all aboard the fertiliser bus

The Australian Business

All aboard the fertiliser bus

January 4, 2010 12:00AM

A FORECAST global food crisis will put pressure on prices.

But there was a television interview he did a few weeks ago which has stuck in our mind, and two points from that are worth thinking about as we contemplate the coming year, significant because 2010 will round off the first decade of the new millennium come next December 31 (please note all those who can't count and have already summed up the decade).

The first point Rogers made was to continue to be bullish about gold. He cited a recent commodities conference in Prague which he addressed, and during which he asked the 300 "heavy hitters" (as he described them) to put their hands up if they had ever owned gold. Only about a quarter had, a response that obviously astounded Rogers. The point: it shows just how big an untapped market remains among the high net worth types for gold.

The other point was his belief that the best investment lies in agricultural commodities. Rogers believes there will be a global food crisis within five years. Food prices have to go up because, without higher farm incomes, it will be hard finding enough people to work the land. He was astonished that even last year, when there were rice shortages, agricultural commodity prices remained depressed.

Gold we have talked about quite enough for now. But it remains frustrating that Australians have few chances locally to weight their portfolios with agricultural commodities plays.

The only significant opening is the fertiliser feedstocks, potash and phosphate, and they have been a big disappointment of late. On Thursday, regional Canadian newspaper the Regina Leader-Post dubbed potash as its business story of the year. Well, it would, wouldn't it?

Saskatchewan is responsible for 30 per cent of the world's potash supply, but instead of the commodity breaking through $US1000/tonne, as had been predicted, it fell below $US400/tonne. China and India, some of the world's biggest importers, have been determined to break the North American stranglehold and are looking elsewhere.

The Indians have negotiated a $US460/tonne contract price. Now we hear that Belarusian Potash will sell China 1.2 million tonnes next year at an extraordinary $US350/tonne.

Phosphate has had a similar downward ride. But we see that the sector leaders are pressing on. Minemakers (MAK) has begun trial mining at its Wonarah phosphate project in the Northern Territory and Phosphate Australia (POZ) has been getting some very positive results from metallurgical testing at its Highland Plains project northeast of Wonarah.

On the bright side, the US potash producer Mosaic Co is sounding bullish about fertiliser sales in 2010 as farmers need to boost nutrient levels. The potash crisis was partly caused by the North American suppliers -- they thought they had enough market leverage to charge whatever they wanted. The price collapse has more to do with that over-reaching than the long-term future of agriculture.

Food is going to become an issue, just as uranium did after years in the doldrums. Remember back in 2003 and uranium was $US7/lb? What if you had bought Paladin Energy (PDN) then when the shares were worth a few cents?

What if you didn't? Five years from now, like those who waved away the Paladin story, investors may be regretting missing the fertiliser bus.

Think long-term

TALKING of long-term trends, there was a thought-provoking argument in a London newspaper last week.

Noting that the price surge across the commodities complex since 2000 has been unprecedented both in its magnitude and breadth, the writer made this point: resource nationalism, from Libya to Russia, has flourished with producer countries using their muscle to extract better deals. (Except Australia, where the federal government tends to ignore the resources sector while happily recycling the industry's tax revenues to Labor's city constituents.)

On the other hand, consumer countries see themselves as vulnerable and fretting about security of supplies. Look at how China, followed by Japan and South Korea, tied up as many foreign deposits as it could lay its hands on.

The problem for Australia is how to strengthen its bargaining hand. Having more than 500 listed companies, many capitalised at risible amounts, makes it hard to present any sort of united front.

But for the investor in 2010, there is also another issue: the way many of the resource companies are run. In his latest report, Deloitte's mining man Eric Lilford says the industry has been disproportionately influenced by short-term outlooks.

"When commodity prices hit record highs two years ago, there was a rush to develop projects which included some marginal or technically complex assets," Dr Lilford writes. The result was a significant increase in costs; and, when commodity prices plummeted as part of the global financial crisis, this was followed by cost-cutting across the board.

There is much need for companies to improve their operational performance and not just put Band-Aids over problems, and to think long term. Something to keep in mind when buying a stock. It's more than drilling results and PowerPoint presentations.

The Australian implies no investment recommendation and this report contains material that is speculative in nature. Investors should seek professional investment advice. The writer does not own shares in any of the companies mentioned

- The Australian