I'm glad 2008 is over. But you must admit -- it was quite a trip.
Take the case of PotashCorp
Then came the plunge. The past six months have brought untold damage down on both stocks. PotashCorp today sits at half of where it started the year. Mosaic is down a good two-thirds -- and investors are understandably upset. They're confused. I know this for a fact, because for the past few months, I've received multiple emails from Fool.com readers asking me, basically, "What the heck is going on?"
Well, I'm far from a potash expert. If you want an educated opinion on where potash prices go from here, and what will happen to profits at the companies that produce the stuff, you'd be hard-pressed to find someone less knowledgeable than I.
But I do have three things necessary to noodle through the problem:
- A passing familiarity with the laws of supply and demand, and the way cause and effect works.
- A modicum of common sense.
- An unsurpassed command of the principles of fifth-grade mathematics.
With these tools at my disposal, I'm willing to tackle the problem, and to explain the rise, fall, and eventual resurgence of Mosaic and PotashCorp.
A cycle begins
Open your Economics 101 textbooks, and turn to the chapter on "Supply and Demand." When demand for food rises, but supply holds constant, the price rises. What's the logical reaction? You don't need to be an ExxonMobil oil exec or an OPEC oil baron to answer that: Producers see high prices for a commodity, and they react in their economic self-interest. They try to grab as much profit as possible by producing more goods.
How? By buying, leasing, and farming more land. And as prices keep rising, producers (farmers) try to maximize the yields on the land they already have. Monsanto
However, along about now, farmers notice an unintended side effect of chasing yield: While they've been rolling in fertilizer, the price has begun to stink. Potash and potassium futures are going through the roof -- and farmers raise their prices to compensate for the higher input costs.
Not long afterward, these higher prices begin making themselves felt in the supermarket aisles. General Mills
And then, a miracle happens
Or a disaster, depending on your perspective (and, specifically, whether you're a Coke shareholder or an investor in PotashCorp). We don't know precisely what it was. Only that it happened.
And it happened because the immutable law of economics remains: The cure to high prices is ... high prices. At some point, they get so high as to be unsustainable, and "something happens" to upset the balance.
At this point, all of the factors that drove Mosaic and PotashCorp to their dizzying heights of mid-June 2008 begin to work again ... in reverse. PepsiCo
Demand begins to slide, and with it goes the price of corn. On one hand, Archer-Daniels-Midland
And now, the question my readers constantly ask me: Will PotashCorp ever get back to $200? Will Mosaic regain $150? My answer is yes. In time.
At some point, another miracle-disaster will occur, because just as the cure to high prices is high prices, the converse is also true: Low enough prices will create demand -- demand for food that exceeds a dwindling supply -- and prices will rise again.
That's why they call it a cycle.
Fool contributor Rich Smith owns no shares of any company named above. PepsiCo is a Motley Fool Income Investor recommendation. Coca-Cola is a Motley Fool Inside Value selection. The Motley Fool's disclosure policy has its ups and downs, but generally speaking, we think it's a pretty good idea.