We enjoyed some great winter sun down in Melbourne this weekend.
On Saturday the thermometer hit a balmy 17°C!
I took my kids down to the park in the morning, and met up with colleague Greg Canavan and his family. After recently moving from Sydney, they are still getting used to Melbourne’s crazy weather. I’ve been here ten years, and I’m still getting used to it!
What was even crazier was that on Saturday, Melbourne was a degree warmer, in the depths of its winter, than London was on Saturday, during the ‘height’ of its summer.
The UK’s ‘summer-time‘ has been a total washout so far. With the London 2012 Olympics round the corner, the Brits are not happy with the freakishly bad weather.
But it’s not just the UK dealing with extreme weather.
The US has been under a heatwave for weeks. The US National Oceanic and Atmospheric Administration is now saying that the US is in the middle of its worst drought since 1956.
The country’s agricultural sector is suffering badly. The corn harvest in particular looks like it is going to be a disaster.
Less than a third of the national crop is in good shape. We’ll have to wait until the harvest to see just how bad it will be, but prices are already soaring in anticipation of a huge drop in production.
The US agricultural secretary was quoted in the Financial Times saying:
‘I get on my knees every day and I’m saying an extra prayer right now … If I had a rain prayer or a rain dance I could do, I would do it.’
Hearing comments like that from the top of the agricultural sector hasn’t helped calm market nerves. The corn price has gone off like a rocket. Since the start of June it has jumped by 45% — setting a new record high.
Corn Price — Up 45% in Just 7 weeks
The US is now looking to Brazil to help bridge the shortfall. The result is that there won’t be much left over for other countries hoping for some corn this year. The corn market will be very tight.
This highlights the issue of ‘food security’: the increasing threat of inadequate or volatile food supplies for global population. This will be something we will hear more about if this harvest is as bad as they fear. The FT also reported:
‘”I’ve been in the business more than 30 years and this is by far and away the most serious weather issue and supply and demand problem that I have seen by a mile,” said a senior executive at a trading house. “It’s not even comparable to 2007-08.”‘
We could well see another swathe of food riots around the world — mostly in poor countries that bear the brunt of supply shocks — like we did the last time the corn price was at these levels, in 2008.
Then, after the market is reminded of the tragic human cost of crop failures, the global conversation will focus on food security once again.
Part of this conversation will be highlighting the importance of fertilisers to increase production rates.
In short — each year the world tries to feed more mouths with less farmland, while enduring more volatile weather. So farmers need to use fertilisers to make every hectare count.
Why Potash is a Key Resource
Potash (a potassium salt) and phosphate are two of the key raw ingredients for the fertiliser industry. And both of them are produced by mining.
The potash sector had been wallowing since the start of last year, despite potash prices holding firm.
However, the major potash stocks have finally turned around over the last 2 months — roughly in line with the corn price.
Majors like Potash Corp (NYSE:POT) have all jumped more than 20% in this time, while the rest of the mining sector crashed around them.
Potash was the darling of the Aussie market a few years ago, after BHP made a bungled bid for Potash Corp. As the excitement passed, the prices of ASX potash stocks slowly fell, as the hordes moved on.
But while the market has been looking elsewhere, some of these potash stocks have been very busy. I’m still following one of the stocks that I tipped for Diggers and Drillers readers, and the price is less than half of what it was when I tipped it. There is hardly a shortage of under priced resource stocks on the market today, but the value in this stock is remarkable.
Generally, Aussie potash stocks move up and down closely with the Canadian majors.
But so far the Aussie market seems to have completely overlooked the fact that the Canadian potash majors are now rallying.
So we may have a double opportunity here.
At some point, and probably soon, the Aussie potash juniors will start playing catch-up to the 20% rally seen in the Canadians. Meanwhile, the market should also start pricing in the progress made by those stocks that have been quietly getting on with things.
I’ve been watching and waiting for this turnaround, and for some potash stocks it looks like we might be witnessing the very start of it right now. Let’s hope so.
Dr. Alex Cowie
Editor, Money Morning
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Written by Dr. Alex Cowie
Dr Alex Cowie is Money Morning‘s Chief Resources Analyst. (To have his newest investment ideas delivered straight to your inbox you can subscribe to Money Morning for free here).
He is also the editor and chief analyst for Diggers and Drillers — Australia’s premier resource stock advisory service.
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