China is hungry…and gets hungrier every day. Satisfying hunger requires fertilizer…lots of it. Think: Potash.  China is not only getting hungrier, it is also developing a taste for the good life. Protein consumption always increases as a population’s wealth increases.

That’s because wealthy populations tend to eat more meat than poor ones, while also eating more fresh fruits and veggies. The diet becomes more diverse, less centered on consuming base grains.

The demand for grains doesn’t diminish, though, because the need to produce meat increases the demand for grains exponentially. Depending on who’s doing the math, five to ten pounds of grain goes into every pound of beef that lands on a dinner plate.

China’s population is also increasing, of course, which is further boosting demand for grains. There are some special issues with China, too. It holds only 10% of the world’s arable land, but 20% of the population. And its arable land resource is in decline. There were about 121 million hectares in service at the end of 2008. That’s down from 133 million hectares as recently as 1988. Increasingly, because of water shortages, desertification, development, urban migration, pollution and a host of other reasons, China is growing less of its own food and relying more on foreign suppliers.

The Chinese government is not happy about that trend and has made food production a priority. In fact, recently, the Chinese premier laid out a number of goals for China:

• Boost Chinese grain production by 50 million tonnes by focusing on increasing the yield per acre
• Subsidize agriculture – which the government does by giving farmers subsidies for irrigation equipment and new seeds and for improving crop yields and crop quality
• Invest in the infrastructure of agriculture – for water supplies, roads and the like.

So it would seem a good idea to be around Chinese agriculture in some way.

Let’s back up a bit and look again at how the dietary pattern has changed. I’ve written about how China consumes a lot more grains before. China is now also one of the largest consumers of fruits and vegetables.

That China is now a consumer of size in the world of fruits and veggies is a relatively new development. China is also a big producer of fruits and veggies. According to the FAO, China produces nearly half of the world’s vegetables and 16% of the world’s fruit. China is today a major exporter of these goods to other Asian countries, supplanting U.S. suppliers.

Well, fruits and veggies have an interesting angle when it comes to fertilizers…

You know if you’ve been reading this letter that the three main nutrients are nitrogen, phosphate and potash. Farmers use fertilizers to boost yields and improve crop quality. Perhaps not surprisingly, China is the largest consumer of fertilizers in the world, with about 25% of global demand.

China is self-sufficient in nitrogen and phosphate. As a result, its application rates are on par with those of farmers in Europe and America. But China is not self-sufficient in potash. The country has few developed potash mines. As a result, it consumes around 12-15 million tonnes per year, but produces only 3 million tones.

Therefore, China relies on imports of potash to obtain most of its supply. But Chinese farmers could use a lot more of this unique fertilizer. In fact, China’s potash “application rates” are half what they are in the West. Quite simply, the Chinese need to use more potash to boost their crop yields to where the U.S. and Europe are.

Potash is an important nutrient because it controls the plants’ water intake, reduces water loss, increases root growth and improves drought resistance. Clearly, crop yields are higher and crop quality is better with the application of potash.

Yet last year, China’s consumption of potash fell. It will probably decline slightly again this year. That’s incompatible with the goals – and the need – of increasing crop yields and quality.

Potash prices soared in 2008 and Chinese farmers pushed back by buying less. The price of potash is cheaper now, but not by all that much. In any event, the Chinese farmers can afford it, as the economic return from using potash is compelling. This two-year decline in potash consumption is unprecedented. And its effects on crop yields and production will not be good.

Most of the potash suppliers that deal in the Chinese markets believe that Chinese demand will pick up later this year as the Chinese burn through their existing inventories of potash and look forward to the 2010 planting season. The Chinese will be hard-pressed to match the record production of 2008 without potash. The quirky thing about potash is that it tends to stay in the soil and you can skip a year, maybe even two, but no more than that.

So potash is also going to be a good way to invest in China’s food story. But there is another layer here.

You see, you can’t use potash directly to grow fruits and veggies. These crops – tomatoes, avocados, melons, etc. – are sensitive to chloride and salt. So you have to modify the potash and remove the chlorine. These potash-based fertilizers, potassium sulphate (SOP) and potassium nitrate (NOP), are ideal for fruits and veggies.

As it turns out, you also need SOP and NOP to grow tobacco. Tobacco is fussy about what fertilizer it will take without messing up its taste or combustibility. It also needs a lot of potash. Yet again, chlorine is a detriment. Chlorine makes the leaves taste sour and can destroy the commercial value of a crop. As with fruits and veggies, you need SOP and NOP.

Selling SOP and NOP to China’s tobacco farmers is also a good business. For one thing, China has the largest population of smokers on the planet, some 350 million. Since potash represents less than 1% of the cost of making cigarettes, the tobacco growers are less price sensitive. What they really want is a quality product consistently delivered.

One of the companies I’m following is the largest producer of SOP and NOP in China and serves both the fruit and veggie market and the tobacco growers. But there are really many ways to get a hand in the Chinese agricultural story. Watch this space.

Source: Buy What China Buys, Part II