Equity Strategy April 15, 2008:

Due to other pressing commitments I will not be updating the portfolios until next week.

Since I first touched on the agricultural commodity sector the markets have heated up significantly with many of the grains reaching all time high prices. The rising prices of agricultural commodities are starting to cause some real concerns globally. The recent increase in rice to record levels is causing riots in some Asian countries such as Vietnam and Indonesia. The situation has gotten so bad in Vietnam that farmers have had to resort to sleeping in their fields in order to stop thieves from stealing their crops. The poorest countries are feeling the pain of price increases the most, food riots and protests calling for the presidents resignation in Haiti are only just the start of unrest as the world struggles with an unanticipated increase in demand.

The increase in demand being created by a burgeoning new middle class is surpassing all expectations. The increased wealth being generated by the industrialization and modernization of both China and India has allowed for an expansion and diversification of the everyday diet at a rate not seen before in history. As more diversity is demanded by the consumer pressure is added to agricultural sectors that previously had seen little if any impact, but as the Asian diet changes to include more meats demand for feed grains will continue to increase. This is causing a huge imbalance in the supply/demand situation globally. In addition to the increased demand from an expanding middle class is an increase in the allocation of basic food; corn, to the production of fuel, ethanol. This exercise in political folly is only going to create enormous unrest in the rest of the world as food prices are pushed out of reach of many of the poorest nations.

 Ethanol will never be the answer to the question of US energy self sufficiency and at the end of the day will have created a situation where there are no winners in the push to expand an unsustainable industry for political gain. This short sighted political agenda is going to back fire as the world wakes up to the fact that American’s are using food to fuel their SUV’s; the back lash could be quite severe.

Throughout history governments have feared food inflation due to the potential for civil unrest leading to political turmoil. There is going to be enormous pressure on Governments around the world to increase crop production at a time when there is very little crop carry over from previous years to fill the void. If crop production is not increased sufficiently over the next year there is a high potential for numerous destabilizing consequences. 

In the short term the main consequences of a global push to increase crop production to keep prices from skyrocketing will be a dramatic increase in the use of new technology and equipment.  Governments around the world will be trying to create an environment of change and will be pushing for modernization at all levels of production. To increase crop yield, new equipment will be increasingly in demand, benefiting one of the premier agricultural equipment manufactures in the world, Deere & Co. (DE-N) which is expanding the production of large horsepower tractors in anticipation of increased demand. The company recently released first quarter results which reported earnings per share increase of 59% to 83 cents per share verses 52 cents per share a year earlier, net sale increased to $5.2 billion from 4.425 billion in the first quarter of 2007. The company is forecasting an increase of 17% in net sales for the full year 2008 with agricultural sales up an expected 33% year over year. The company sees a sustained increase in demand globally over the net year.

The other major sector to benefit from the increase in demand for higher crop yields will be the fertilizer industry and Canada has two of the major fertilizer producer in the world. Agrium Inc. (AGU-T) is the largest agricultural retailer in the US and a leading global supplier of fertilizers, industrial and specialty products. Agrium is in the process of buying United Argi Products (UAP) and on completion of the takeover will be the largest agricultural retailer in North America with sales of over $8 billion annually. Agrium is aggressively growing their agricultural business in North America and continues to expand the fertilizer business world wide.

The World’s largest fertilizer producer is Potash Corp (POT-T) which produces three key products, potash, nitrogen and phosphate. The company operates 22% of the global capacity for potash producing 9.4 million tonnes in 2007 a new record and a 31% increase in volume over 2006. The company produced over 1.4 million tonnes of nitrogen a 19% increase over 2006 and total phosphate sales including liquid fertilizer, solid fertilizer and industrial products set a new record of $432 million dramatically surpassing the old record set in 1998 of $230 million.

Potash is forecasting another record year for 2008 expecting potash shipments to be up 7% over 2007 and nitrogen sales to set another new record in 2008.

The businesses that supply products and technology to the agricultural sector are positioned to benefit from the long term change to a more diversified and varied diet that is likely to force governments around the world to spend increasing amounts on upgrading the agricultural sector to meet the increase in demand.