Natural gas prices rose a tiny bit over the past few weeks and China slowed down, producing worse-than -expected false data about its economy – and the situation is really much worse than the official data. People began to worry about Europe, markets softened and agriculture stocks sold off, big time, some down as much as 25%.
It’s sort of like the crowd at a baseball game leaving early because the hockey game being played across town has just ended.
The crowed, bless their greedy hearts, sold off a company facing booking demand, falling or permanently low feedstock costs, a company paying an 8.1% dividend. No kidding. You cannot make this stuff up.
Growing demand for corn, fertilizer
The company is Terra Nitrogen (TNH). It makes the fertilizer needed to get more corn out of an acre. The number of acres planted to produce corn is at an all-time high, meaning less productive land is being put into production. I saw this a couple of weeks ago back in the Midwest – farmers are actually cutting down trees by the roadside and in some windbreaks to put more land into production. When you farm less productive land, you need more fertilizer. So not only is demand increasing based on the number of acres, demand for fertilizer is increasing due to the average amount of fertilizer. I guess the folks in the Wall Street crowd skipped second-grade math.
This is not a one-year event.
Core demand for foodstuffs around the world is growing faster than the population and faster than GDP growth. While people in the developed world know they are too fat and trying to shrink, they are buying more expensive food to do so and most of the rest of the world wants to get fatter and is on the road to doing so. People around the world – including emerging what are colloquially known as emerging economies – are, at a minimum, spending their extra income on high-quality food. This is especially true in China; more on that in a minute.
The bottom line for investors: When a few million people want to buy more and better food, it is a nice little trade. When more than 3 billion want to do so, and are on a track to do so, it is time to (and I am now stealing a line from Jim Rogers) “trade that Mercedes for a tractor.” Demand from emerging markets — and demand for specialty foods in developed markets — has been boosted by government policies that have farmers growing corn to burn in gasoline tanks.
A predictable trend
Demand for more and better food should increase for the next 50 or 100 years. Let’s start with corn. Forget other crops. In the farm belt it is all about corn. Corn prices hit all-time highs this past year, retreated and are climbing back towards all-time highs. Why? Once you eat better pork and chicken, you are not going back to soup even if it means delaying purchase of that moped because the factory is cutting back. Chinese imports of corn are at record highs and will go higher over the next 12 months. This is a new, predictable phenomenon not predicted by Wall Street. Big surprise.
When you think of intensive corn production, you think fertilizer. For each acre of lousier and lousier land farmers put into production, the more fertilizer those farmers need to get the best yields from that lousy land. And since this is the largest number of acres being put onto production in generations, increasingly intensive cultivation is the trend. That means more fertilizer and that means Terra Nitrogen. It’s a very fine company, a stock that may scare you because it ran, sold off and is now running again. The stock’s chart is masking the underlying fundamentals of the company. This is not a bubble stock. The current dividend yield is 8% or more.
Think long term
Am I being too optimistic about agriculture? In 2012, the value of farmland is at a 30-year high – making farmers very liquid – and I said previously plantings for corn will be at an all-time high. That is the demand side. The cost side looks even brighter. You have heard about fracking? Well, natural gas is TNH’s feedstock to make their fertilizer. Natural gas was once north of $12. It is now struggling to stay above $2. Not much more to say on the cost side. And if you think gas prices have to rise, well, it’s your money. They should stay low — under $3.50 adjusted for inflation — for one to three generations.
The crowd, as usual, has it wrong about TNH although it has bounced and is now in an upward trend. And unlike the crowd, think long term. People around the world will eat more, not less. Not everyone is as fat as we are. There is little arable land left unexploited in places that can produce the core feedstuffs used to support the world eating more and better food. To exploit the land, you need more fertilizer. To make that fertilizer, you need natural gas. All of this points to where the crowd is not: TNH.