I've found a situation that would make any business owner salivate...
Trust me, it doesn't happen often. Cutthroat competition and other factors usually prevent it. But when an opportunity like this arises, companies (and their stockholders) can rake in extraordinary gains while it lasts.
There are two powerful market currents converging. And where they meet, there is a well-positioned company that is poised to make a ton of money simply by riding along and doing nothing.
Let me explain...
In the simplest terms, a company makes money by selling what it produces. But, of course, it's not what you make that counts -- it's what you keep. The gross profit is the difference between the revenue that flows in and the product manufacturing costs that flow out.
This is the fundamental idea behind any business activity...
Normally, if a company wants to increase profits, then it has two options. First, it can raise the price of its product. But this can be extremely hard to do without scaring away customers, especially if there's a lot of competition.
The second option is to reduce costs. This is usually an easier route, but again, it can be difficult... there's only so much a company can do to lower its costs.
But every now and then, a company finds itself in a rare situation where outside market forces do all the work and accomplish both goals at once -- raising the ceiling price for the product and lowering the floor for the costs to make it.
Again, this doesn't happen often. But when it does, it's usually wise for investors to climb aboard.
Take CF Industries (NYSE: CF) for example. CF Industries is a fertilizer company whose nitrogen and phosphate-based crop nutrients are commonly used to grow corn. To harvest 150 bushels of corn from an acre of land, farmers typically have to apply 150 pounds of nitrogen fertilizer.
U.S. farmers are expected to plant about 96 million acres this year, an area larger than Pennsylvania, Florida and Michigan combined. Due to increasing demand from China and rising grain-based ethanol usage here at home, the price of corn has been elevated for several years, leading to a surge in the price of nitrogen fertilizer.