If you're a resource investor, fertilizer stocks should be on your radar right now.
Making the stuff that helps crops grow might sound like a boring business. But buying these companies could make you a lot of money in the years ahead.
Let me explain...
Fertilizer is essential to grow the food billions of people eat. Most soil doesn't have all of the nutrients that crops need to grow... nutrients like nitrogen.
Nitrogen is the seventh-most-abundant element in the universe. Most of the air we breathe – about 80% – is nitrogen. It's also necessary for healthy crops. They absorb more nitrogen than any other nutrient.
Corn, rice, and wheat – the biggest grain crops – are the most hungry for nitrogen. They demand more than nature can provide.
You see, crops can't use the nitrogen in the air. Airborne nitrogen consists of two nitrogen atoms bonded together. Crops can only use nitrogen atoms that have been attached to hydrogen. The only way that happens naturally is through special bacteria that grow on bean roots... or lightning strikes.
That's where nitrogen fertilizer comes in.
With the help of nitrogen fertilizer, production of the major grains has grown 57% globally over the past two decades, according to the Food and Agriculture Organization of the United Nations (FAO).
That is a huge improvement, but it will have to continue. The world's population continues to increase. It doubled from 3.5 billion in 1968 to more than 7 billion in 2012. And it will add another 3.3 billion in the next 35 years. As the population grows, so will the demand for grains.
The world is also eating more meat...
India and China – which account for 36% of the world's population – are getting richer. The richer they get, the more meat their citizens eat... And it takes a lot of grain to make meat.
Raising a pig requires 3.5 pounds of corn for every pound of pork. It takes between five and 20 pounds of feed for every pound of beef. This is one of the reasons that the annual corn usage in the U.S. has increased nearly every year since 1995.
All of this adds up to more demand for nitrogen fertilizer...
The FAO estimates the world used 113.1 million metric tons of nitrogen last year. That will climb to 115 million metric tons in 2015 and up to 117 million metric tons in 2016.
That's why the world's nitrogen producers are merging to increase production and reach more markets...
For example, just last week, nitrogen producer
CF Industries, Inc. (NYSE: CF, Stock Forum) announced it will pay $8 billion to buy competitor OCI's European and North American businesses. CF expects the combined operations will save $500 million per year after-tax. The combined assets will make the world's largest public nitrogen company.
Stansberry Resource Report holding CVR Partners is also expanding its reach. It currently produces its fertilizer from a single plant in Coffeyville, Kansas. But it's in the process of acquiring Rentech Nitrogen Partners and its East Dubuque, Illinois production facility to increase production.
Growing demand and increased production will provide a big tailwind for nitrogen producers like CF Industries and CVR Partners going forward.
But there's another reason I like nitrogen producers right now...
As regular readers know, oil and natural gas prices have plummeted since June 2014. They're now trading at multiyear lows – less than $45 per barrel and $3 per thousand cubic feet (Mcf), respectively.
This has been great news for nitrogen producers' bottom lines...
To make nitrogen fertilizer, nitrogen atoms need to be combined with hydrogen... which comes from fossil fuels like oil and natural gas. And a large portion of the cost of making nitrogen fertilizer is these fossil fuels.
So lower oil and gas prices have dramatically lowered production costs. This is fueling profits for nitrogen producers.
For example, CF Industries reported a 15% increase in its gross margin (revenue less cost of goods sold) from the last year's fourth quarter to the second quarter of this year.
CVR Partner's gross margin is up nearly 5% over the same period.
In short, demand for nitrogen fertilizer is growing... and with low oil and natural gas prices, these companies are pumping out profits.
Many of their share prices are already benefitting. CF Industries and CVR Partners are both up more than 10% since the start of the year. But with increasing demand and low production costs, there's plenty more upside ahead.
I recommend looking at nitrogen producers like CF Industries, CVR Partners,
PotashCorp. (TSX: T.POT, Stock Forum), and Agrium today.