Organic farmers typically use manure from farm animals, or some other form of organic compost. Large, commercial operations typically use ground potash, a rock mined in Canada and elsewhere.

I’m not going to debate organic versus conventional farming here, but suffice it to say that all plants – regardless of how they are grown – need a good source of nitrogen and potassium.

Potash – otherwise known as potassium carbonate – is essential to commercial agriculture. It improves crop yield, taste, water retention, color, disease resistance and texture of food crops. Fruits, vegetables, rice, corn, wheat, soybeans and cotton all benefit from being grown in soil enriched with potash.

In the past few years, shareholders of the largest, profitable potash producers like Potash Corporation of Saskatchewan (NYSE:POT), The Mosaic Company (NYSE:MOS), and Agrium, Inc. (NYSE:AGU) were very happy campers. The stocks traded at PE multiples pushing 30 during the commodity boom of last year.

Not anymore: they’re all off more than 70% from 2008 highs. The financial distress that hit the rest of the economy in the fourth quarter of 2008 hit farmers too. When times are tough, farmers hunker down and cut costs. And one of their biggest expenses is fertilizer.

Most farmers typically have a large stockpile of potash on hand, and not buying on a regular basis causes them to use up what they have. You see, they can’t just stop fertilizing: many soils are overworked, or are marginal to begin with. If they scrimp or otherwise cut back on their applications of nutrients, yields suffer, and crop prices rise.

Once their penny-pinching became obvious to Wall Street, the already jittery markets didn’t need any prompting to hammer shares down to today’s low single digit PE’s, where they’ve remained since last October.

The problem facing the three companies mentioned above is that several big financially strapped potash producers in Russia have dropped prices 25%, putting pressure on others to do the same. This would have the effect of continuing to hold prices low.

It’s all being watched closely by China – one of the world’s biggest potash customers – who’s set to begin negotiations with the industry for its 2009 purchases. In response to the Russian action, Potash has cut production in order to keep prices from dropping through the floor.

The key here is to keep a watchful eye on crop prices. As they start to rise, farmers will jump on the bandwagon and fertilize more to increase their yields and make more money. And given that most are depleting current potash inventories, buying could soon resume in a big way, driving prices up once again.

Growing economies like the BRIC’s: Brazil, Russia, India and China are big potash users, and let’s face it: the world’s growing population will always need to eat.

Source: Agrium, Inc. (NYSE:AGU): Stock of the Day