We have learned that the Federal Reserve is about to leave interest rates at historically low levels for an unprecedented period of time. They also hinted that adding even more liquidity is certainly an option. As expected, gold, silver and other precious metals took off higher. But is there another way to take advantage of this wall of cheap money? Quite possibly, in the agriculture sector. What I’m talking about is potash.
As money floods the system and we see inflation start to move higher around the world, not only will precious metals move up, but so will a lot of other commodities like food. We’ve seen many commodities come down in late 2011, but it appears they are now set to take off for an extended period of time. Higher food prices mean more people will be farming and existing farmers will want a higher yield, meaning more crops for the same amount of space. To achieve, this they use fertilizers
Fertilizer is made of three main components: nitrogen; phosphorus; and potash. Potash, a product made from natural potassium salts, is essential for plant growth and is in huge demand, but is costly. When the prices of commodities fall, farmers use less fertilizer to reduce costs, since they are getting less money on the market for their crops. But when prices of commodities rise, as they will with higher inflation, then farmers want more crops and can get higher prices, so they are willing to spend more on fertilizers containing the key ingredient potash.
Potash Corp. of Saskatchewan, Inc. (NYSE/POT) just came out with corporate earnings that missed expectations, as investor sentiment was hoping for a better return. This might be a good opportunity to get in ahead of 2012 being better than what current investor sentiment is expecting, if inflation in food prices starts to move higher. This potential move up in food prices will result in more revenue to farmers and better corporate earnings for late 2012 and 2013. If the Fed is going to keep the money supply flowing into late 2014, then we could have a very long period of inflation starting to rise, moving investor sentiment later this year into the camp of higher expectations, which would mean that the prices of potash stocks would also be quite higher.
Other companies to watch in this sector are CF Industries Holdings, Inc. Co (NYSE/CF) and Agrium Inc. (NYSE/AGU). If investor sentiment becomes more positive for potash in general, then all of these firms will have stronger corporate earnings. While they have moved off their lows from last fall, they are still far off from their highs.
While I wouldn’t recommend stepping in immediately, I would pay attention to how their next corporate earnings outlook appears and the guidance issued by the companies. This will drive investor sentiment. A good example is from the last corporate earnings release from The Mosaic Company (NYSE/MOS), in which the company outlined its guidance for 2012. It stated that, in early 2012, they were cautious, but could see a strong second half, with volume starting to build after February.
I am going to be paying close attention to investor sentiment in agricultural prices, as well as these stocks themselves, ahead of the next corporate earnings releases. If we see inflation start to pick up and food prices headed higher, we should see this result in better corporate earnings for this sector later this year.