Potash is a mineral form of potassium, and a key ingredient in fertilizer. For the last 20 years, farmers have bought potash for about $125 a ton. But the BPC started the year selling potash for $270 a ton. It quickly raised the benchmark price to $450 a ton. In March, it raised the benchmark to $650 a ton. Last week, the BPC announced its latest price hike. On June 1, it will begin selling potash for $1,010 a ton. That’s a 274% price increase in six months… and a 709% leap from its 20-year norm.

Prices for potash are rising so fast, stock analysts can’t maintain their spreadsheets. They update their models on Monday. By Friday, the models are obsolete…

And the stock prices of potash producers are arcing into the sky like fireworks, too. Take the Potash Corporation of Saskatchewan, for example. The largest potash producer in the world, its stock price has risen 1,000% in the last five years and 620% since June 2006. It’s now the second-largest company in Canada, ahead of EnCana and the Royal Bank of Canada. It trades for 10 times book value and more than 46 times earnings.

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Uralkali, a large Russian producer, has seen its shares rise 1,984% in the last three years.

Intrepid Potash, the only American producer, floated shares on the stock market for the first time last week. Its shares rose 58% on the first day of trading.

You couldn’t make me invest in the big potash producers if you put a gun to my head. This is a classic investment mania. Commodity producers have huge capital expenses and nearly no competitive advantages. They should not sell for 46 times earnings.

Here’s the thing: While I wouldn’t touch the major potash stocks, I still think potash, the commodity, could go much higher.

China is the world’s largest consumer of potash. In 2007, it bought 2.5 million tons in a contract with the BPC. The supply crunch is so serious, this year the BPC could only sell China 1 million tons. My point is, even at $1,000 a ton, potash supplies still cannot meet demand.

So potash prices can keep rising. How far? Consider this: Before potash was discovered in New Mexico, Germany was the world’s only supplier. In December 1915, when World War I cut trade between the United States and Germany, potash prices jumped from $35 per ton to more than $500. In today’s money, that’s the equivalent of more than $10,571 per ton.

My advice: Don’t buy the major potash stocks. The upside is already “priced in.” If potash doesn’t rise, these stocks could collapse.

If you want to invest in potash, buy the potash “juniors” and use a stop loss to limit your exposure. These small potash companies are building mines in risky countries. They’re risky, but you get a big discount on the potash in the ground. If potash keeps rising, you’ll multiply your money. If it doesn’t, you’ll lose only as much as you’ve put at risk.

Good investing,

Tom

P.S. In my newsletter International Strategist, we’re getting into the potash business. I’ve found a potash mine that I think is worth $2 billion. And because it’s in a third-world country, you can buy this mine today for just $520 million. To learn about a trial subscription to International Strategist, click here.

Q: I saw that Nigerian oil output is going to fall… Doesn’t America import oil from there? What are the ramifications? – D.C.

A: The ramifications are, we could be in trouble.

A recent story in the Financial Times covered the possibility that Nigeria’s crude oil output could fall by a third in the next seven years. The problem is, Nigeria is one of the top five foreign oil suppliers to the U.S.

Here are the latest numbers from the Energy Information Administration:

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Now let me show you that same table from a scary perspective… the change in production levels from 10 years ago, and one year ago.

As you can see, our primary oil suppliers are suffering production declines… except for Canada. The major reasons Mexico, Nigeria, and Venezuela are faltering are lack of investment and government mismanagement. The major reason Canadian production is increasing is the development of its gigantic tar-sand deposits.

So… the short answer to the Nigerian question is “yes… this is bad for the U.S., and it signals higher oil prices.” But so does the decline of Mexico’s Cantarell field and the idiotic ramblings of Hugo Chavez.

Basically, any bad news you read from these regions is just more of a buy signal for the safe, vast deposits of Canada.

Q: Did you see that a rocket hit a Japanese oil tanker in the Middle East? Will that affect U.S. oil prices? – J.S.

A: Absolutely. Attacks on oil tankers, drilling platforms, and pipelines are all too common today. That’s because they make easy targets for any group with a cause and some easily-purchased explosives. What better way to hold a country hostage than to threaten its energy infrastructure?

And now look where you’ve gotten us, J.S., we’re right back to the answer above. We’re right back to Canada.

Canada is sitting on a huge oil reserve with a “no risk” transport route to the world’s largest consumer. Caribou generally do not engage in the destruction of oil infrastructure.

Q: What oil companies will benefit most from the high oil prices? – A.L.

A: In a recent DailyWealth, I covered the benefits of investing in government-backed oil companies, like Brazil’s Petrobras. I think these are big beneficiaries of $117 per barrel of oil.

These majors have many of the benefits of investing in a “non government-backed” oil company like Chevron, except they have huge backers behind them when it comes to securing resources at less-than-competitive rates.

Brazil doesn’t entertain outside offers for its choice of offshore drilling blocks. These are some of the most promising offshore fields in the world, they’re getting more valuable by the day, and they’re reserved for Petrobras.

And let me throw this curve ball in here… natural gas producers.

While the price of natural gas has increased about 40% in the past 12 months, the price of crude oil has skyrocketed 80%.

Natural gas and crude oil can be substituted for each other in some applications, so high crude oil prices act as a magnet to draw natural gas prices higher. That’s great news for natural gas producers like EnCana, XTO Energy, Apache, Devon Energy, and Canadian gas trusts. Many of these companies are soaring right now… which tells us the market agrees with the “higher natural gas price” thesis.

Good investing,

P.S. If you can’t tell yet, I’m as bullish on Canada as any region in the world. The bull market in oil could easily send my top Canada ideas up by hundreds of percent this year. You can learn more on the region’s best investment here.