Arbitrage opportunity in agriculture

At this moment there is an interesting arbitrage opportunity for investors in the agricultural space.

When we look at the potash price we see the following trend downwards. Ever since the break-up of the potash cartel between Uralkali and Belarusian Potash Company in July 2013, we have seen a drop in potash price from 400 USD/t to 300 USD/t (see chart below from InfoMine.com).

Normally, the potash price follows the food price, because the food price is a leading indicator for the potash price. I have noted this correlation here. So you would expect that the potash price would get some momentum upwards since food prices have soared almost 20% since the start of 2014 (see chart of RJA below from Google Finance, which represents agricultural prices).

To read further, go here.

Rising Food Prices Pushing Up Potash Stocks

Agriculture prices have been going up since the beginning of 2014 and I think that if this trend continues, we will see demand going up for potash, which is used for agriculture.
The chart below monitors the food prices. You can see the recent surge in 2014. Many foods went up like coffee, sugar, even wheat.

RJA agriculture

If we chart the agriculture index RJA against the largest potash producer Potash Corp., then we get this.

Food (RJA) Vs. Potash (POT)

We see a correlation here between food prices and potash prices. Food prices are obviously a leading indicator for potash sales and as a consequence we can say that higher food prices will push up potash prices.

So if you want to bet on higher potash prices (because of the recent surge in food prices), then you should buy the potash companies like Yara International, Potash Corp. or Allana Potash.

Allana Potash: Update

Agriculture has been in a bear market since February 2011 as evidenced by the Rogers Commodity Index for Agriculture (RJA). But surprisingly, since June 2012 something interesting happened. We got a spike of 16% in the agriculture price due to supply concerns in the corn, soybean and wheat market (Chart 1). This spike is also felt in stocks like Potash Corp. of Saskatchewan (POT) and Mosaic Company (MOS). As agriculture prices increase, so will the fertilizer prices increase.

Chart 1: Rogers Commodity Index Agriculture (RJA)

Agriculture is one of the sectors I’m very bullish on and it’s not just me. Marc Faber’s recent outlook for agriculture has been very positive. Marc Faber expects more weakness in industrial commodities, though he said agricultural commodities “look better”.

In the past year, fertilizer developers have been decimated. One of these developers: Western Potash ( (WPSHF.PK ), had additional problems due to development doubts in their project due to market speculation that a deal with a potential Chinese investor in the company fell through. Another company, Ethiopian Potash (FED) has been on the brink of collapse due to its dire financial situation. And more recently, BHP has been exiting Ethiopia due to weak exploration results.

On the other hand, Allana Potash (ALLRF.PK), which I talked about in this article, had increasingly positive news over the past year. Though, the share price hasn’t increased yet (Chart 2).

I will give a quick update on Allana Potash in this article.

What if Oil Prices Double?

Today we are concerned about peak oil because global demand in oil and gas is increasing 3% a year while production is decreasing 3% a year. There have been tensions with Iran trying to shut down the Strait of Hormuz, which will affect 35% of seaborne traded oil. The Obama administration is already concerned itself about oil prices and is now focusing on increasing the drilling rate of oil domestically.

The fact is that the U.S. imports of oil have skyrocketed. 30 years ago the United States imported 28% of its oil, while today, oil imports were over 60% in 2008 but have come down to 49% in 2010. Most of those imports are coming from Canada, the country with the third highest oil reserves on the world after Venezuela and Saudi Arabia.

If oil prices were to double, there are a few things to think about.

Please go to my analysis here to find out: Benefiting from $US 200 dollar oil.

Agriculture turning around?

At the beginning of 2012 agriculture prices are starting to turn around after the big correction that occured in 2011. Speculators have started to add net long positions in agriculture due to drought concerns in South America. Global demand is still going up.

Soy Bean prices are going up on dry weather in Brazil and Argentina.

Palm Oil prices benefit from the problems in the Soy Bean crops.

Cotton prices are improving but are still weak. Cotton prices are bottoming out though.

The rubber market is likely to continue the uptrend due to bad weather conditions. Demand for rubber is strengthened by the buying up to the Lunar New Year.

Wheat prices are still weak due to large wheat production.

Coffee prices had a surge in 2010 and were correcting in 2011. Prices will remain firm though due to supply shortages.

Sugar is in an uptrend, but speculators are turning bearish.

Corn prices are weak due to a surplus in inventory, but seem to be bottoming out.
Rice prices are turning in a downtrend as India starts exporting more rice to the world.

Overall, we can say that agriculture prices are in the process of bottoming out, but I wouldn’t count on making money here because wheat, corn and cotton (the three biggest agricultural commodities) are still in oversupply.

RJA Rogers Agriculture ETN