Let's talk economics, shall we? My dad wrote me a quick email question:

So what do you think about potash prices. The stock prices are down and it may be a time to buy. I haven't looked at why they're down but this may be an opportunity judging from your earlier comments.

Well Dad... here are my thoughts:

The main agriculture stocks that are out there are POT, SYT, MON, CPO, DAR, DD, AVD, MOS, IPI, AGU, and CF. POT, MOS, IPI, and CF have some direct 'exposure' to Potash specifically. They are all down ~50% across the board on average from the 2008 commodity boom. I currently own Syngenta, but that's because they create genetically modified crops, and are based out of Switzerland... and you know me... I like to ruin the farming industry though Nazi gold financing... umm, right (joking around with a neutral countries shady war past... always fun). I also own DAR.

So... there is only one question to ask: will commodity pricing go up, or down during a given timeline? Take POT for instance... in 2006, their stock price was between $35 and $45... while today they are at $100. Overall, their revenues in 2009 were the same as 2006, but they had ~40% higher Net Income... great cost controls, etc. gave them good leverage and will right into 2010. Their 1Q10 results were up 86% (thus the higher stock price... and P/E of 32 vs. industry around 20). They've got low debt, they make money, and thus they trade at a bit of a premium... but still the question remains... commodities up, or down? ... here's a fun tool to get you started: http://money.cnn.com/data/commodities/

I must admit, it's a weird market... if potash / phosphate / etc. becomes rare, fertilizer prices go up, corn/wheat/soy would go up as well. The "lag effect" I'll call it. Or... corn/wheat/soy demand goes up which means pricing does, which means more production to take advantage, which means higher fertilizer demand, and thus higher prices... the "pull through effect." So... ultimately, we have to look both ends from a global perspective.

"Lag Effect"

• Is there a shortage of phosphate? Morocco possesses 75 percent of the world's phosphate reserves. It is the world's first exporter (~30% of the global market) and third producer (~20% of global production). If they move, the market moves, and will effect these businesses. Is there any major socio-political issue occurring in Morocco? Well, a quick Google search of the latest Morocco news shows that religious conservatives aren't happy about the Elton John concert in Rabat... I'll take that as a "no problems here" sort of situation. There are a number of articles about the 'phosphate shortage' in 2008 during 'holy crap the world is overheating' time... but the news really died off in 2009/2010. I would say "no," simply on the terms of any real concerns of phosphate shortages would be a much bigger concern for the world food supply, and you simply never hear about it.
• Is there a shortage of potash? Since Potash is the fertilizer form of Potassium, and Potassium (K) is the 7th most abundant element on earth... ummm, no, probably not.
• Do I think a shortage of raw materials for fertilizer is going to drive us up the supply/demand curve? No, I do not.

"Pull Through Effect"

• Is there an increase in demand/production forecasted for US agriculture? According to the Jim Hilker, professor and MSU economist at the Department of Agricultural, Food, and Resource Economics Michigan State University, in his May 11, 2010 (last week) report on Commodity Market Outlook... "no." https://www.msu.edu/~hilker/outlook.htm ... For the US he's telling the US farmers to sign up for Average Crop Revenue Election (ACRE) 'insurance' to combat a likely weakening in the $/Bushel for corn / soy... while Wheat may have a slight increase.
• Is there an increase in demand/production forecasted for Rest of World (ROW)? According to the USDA's May 11, 2010 review of the Global Agricultural Supply & Demand Estimates (which our buddy Jimmy from MSU used in his write up), not so much. They say "global wheat supplies for 2010/11 are projected 2 percent higher with larger year-to-year beginning stocks more than offsetting lower expected production." Okee doke... so less production = less fertilizer = less potash. How about corn/coarse grains? "Global coarse grain production for 2010/11 is projected at a record 1,129.8 million tons, up 2 percent from 2009/10. Most of the 27.4-million-ton increase in coarse grains production results from higher projected foreign corn production, up 19.9 million tons from 2009/10."... in other words, yeah, sorta.
• Overall... the pull through isn't going to be dramatic. The industry won't "pop" because someone didn't realize a billion people existed in a given region of the world. They've got that pretty well figured out.

