Who Would Think the Ground Could Be So Profitable?

“Ahead of the Street Column,” by Mitchell Clark, B. Comm.

In the investment community, there’s growing interest in the agricultural sector. Not only does this sector benefit in an inflationary environment, but also many investors (myself included) feel that the commodity price cycle has yet to play out in this burgeoning industry.

One company that’s worth following in this sector is Potash Corporation of Saskatchewan Inc. (NYSE/POT), which is the world’s largest fertilizer business by capacity. A company with a name like this doesn’t conjure up feelings of excitement, but sometimes the best businesses in the world are boring, real-world type enterprises like this.

Not surprisingly, the fertilizer business is cyclical and, because of previously high fertilizer prices and the financial crisis, there’s a lot of pent up demand for potash, phosphate and nitrogen.

Potash Corporation recently surprised the Street by providing first-quarter guidance well ahead of previous expectations. According to the company, its upward revision in guidance was due to a substantial rebound in potash demand both domestically and internationally. The company also said that it is experiencing better-than-expected margin growth and that its customers, who are farmers, are experiencing stronger returns from their operations.

I wouldn’t have an equity portfolio going forward that didn’t have some exposure to agriculture. There are some big conglomerates in this industry. They include Archer Daniels Midland and Monsanto, among others. Realistically, if I were to invest in this sector, I’d love to own productive cash crop land and/or a fertilizer business. Agrium Inc. (NYSE/AUG) is another big fertilizer seller that’s been a real success. Pull up a five-year stock chart on Agrium and you’ll see just how successful an agricultural enterprise can be.

Right now, one of the hottest stocks on the NASDAQ is, of course, China Agritech, Inc. (NASDAQ/CAGC). We’ve talked about this company quite a bit in this column. This business sells fertilizer in China and, like many enterprises across the pond (I mean the other pond), business is booming.

Global investor sentiment has really changed since the financial crisis. Both institutional and individual investors are now looking to invest in “real” assets and both precious metals and other commodities fit the bill.

I can foresee a real boom in the agricultural sector over the next 10 years and, if you know any farmers, it’s well deserved. It’s funny how things tend to occur in waves of enthusiasm. The fertilizer business just could be the next big thing.