In a choppy market swirling with negative energy, wouldn’t it be nice to own a resource stock that keeps rising in the face of ALL bad news?

Welcome to the “agriculture super cycle” and the wild and whacky world of fertilizer.

To give you an idea how bullish the fertilizer industry is – since Jan 1, 2008 – while the S&P TSX composite index has decreased 4%, major fertilizer companies like Agrium [TSX:AGU], Mosaic [NYSE:MOS], Potash Corp [TSX:POT] and Kennecott [NYSE:RTP] have gained an average of 21%.

What are the fundamentals that go into creating this so called “super cycle”?

Potash and phosphate fertilizer are mined from deposits left behind when ancient sea beds evaporated. There is no commercial substitute. As one analyst put it, “As long as people are eating and making babies, the price of fertilizer will continue to rise”.

Publically traded companies love displaying line graphs depicting the rise in world population as evidence of a growing market. “More people = more sales”. Maybe, maybe not. In the case of fertilizer what’s relevant is not so much that the world population is growing, but that incomes are growing, particularly in China and India.

As the incomes in these developing nations grow the workers demand a more protein-rich diet, which means more meat. This has an amplifying effect on the demand for fertiliser, because it takes about 10 kilograms of grain to produce one pound of meat.

So as meat consumption soars, we need more grain to feed the livestock. But remember the rising population? Well guess what? All those new people have to live somewhere. So – as the cities and the suburbs continue to sprawl, there’s less arable [fertile] land to grow food on.

The end result being that the remaining farm land needs to be more productive. And there is only one way this can be accomplished: with fertilizer.

As luck would have it, there is no shortage of fertilizer. The Saskatchewan basin alone could provide the world with enough Potash and phosphate for the next ten thousand years. The planet doesn’t need more “discoveries”, it needs more production.

A year from now there is going to be a cluttered field of junior fertilizer companies making big claims. Right now, it’s pretty easy to sift through. I’ve identified a couple of
juniors with big upsides who are occupying different niches (Potash and Phosphate) in the agriculture super cycle.

It appears Potash One (KCL-TSXv) is the front runner in the race to Potash production. They are building a “solution mine” which involves dissolving Potash with salty water and pulling it out of the ground with pumps. This will be much cheaper than traditional mining.

The 43-101 compliant resources amount to some 400M tonnes of Potash. A typical solution mine will produce close to 2M tonnes per year.

The Potash One management has an interesting pedigree. CEO Paul Matysek built a uranium company and merged it with a major uranium producer in 2007 in a deal valued at $1.2 billion.

With a market cap of $165 million, 35% institutional ownership and diluted working capital of $52.9 million, Potash One’s balance sheet is solid.

Matysek and his team are focused solely on developing the Legacy Pot Ash project, and their track records would suggest that these guys do not take their eyes off the ball.

Phoscan Chemical Corp (FOS.TSXv) is another company worth looking at. Their stock price has risen 300% in the last 12 months. It’s a good way to stake a claim in the Phosphate fertizer industry. Phoscan owns the last undeveloped high-grade igneous phosphate deposit in North America. They are focused on lowering production costs and increasing flexibility to create cushioning against the cyclical pricing common to fertilizers.

Phoscan is moving ahead aggressively with a pre-feasibility study and they have a relatively modest market cap of $121 million. Their CEO is a financing veteran with extensive experience in mineral resource development. He was one of the co-founders of RFC Resource Finance Corporation which is now a wholly owned subsidiary of Teck-Cominco Ltd.

Phoscan is a bright surging company with an unusually sophisticated grasp of their target market. From my homework, it appears that it is the only junior listed on the boards that offers a pure Phosphate play.

I recommend you have a close look at the junior Potash and Phosphate development companies. A super cycle is a beautiful thing to be part of. You can tune out the bad news, sit back and watch your portfolio grow like corn in the mid-august heat.

Guy Bennett