Now, the last thing... currency. This part is fun, and in my mind, is the real driver. The US Dollar is the currency of choice for commodity trading. So, let's think about what our friend the USD has done in the last 3 years, and compare it to Oil and Corn. The first chart is the US Dollar Index from out friends at Deutsche Bank, for which I believe they closed the fund at the end of March 2009, which is why the graph doesn't continue. A USD Index is generally calculated from the value of the Dollar versus other major currencies (Euro, Yen, Real, etc.). The second chart, is also from our Deutsche Bank buddies, with the same 1Q09 end date, but it is the value of Oil during the same period. And lastly, the 3rd chart is the CORN electronically traded fund (ETF) from the London FTSE, where futures in Corn commodities are indexed. This one is still actively traded, but I cut it off at the end of 1Q09 to show the same scale. So, let's take a look (courtesy of screen shots of http://finance.google.com/):

The Deutsche Bank US Dollar Index: (USDUPX.X)
Deutsche Bank Liquid Commodity Crude Oil Index (DBOLIX.X)
ETFS CORN (CORN)
I suppose if you have eyes, you're seeing what I'm seeing. But, let's state the obvious anyway. Sometime around... errr, middle of 2008... the USD Index was at its absolute lowest, while the Oil and Corn indexes were at their (say it with me), "highest." A little think we'll call "inverse correlation." Dollar goes down, commodities go up... and vice versa. Mmm, okay, that's cool, but what about 2010? Didn't we just experience a global reset and dramatic change in global economics? Well, let me tell you a little story: Our friend the US Dollar was weak... weak for a long time. And what do bullies do to someone else who is weak, especially to someone who used to be the bigger bully? You pile on. You pile on like there is no tomorrow. You come out and say "Hey, I might trade my trillion dollars in my reserves for Euros." Or "Look at your trade deficit, you need all of our help, so how can we rely on you?" Well, that's exactly what the Chinese, Russian, and Euro finance ministers did. How sweet they are. But, just like any bully, they weren't thinking of longer term consequences. Oil was just shy of 50% of our trade deficit in 2008... and rightly so, because the US Dollar pseudo-pegged Oil price are... you remember, right?... "inversely correlated." So, every report that came out where the trade deficit widened, the US Dollar would drop further in value, and then oil would go up, and then we'd pay more, and the trade deficit would widen, and so on, and so on. This was widely reported by intelligent economists like Martin Feldstein (http://www.nber.org/feldstein/), et. al., but the news media and global market paranoia were no match for their "reason," and the dollar kept on dropping and the commodities kept on climbing. But alas, the words of enough economists and that always reliable "supply and demand" curve prevailed, and everyone realized that there was not a global spike in oil demand, nor were the bullies going to be taking any significant actions on ditching our beat-up but breathing friend the USD. Then, to everyone's (read: no one's) surprise, the only major currency created at the height of unprecedented economic prosperity yet with no emergency stop loss or reserve structures, that new kid on the block, the EURO, began to falter in March of 2010. Ruh roh. In come the "PIGS"... Portugal, Ireland, Greece, Spain... and man do they stink. Ireland has overvalued real estate issues similar to the US, and Greece, Spain, and Portugal simply can't handle a stronger currency and overspent when they magically went from having 15%+ interest/borrowing rates to 5-8% with the Euro. So, the Euro finance ministers get together, say "Look, we've got a trillion dollars, everybody relax." Except, that doesn't solve the issue, and the flavor, ahem, currency of the decade, begins to drop. So, the world scrambles in the last few weeks, and says "Which one do I use?" Well, the Yen hasn't been favored since the original Nintendo came out, the Yuan is controlled by the next economy to realize it's overheating (Ni hao, China), the UK is probably in worse shape than the Eurozone, and the rest of the players are too small and/or unstable. So, they look back to the USD and still see some issues, but a few come crawling back. Thus, the increase in the dollar value in the last few months. (WARNING: It's not 'all the way' back, but the extreme weakening of the Euro makes it appear to have come back more than it actually has... why? Beware of that "false positive" in US Dollar Indexes... most Indexes are calculated with >50% EURO comparison, and its the only one having a big issue). What's the next logical choice if not the USD? Gold, baby, gold. Where has Gold gone? Up. 8% in the last month... 30% in the last year. It's great for 'currency protection' sure, but there is a reason why they call gold "gold" and dollars/euros/etc. "currency"... because one flows more easily than the other. Eventually, the global economy will pick a currency to do business with, and the story will continue. So, with the continuing issues of the Euro, the overheating Yuan, the unloved Yen, and the troubled Pound... yes, I believe the dollar will stage a stabilized and slow recovery.

And therefore, due to a fairly well bottomed out dollar, my prediction of its slow recovery, the inverse correlation of the USD to commodity pricing, and the lack of any "lag" or "pull through" effects of supply and demand within the agricultural sector, I am NOT bullish on potash/fertilizer stocks. They are certainly lower in valuation compared to the past couple of years, but on a more historic "2000-2006" basis, there is nothing to say that the fundamentals of the industry warrant a buying spree. There are other factors (i.e. gold being overpriced, but people want to play in commodities, etc.), that could drive some changes in the market, so if you want some exposure into the fertilizer/agriculture market, I would suggest an underweight investment and expect to hold for at least a year.

My $0.02... and naturally, no guarantees.