With the problems we face these days in the investing world – possible rising interest rates, the Greek debt crisis and volatility in energy prices – it’s easy to ignore the big picture. Who cares if rates go up, the euro goes under or oil prices shoot back up to $150 a barrel … if there’s simply not enough food to eat.
Sixty-five years ago, there were just over 2 billion people on this planet. Now, there are more than 7 billion. In another few decades the global population will reach 11 digits. Yet arable land hasn’t increased a single acre. In fact, with receding water reserves, the amount of land available to grow crops has actually decreased over the last several decades.
The problem, however, has intensified even more of late. Not only is the amount of land available for farming decreased, but the demand for grain has skyrocketed at a pace even faster than the population has grown.
You see, to compound these problems, what we eat, rather than how much we eat, is changing the agricultural landscape. Let’s take a look at the world’s most populous country as an example.
According to McKinsey & Company, China’s urban middle class has grown from just 4% of the population in 2000 to 68% in 2012. It will reach 75% in less than a decade. Those numbers are staggering. But similar results can be found in many emerging countries like Indonesia and Brazil.
As the middle class grows, a great shift in what people eat occurs. Rather than simple protein foods like wheat and corn, middle classes around the world begin consuming more complex proteins like meat and dairy products. The problem is that it takes more grain to produce those more complex proteins.
According to the United Nations’ Food and Agriculture Organization, it takes three times as much grain to raise the same amount of pork than if just the grain itself were consumed. It takes seven times the amount of grain to raise beef. That means that as the world begins eating more meat, each arable acre of land needs to produce higher yields of feed grain.
Just look at how big of an impact this emerging transition into the middle class has had on pork consumption in China alone:
Certainly, these facts present us with a serious problem. Fortunately, there are some steps and changes that can be made to mitigate some of this ongoing concern.
Crop yields can be increased to satisfy some of this extra demand. Certainly, water remains a problem. Any basic study of agriculture will tell you that when crops have access to proper irrigation, yields increase. But on the other side of this coin, fertilizer is also crucial for increasing crop yields.
Fortunately, there are already some ways to play this angle.
Two weeks ago, my fellow Wyatt Research analyst Bob Ciura wrote this piece, describing one such fertilizer company, Terra Nitrogen Company LP (NYSE: TNH). Terra is one of the smaller players in the fertilizer game, but it is also one of the highest-paying companies, due to its master limited partnership tax status.
But Terra Nitrogen isn’t the only way to make a buck in fertilizer.
In fact, because fertilizer represents an investment in such a long-term trend, investors would be best served to diversify their holdings. Along with Terra Nitrogen, here are three more names you should consider adding to your portfolio.
- Potash Corp. (NYSE: POT) – Potash, as a product, is an essential crop nutrient. It increases crop yield and disease resistance. Potash Corp., as a company, is the largest producer of potash. It also produces nitrogen and phosphate for use in fertilizers. The recent fall in agricultural commodity prices has made Potash Corp. a bargain. It trades around $31 per share – down from as much as $60 four years ago. Investors can also lock in its incredibly steady 5% dividend yield by purchasing shares today.
- CVR Partners LP (NYSE: UAN) – Like Terra Nitrogen, CVR Partners is an MLP. That explains its unusually large 14.1% dividend yield. The company produces and sells urea-ammonium nitrate, a chemical solution that provides essential nutrients to crops. CVR is relatively small, with just one facility and a market capitalization of under $1 billion. Its facility, however, is the only one in the U.S. that produces nitrogen from low-cost petroleum coke, rather than natural gas. Right now, shares of CVR Partners are trading at a deep discount, and you have an almost unbelievable chance at a double-digit dividend yield.
- Agrium Inc. (NYSE: AGU) – One of the largest, most well-rounded fertilizer companies in the market, Agrium is also the most stable play. Unlike its competitors, it combines its wide operating net of production facilities with a retail unit. That segment helps it mitigate some of the industry’s downturns when crop prices decline. Agrium produces and sells a wide range of fertilizer components, ingredients and end-use fertilizers worldwide. Shares of this fertilizer giant pay a steady 3.4% dividend yield.
Clearly, fertilizer companies often suffer from the highly cyclical nature of agricultural prices. When corn, wheat and grain go up in price, so do fertilizer stocks. So with a freefall in those prices of late, we’ve seen these stocks lag the market’s rally.
But the recent retreat provides an opportunity to scoop up some of these fertilizer plays. These stocks could – and most likely will – remain more volatile in the short term. But as you can see, the world’s expanding need for increased crop yields is a very long-term trend with no other viable solutions.
This is making ordinary people rich
Ordinary people across America are getting insanely rich. Take Gladys Holm. She never earned more than $15,000 a year as a secretary. But by making one simple move, she was able to leave an $18 million fortune to a children’s hospital when she died. There’s many more just like her. Find out how they did it right here.