanks!

Related Gumshoe Articles

What is Lombardi’s “New Swiss Bank Account” teaser all about?

Sniffing out teaser solutions from Michael Lombardi's "Investing with Michael" letter

50 Comments Read More

Leave a Reply

21 Comments on "“‘The Big One’ … The Single Greatest Way to Play the Next Agricultural Boom”"

avatar

Jerry McBrayer
Guest
0
Jerry McBrayer
January 24, 2012 1:01 pm

I think I’ll stick with MOO EFT in this Agri Catagory

Bruce
Guest
0
Bruce
January 24, 2012 1:12 pm
I like UAN in the AG market. It is an MLP so not necessarily the best investment in IRA accounts. They estimate their UBTI to be 50 % of their payout. I am glad that I bought a small piece of Iowa farm land in 1975, better than any stock investment I have ever made. Ground with a reasonable CSR here is now going for $10000-20000 an acre. Granted the ethenol insanity has contributed to this. And the govt has mandated more and more. I would appreciate any info on another good AG stock or ETF that has land and… Read more »
alainbm
Member
1
alainbm
January 30, 2012 12:10 pm
I have been looking at some of the junior potash companies suggested by yourself and other posters. I have owned potash and Mosaic since i like the long terms trends that will be beneficial for the industry. Verde Potash is eye opening in their most recent presentation they claim to be able to produce Potash for 40$ a ton which is about $100 cheaper than the average producer. They claim they can achieve that using a new process developed Dr. Derek Fray of the University of Cambridge. If that is anywhere close to being true then Verde can be a… Read more »
alainbm
Member
1
alainbm
January 31, 2012 10:23 am

Verde just released today a Preliminary Economic Assessment of producing KCL Potash. They estimate a cost of production of 273$ to 292$ per ton if I am reading this right.
The 40$ seems to be for production of Thermo Potash which seems to be a product they are developing in addition to wanting to produce KCL Potash.
I am a bit confused by their numbers and maybe the market is too since the stock is tanking today down a $1.54 per share as I write.

Jason
Guest
0
January 24, 2012 1:21 pm

I think there are better opportunities in the smaller potash companies such as Allana Potash (AAA), Verde Potash (NPK), etc. Adecoagro (AGRO) is another great way to play agriculture. POT is a great company, but they seem fairly valued in my opinion.

Mark
Guest
0
Mark
January 24, 2012 1:27 pm
Speaking speculatively, I own a future producer of Potash named Encanto Potash that has a good bit of property “in the heart of potash country” Saskatchewan, Canada. They plan on producing 2.5 million tons per year; I believe starting sometime in 2013. They presently sell for the whopping amount of 26 cents per share. Other soon to emerge producers I find interesting are Verde Potash (has a giant property in Brazil, and Brazil presently has to import a huge amount from Canada) and Allana Potash (has a giant property in Ethiopia). Well there you have it all you potash heads.… Read more »
RonH
Guest
0
RonH
January 24, 2012 2:12 pm

Or if you prefer a really speculative fertilizer company, there is China Agritech (CAGC.PK), a maker of liquid fertilizers in China. They have a PE of less than 6, but like all Chinese stocks you have to take their word that their reports are accurate.

Ron
Guest
0
Ron
January 24, 2012 3:59 pm

People should look at IC Potash ICP A potential niche fertilizer in USA. Will supply SOP vs MOP which seems to be oversupplied and majors cutting back on production. ICP had a nice rise last couple of days , probaly because of over supply of MOP announced

DaveM
Guest
0
January 24, 2012 4:33 pm

This company has a good chunk of resource in Saskatchewan and good industry fundamentals. It uses a newer injection process, no mine, with lower capital costs and operating expenses. TSX-KRM

Peter
Guest
0
Peter
January 24, 2012 4:48 pm

You commented on a Drillers and Diggers pick, about 2 months ago, Transit (TRH) now renamed Potash Minerals(POK) on the ASX has a large exploration area in Utah. They are drilling 3rd hole at the moment, with a target resource of up to 5 Billion tonnes!!! Great speccy at current prices!

