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The Potash Prize
Toronto: August 30, 2010
By John Stephenson

What do floods in China , droughts in Russia and a $40 billion takeover fight have in common? Food inflation is once again front-and-center and coming soon to a supermarket near you. Agricultural commodities have been on a tear lately with wheat and corn prices spiking and coffee surging to $1.70 per pound—its highest level in more than 12 years.

Behind the hype about food prices, however, something very real is happening in the world of food. Changing diets, rapid urbanization and a growing global population are all putting unprecedented stresses on the global food chain, meaning more food must be produced between now and 2050 than has been produced during the past ten thousand years combined.

The recent run-up in food prices stands in sharp contrast to the previous four decades when food prices were declining. Over the last fifty years, global food production tripled, while the world population doubled and average life expectancy surged from forty-six in the 1950s to a worldwide average of sixty-five today. During this period, output expanded as Western farms became large-scale commercial enterprises, fields were irrigated and artificial pesticides were used to boost yields.

Underpinning the surge in global food prices has been the stunning rise of Asia, underscored by China replacing Japan as the world\'s second largest economy. As incomes globally have risen, the consumption of meat and dairy products has exploded worldwide. This, in turn, places greater demands on grains production, since these foods are very grain- and water-intensive to produce. Currently, the most popular meat in the world is chicken. In China, were half the world\'s pigs are eaten, pork is dominant. It takes between two and seven pounds of grain to produce just one pound of meat. A meat-based diet is so resource-intensive that it takes from two to four times more land for a meat eater\'s diet than it does for a vegetarian\'s diet.

Propelling wheat prices higher was a snap decision by Russian prime minister Vladimir Putin to ban the export of grains and other agricultural goods due to the impact of severe weather. Russia \'s wheat farmers are reeling after a severe drought, the worst in more than a century, has blanketed the Black Sea region and forced the government to act to protect domestic interests.

The Russian export ban has done more than put a crimp in the country\'s plan to become the world\'s biggest supplier of wheat by 2020, its sent prices for wheat spiraling higher. Nowhere is the impact of Russia \'s actions more keenly felt than in Egypt , the world\'s largest importer of wheat. When Mother Nature is unruly and the weather is not cooperating prices for agricultural commodities will soar, fattening the profits of farmers and impacting the pocketbooks of consumers. In early 2008, when wheat prices were marching higher, many retail prices in the Western world for products such as bread, pastry and pasta rose by 20 percent.

As economic influence continues to shift toward the East, global commodity players are looking for ways to bolster their offerings of the basic raw materials that support economic growth—commodities. And they don\'t come any bigger than BHP Billiton, the world\'s largest mining company that recently made a $40 billion bid for Potash Corporation of Saskatchewan (POT—NYSE). Behind BHP\'s aggressive offer is the realization that to feed a hungry planet, the use of commercial fertilizers will need to be dramatically expanded, since fertilized crops grow at twice the rate of unfertilized crops.

And Potash Corporation, the world\'s biggest fertilizer company, is sitting on the biggest and best reserves of potash, a critical plant nutrient. The province of Saskatchewan in western Canada is responsible for supplying 39 percent of the world\'s potash needs, making its biggest company an attractive target for BHP Billiton.

The Financial Times has run several articles recently decrying the amount of money that Marius Kloppers, the aggressive CEO of BHP Billiton, is offering for control of Potash Corporation. But one thing that most of this snapshot analysis has missed is that Potash Corporation has a reserve life (reserves divided by current production) of several hundred years. While the acquisition may look expensive on a single year\'s multiple of earnings or cash flow, a successful acquisition would help offer an immediate adrenaline boost to BHP\'s reserve life. And in a world of increasingly scarce commodities, control of the best quality, geopolitically secure and long-lived assets cannot be overstated.

Changing diets, whacky weather and a swelling of the global middle class have all conspired to raise the cost of a trip to the supermarket. As the world economy begins to shift into high gear, food inflation is once again about to become everybody\'s business.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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