Commodity producers have seen choppy trading so far this year due to subdued global trends and commodity-specific risks. This is also true for the agribusiness market, and especially so in the fertilizer segment.
The agribusiness market is bearing the brunt of lower prices for chemicals, such as potash, urea and sulphur, used in fertilizers. The downtrend can be traced to sluggish global demand and a supply glut, uncertainties in the potash market, and low crop prices due to a longer planting season (read: Inside the Recent Plunge in the Corn ETF).
Additionally, dismal performance by the fertilizer segment and falling earnings estimates across the space have added to the plight of the industry, which has been pushed way down in terms of Zacks Industry Rank. In fact, share prices of some of the top players such as Potash Corporation of Saskatchewan (POT - Analyst Report) , Mosaic (MOS - Analyst Report) and Agrium (AGU - Analyst Report) have faced a significant amount of trouble since summer.
This corner of the market continues to deteriorate due to weakening potash fundamentals as we head toward the end of the year.
Potash Price in Focus
Potash prices have been declining since midsummer when the Russian producer Uralkali ended the partnership with the Belarusian company Belaruskali. This trend in prices will likely continue in the near term as Uralkali has decided to raise potash production by 3.5 million tons by 2014 by expanding its capacity to the optimum level. This increased production would lead to an oversupply condition in the global market.
Further, the demand for potash remained weak in India, the fourth largest potash consumer after the U.S., China and Brazil, thanks to their weakening currency. The Indian rupee plunged 15% since the start of the year.
As if this wasn’t enough, the space is also having to deal with reduced projections for potash prices and sales this year due to the break-up of the potash cartel (read: Agribusiness ETFs in Trouble as Potash Cartel Collapses).
Falling potash prices are hurting producers across the globe, leading to lower revenues, and in turn hampering margins.
Though the demand/supply imbalance would continue to put pressure on fertilizer prices in the short term, the long-term fundamentals look promising. This is especially true given the ever-expanding world population that would lead to higher consumption of fertilizers in order to meet the growing food demand.
As such, the companies in the agribusiness industries such as manufacturers of seeds and fertilizers, and farm-machineries will benefit from booming demand (read: 3 ETFs for Insatiable Global Food Demand).
ETFs to Consider
With that being said, long-term investors could definitely benefit from the current weakening trends for potash. While investing in fertilizer producers is certainly an option, there are a couple of agribusiness ETFs that provide a nice play in the beaten down fertilizer segment with much lower risk.
The Global X Fertilizers/Potash ETF (SOIL)
This fund provides a great deal of exposure to the in-focus segment by tracking the Solactive Global Fertilizers/Potash Index. The ETF holds about 22 securities and includes the largest and most liquid global firms that are active in some aspects of the fertilizer industry (see: all the Materials ETFs here).
The product is spread out across securities as none of them holds more than 6.6% share in the basket. Large caps constitute about 44% of the total assets, while mid caps make up for 27% and the rest goes to small caps. Country exposure is tilted toward the U.S. with 26% while Australia, China, Canada, and Israel also make up for a decent allocation of 10% each.
The fund has amassed $22.8 million in its asset base while trades in light volume, suggesting additional cost of trading beyond the expense ratio of 0.69%. SOIL is down 17% year-to-date.
PowerShares Global Agriculture Fund (PAGG)
This product provides global exposure to companies engaged in agriculture and farming-related activities. It follows the Nasdaq OMX Global Agriculture Index and has $91.4 million in AUM while trades in paltry volumes. PAGG charges 75 bps in fees per year.
Holding 47 securities, the fund is concentrated on the top three firms – POT, MOS and Syngenta – with 8% share each. U.S. firms dominate the fund’s return with 40% of assets, followed by Canada (12%) and Switzerland (8%). The product is tilted toward the large cap at 77% while mid and small caps take the remaining portion in the basket.
From an industry perspective, about three-fifths of the portfolio is allocated to agricultural chemicals like potash and fertilizer, while farming/fishing make up for the rest. The ETF lost nearly 6.4% in the year-to-date time frame.
Market Vectors Agribusiness ETF (MOO)
This fund tracks the DAXglobal Agribusiness Index and provides exposure to companies that derive at least 50% of their revenues from the agricultural business. In total, the fund holds 50 securities with largest share going toward Syngenta (8.34%), Monsanto (8.27%) and Deere & Co (6.93%).
In terms of country allocations, U.S. (48%), Canada (10.6%) and Singapore (8.3%) occupy the top spots. The product provides nice diversification across business segments with agricultural chemicals accounting for 44% share while farming/fishing stocks (20%), and industrial engineering (16%) rounding out the next two spots (see more in the Zacks ETF Center).
MOO is by far the most popular and liquid choice in the space with AUM of over $4.6 billion and average daily volume of more than 378,000 shares. The ETF is one of the low cost choices in this space, charging 55 bps in annual fees. The fund is down roughly 2.8% so far this year.
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