The Source
Ian Nakamoto, director of research at MacDougall MacDougall & MacTier.
The Idea
Buy shares of Canadian fertilizer companies Agrium Inc., Hanfeng Evergreen Inc. and Potash Corp. of Saskatchewan.
Ever since the credit crisis began last year, the global farming community has either skipped applications of fertilizer or applied a smaller-than-normal amount, Mr. Nakamoto says. As a result, fertilizer demand and prices have fallen, and farmers are getting a lower yield per acre than they typically would.
Farmers are also using up their inventories rather than buying more fertilizer because they are concerned about economic uncertainty and low crop prices.
As economic conditions improve and crop prices recover, however, farmers will have an economic incentive not only to put down more normal amounts of fertilizer, but also to rebuild their inventories, he predicts.
"Those are two strong demand drivers for fertilizer prices."
Agrium specializes in nitrogen-based fertilizer, Potash Corp. deals in potash-based ones and Hanfeng - a Canadian company that does all its business in China - in environmentally friendly slow- and controlled-release fertilizers. Such fertilizers are especially well suited for China because traditional fertilizers tend to get washed away in heavy rains.
Hanfeng is the largest, fastest-growing producer of fertilizers in China.
"It's a way to play one of the largest agricultural markets in the world through Canadian eyes," Mr. Nakamoto says.
Many investors like what is going on in China, he adds, but they're either apprehensive about investing directly or they don't know how to do so. With Hanfeng, concerns about such things as Chinese accounting standards aren't an issue because the company is based in Toronto.
The Payoff
Respectable capital gains in a fairly short time and even better gains longer term, the analyst says. Mr. Nakamoto has a one-year price target of $75 for Agrium (it's now $65.95); $10 for Hanfeng (now $7.24); and $145 for Potash Corp. (now $124.18).
His targets are well down from the record high for fertilizer stocks in 2008, when Potash Corp. soared to a high of $230, Agrium to $110 and Hanfeng to $14.
The Big Risk
That the global economy weakens again and crop prices fall.
"If crop prices fall from current levels because of general malaise in the farm sector, farmers will be reluctant to build their fertilizer inventories. You'll just get normal application rates, so you won't get the second fertilizer price driver," Mr. Nakamoto says.
"I tend not to be that short-term oriented," he says. "I still believe in the long-term, secular story, that as the middle class in India and China grow wealthier, they will want better diets, better-quality protein," pushing up food prices and buoying the agriculture sector.
Why Listen to Ian Nakamoto?
Mr. Nakamoto, who has been in the investment business for 30 years, has a history of sound calls. In May, for example, he recommended clients buy shares of Teck Resources Ltd., which was trading at $10.77. It is now trading at $38.80.
Special to The Globe and Mail This article first appeared in Globe Investor Magazine at tgam.ca/GIMAG