Dave
Guest
0
Dave
January 24, 2012 5:36 pm

Western potash, WPX.to, They are being touted as the next producer.
They will be running a solution mine, cheaper and faster to implement.
Permitting and Pre feasibility mostly complete.
Looking for a partner, ongoing talks with China and India
http://www.westernpotash.com/

I own some, so please buy lots of it so I can become Filthy, Stinking rich. :-))

Sam
Guest
0
Sam
January 24, 2012 8:14 pm

Nobody has heard about TNH? Besides the best divident paid in 2011 in this sector, it has been the best performer for this year in the sector. Plus, it is a buyout candidate, possibly by CF who owns about 70% of TNH.

Dave
Guest
0
Dave
January 24, 2012 8:34 pm

TNH: See Travis’ 3rd-to-last paragraph…

Olin
Guest
0
Olin
January 24, 2012 9:08 pm

You mentioned Terra Nitrogen as an MLP, but skipped that they are majority owned by CF Industries, which looks to me like a good play on the nitrogen side of things, without the reporting requirements. Am I off track here?

Olin

Dan
Guest
0
Dan
January 24, 2012 10:18 pm

CHS Inc is the best play in agriculture, bar none. It is stable, it no doubt will continue to grow, it pays a decent dividend, it is a huge co-op, it is well diviersified. It is the perfect stock for retirees.

MyWealthyOptions
Guest
0
January 24, 2012 10:24 pm

Nice article. Interesting insight into MOS and POT. MOS is steadily rising after the results, but how about medium to long term outlook. Generally fertilizer stocks trend higher in the first quarter and then become unpredictable.

Nice article.

Please visit my blog at mywealthyoptions.blogspot.com. I traded MOS before the results and made about 87% in the single trade.

Cliff Page
Guest
0
January 29, 2012 12:07 pm
I hold positions in TNH and UAN. I have over 60 equities and TNH out performed them all last year. I was up 35% on capital gains and the stock pays around 8% dividend. The company indeed is owned by MOS 70% which is good. It is still an under the radar company with great potential. UAN has a distinct advantage in that it produces liquid fertilizer that it can transport at a cheap cost of only $35 per ton to 80% of its customers. Liquid fertilizer is three times as strong as the granular fertilizers. The company has a… Read more »
Jeff
Guest
0
Jeff
January 29, 2012 8:47 pm

I assume you understand the biggest reason THN overachieved last yr. The price of nat gas….. If you believe nat gas will stay at these almost giveaway levels stay with THN. I don’t….. If I owned the stock and didn’t want to sell (perhaps capital gains/taxes) I would sell some near-the-money calls and collect that and div.

Jeff
Guest
0
Jeff
January 29, 2012 9:14 pm

Sorry. No options available (very surprising). Carry on.

suzi
Guest
0
suzi
March 25, 2012 6:42 am
I did something crazy and bought what was for me a huge amount of MOS at the ‘high’ in august 2008. I have held on and watched the money shrink, not taking advantage of some recovery last year. I put my head in the sand and felt a rise in oil prices would positively affect MOS and see it continue to be flat, flat, flat and now just saw that POT split 3 to 1 last year – making that stock outperform MOS by what feels like a huge margin. Why is MOS so low and POT raised so high.… Read more »
jesaja
Member
0
March 31, 2012 10:33 am
Interesting article! But the most exciting shares in agroculture is Siaf Sino Agro Food that is now starting to take off! Do people who have been down and tiitat at the company and came home and was very enthusiastic and positive. P / E’s are about 1.5 and it is very low. Normally valued China-companies in this sector is about 5-8 and then shall ye know that Siaf growing fast and will be upgraded substantially very soon with a normal P / E score 5-8, which means a share price four times a day rate . And it could go… Read more »
wpDiscuz