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.

Farmers: An Endangered Species

In China, those working in primary industries like agriculture accounted for 40 percent of total labor force at the end of 2010, in comparison with 70 percent in 1978 (Chart 1).

Chart 1: Chinese employment by industry

Since 1990 the percentage of farmers in China has been declining over time, resulting in a shortage in food supply.

The same declining trend in farmers was also visible for the U.S. (Chart 2). Agriculture employment accounted for 40% in 1900 and dropped to 2% in 2000.

Chart 2: U.S. farm population and rural population as share of population

Today, China’s agriculture employment stands at 40% and will likely continue to drop due to industrialization. China will follow this similar path as the U.S. did from 1900 up till today.

The amount of farmers in China is declining, but production is still increasing at a fast pace due to industrialization (Chart 3).

Chart 3: Agricultural Production in China

From year 2000 though, China is facing a water shortage due to depletion of aquifers and this poses a big problem for agricultural production growth. Since then on for example, China became a net importer of grain.

Meanwhile, the Chinese population is expected to grow 0,5 % per annum. For India the growth rate is 1% per annum. If production doesn’t keep up with population growth, food prices will inevitably spike upwards.

Chart 4: Population Growth

P.S.: some funny stuff is happening in the United Kingdom. Gasoline is spiking upwards and this will of course have consequences on the food prices too.

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.

Adecoagro (AGRO): Agriculture in South America

At the beginning of 2012 agriculture prices are starting to turn around after the big correction that occured in 2011 (Chart 1). Speculators have started to add net long positions in agriculture due to drought concerns in South America.

Chart 1: Rogers Agriculture ETN (RJA)

A great play on agriculture is Adecoagro (AGRO), to find out, go to: Seekingalpha