Over the weekend, some friends from out of town came to visit and I spent the majority of my weekly allowance showing them the city. And what better way to finish an evening but to play some classic board games. I’m talking about MONOPOLY of course, the game that holds the Guinness Book of World Records’ record (yes, you read that right) for being the most played game in history.
Brief History Lesson:
The best known example of a United States monopoly is AT&T and its breakup into the ‘baby bells’, however, here we’ll take a look at what I think is the GOLD standard of what a monopoly can do.
Although a monopoly can create outsized profits for its investors, it is bad for competition and in the long run bad for the consumer. In the end, Standard oil was broken up into around 40 separate companies which now represent every oil company you have ever heard of, including ExxonMobil, Chevron, ConocoPhilips, and Marathon.
Today, thanks to the Sherman antitrust act, companies are closely monitored so that they do not fall into the category of a monopoly. But lucky for us, monopolies (and their outsized profits) still exist. They exist in the forms of natural monopolies and government-granted monopolies (like utility companies or copyright protection).
Potash Corp./Saskatchewan (NYSE:POT):
Potash is a perfect example of a natural monopoly. Potash owns over 20% of the world’s potash reserves which provides it with a natural monopoly based on natural resources. Potash is an integral, naturally occurring resource used in the fertilizer business. The rest of the world’s potash deposits are concentrated in Russia, Belarus, Germany and Israel. This means Potash Corp. owns nearly all reserves that are geographical located near the United States.
By controlling such a large part of the market and having naturally lower transportation costs then competitors, Potash has significant pricing power, which is the holy grail of all monopolies. At operating margins of around 30% this company has the opportunity for outsized returns to shareholders.
Another trend which will most certainly help fertilizer stocks such as Potash, is increased demand. Just like Standard Oil was born out of an explosive demand for oil based products, the demand of agricultural products is now soaring along with the world’s population. The United States Midwest is well positioned to become “the world’s farm” and Potash is conveniently located just a few miles north.
Alternatives?
There are hundreds of opportunities to own natural and government-granted monopolies and you should always be on the lookout for these. If you are looking for some other stocks in the fertilizer industry, take a look at The Mosaic Co.(NYSE:MOS) and Agrium (NYSE:AGU)
Disclosure:
I don’t own any
Kevin’s Take: I would need to do a little more research to determine what exactly potash is used for and how it is used in fertilizer. Last I checked, all you needed was a little cow poo to make some really good fertilizer. Warren Buffett only invests in companies that he understands, and I like to follow his lead; I’d need to understand this industry more before making and investment. If everything checks out, this one sounds good to me!
Important to note that ALL ideas, thoughts, and/or forecasts expressed or implied herein are for informational and entertainment purposes only and should NOT be construed as a recommendation to invest, trade, or speculate in the markets.
Monopolies can definitely bring in some nice profits for investors, that’s for sure. (Or even almost-monopolies like Google…)
Google has a large market share of internet searches, but I don’t think it’s a “monopoly” because there is nothing stopping other companies from providing the same service. Google just offers the best service and it’s free.
With that being said, I invest in Google because they are awesome!
I agree with that last statement, which is why I bought exactly one share about 2 weeks ago. I’m up about 12 bucks so far haha.
I’ve never viewed Potash corp as a monopoly.. They have just been in the game for so long and its only been recently that potash prices have soared. Expect many new entrants to the game now that prices are so high.
BHP, for example, is the worlds largest miner and is setting up shop in Saskatchewan in a big way. After a failed attempt to takeover Potash Corp last year, they are advancing their own properties in saskatchewan and have vowed to not play within the current potash pricing scheme where Agrium, Masaic, and PCS all broker through Canpotex. As such, BHP will be undercutting their competitors artificial pricing quite a bit. Remember, Canpotex controls not just the price, but the supply. All 3 of the mentioned players have the capacity to increase production and choose not to.
The reality is, Potash isn’t scarce. so they have to artificially control supply and price. It makes sense. But when someone decides not to play by those rules (and in this case, that someone is the largest global mining company around), expect some downward pressure on prices in the longer term.
As for fertilizer in general, the population is swelling and people need to eat. Potash will continue to be in high demand.
Wow, great information here! Next time I need to know something about potash, I’m coming to you!
Thanks for sharing!
Correct, Potash is not scarce and that Potash Corp. is not a monopoly. However, at 30% operating margin, Potash does have the pricing power of a monopoly and therefore I would qualify them as a quasi-monopoly.
As you pointed out, large profits like this will quickly attract competitors (like BHP) so in order to maintain its pricing power, Potash would need to make sure that barriers to entry into that market are in place. I do think some barriers are in place for example: Canada government is on the side of Potash (they recently rejected the BHP purchase) and although Potash is not rare, land where it is economically viable at low prices harder to come by (BHP will have to purchase this land in order to compete)
I agree that there is a significant risk to Potash loosing its monopoly pricing power, but in the meantime I am happy to reap the benefits.
I would most certainly like Comcast broken up! Lousy service, net neutrality, astroturfing… you name it!
I wish any telecom provided would get it right. I’m never happy no matter which company I’m with.
@Kevin
I will have to disagree with you about Google having monopoly status. If we look at the consumer facing product – search – I can agree that any other company can provide a similar service with few barriers to entry and consumers can freely switch to that provider.
However, if you look at the product where Google really makes their money its advertising, and in advertising Google controls one very important barrier to entry, economies of scale. Nobody can match the number of customers reached by a google ad, and because of this google has certain pricing power.
I think it’s a little dangerous to invest in companies that can easily turn into monopolies, just because of the risk that comes from anti-trust lawsuits and such. Potash sounds like a better choice than AT&T though mainly because they have a ‘natural’ monopoly, aka a huge advantage over the competition because of their location.
You should certainly do a followup if you take the plunge.
I work as a Mac specialist in Chicago and I cannot get enough of monopoly. It reminds me of being a kid and learning about it’s history while comparing it to real life is fastcinating. Thanks!
I definitely aggree with Warren Buffet’s strategy especially when it comes to investing money in a company. I happen to think that informed decissions are the best ones to take. Thanks for the post, Patricia