Aside from the financials, the fertilizer group has been one of the worst performing sectors in 2011. There are many reasons for this (strong dollar, less imports from Asia, supply issues, downbeat expectations, recession fears) but I believe the tide is about to turn. The fundamentals for the ag sector have never been better than they are today, and perhaps stock prices more reflect the emotions and fear related to the market than the individual companies. Supplies are tight, prices are firm and demand is strong. I suspect there is something other than the odor that is attracting me to these names!

The fertilizer business is simple and straightforward -- make the stuff and sell it. N P K S is the main combination Potash ( K potassium chloride) is a main nutrient in the making of fertilizer along with nitrogen (N), phosphorus (P) and sulfur (S). These ingredients are found in abundance around parts of the world (US, Canada, Morroco), the major players include Potash (K producer), Mosaic (K P), Agrium (K P) and CF Industries (N producer). Producers sell fertilizers to farmers all over the world who need these nutrients when planting crops such as corn, soybeans and wheat. Farmers look for a good yield on crops such as corn as they make plans for growth. As one might expect, the price of potash correlates with the price of these grains and with currency, too.

Dollar-based commodities will move higher when there is pressure on the greenback. Weather is also a major consideration, too. In recent times big storms, wind and hurricanes have wiped out crops, reducing available crop supply and driving up grain prices as farmers have to start over growing their grains. Each year India and China enter into contracts with the providers in order to lock in rates, always an uneasy discussion for the buyer when prices are firm or rising. For years the fertilizer companies have had the upper hand, the next few years will be no different.

Demand for fertilizer has never been better than it is today. India and China boast miles and miles of farmland, demanding fertilizer to help grow crops -- They have more than 2 billion people in their countries combined and they need to eat. Here in the US and even in parts of South America farmers are faced with huge demand for corn and wheat, but they just do not have enough product to satisfy it. Hence, we've seen a substantial rise in these grains. Ethanol usage is robust not just here but in China, this being a major reason for higher corn this year. Inconsistent weather patterns have hurt the wheat crop in 2011 and with Russia a major importer supplies are also tight. These supply shortages will NOT end overnight and as our worldwide population exceeds 7 billion, well people have to eat.

Looking to the charts, the longer-term weeklies look far better than the noisier daily charts. f we look beyond the currency fluctuations, grain price volatility and market fears then it appears these stocks are in a great position to rise in 2012 as stock prices catch up to the fundamentals. According to the CEOs of Mosaic ( MOS) and Potash ( POT) strong fundamentals will be in place for years, fertilizer pricing will be to their advantage. The market affords this group very little premium for growth, which in my mind is just another market disconnect. But why is this the case when it all seems so bullish? Markets don't always get it right in shorter time-frames, but eventually they catch up.
POT Two Year

Look for this group to be a big performer in 2012. Names I would consider include POT, MOS, Agrium ( AGU), CF Industries ( CF) . Another way to play would be the ETF called Powershares DB Agriculture Fund ( DBA), which includes all of these names.


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At the time of publication, Bob Lang was long MOS, POT call spreads.

Bob Lang has been a private trader in equity and option markets for several years and manages separate accounts via Aztec Capital LLC. He has managed a $300 million pension and 401(k) plan for a Southern California cooperative. In early 2000, Lang started a hedge fund for private and institutional clients. This fund, Aztec Partners, was a top-performing fund that year relative to its peer group. In 2002, Lang worked with floor traders in the active bond-trading group of Countrywide Capital Markets. In May 2011, Lang launched an options trading service called Explosive Options.