Eric Dutram: Although it now appears to be a distant memory, the summer’s crop crisis should never be too far outside of investors’ minds. With the shifting climate it appears as though more extreme weather events could become the norm and make more droughts a relatively frequent occurrence.
This could be especially important if global population figures continue to march higher, putting extra strain on food supplies around the world. These supplies are already struggling as more emerging market consumers are able to afford higher quality foods, so added mouths on top of uncertain and dwindling production figures could be particularly troubling as the years go by (read USAG In Focus as Agricultural Commodity ETFs Soar).
For these reasons, agribusiness firms could continue to surge in importance and assist in mitigating the broad food crisis. Yet while a number of agribusiness segments—such as tractors or seeds—could see increased demand, it could be the fertilizer and potash sectors that see the most bang for their buck in the years ahead.
That is because these fertilizers help to boost yields of farmers around the globe, helping many to cash in on higher food prices. Furthermore, products in this segment can also help those who are suffering from ill-climate effects to recoup at least some of their losses, making goods in this sector a lifesaver for many (see Beyond Corn: Three Commodity ETFs Surging in the Summer).
Beyond the vital nature of these products, the segment is also projected to see strong growth in the years ahead too. Recent research suggests that grain consumption will increase by about 30% by the end of the decade, while total fertilizer consumption looks to come close to the 200 million tones mark in just a few years time.
If this strong growth outlook wasn’t enough for investors to consider taking a look at the space, consider the margins picture as well. Natural gas is often a key component of many nitrogen-based fertilizers and with the fracking boom, prices for natural gas have plummeted, greatly reducing one of the key input costs for those in this space.
However, it should be noted that the space does face some significant volatility and sluggish demand in the near term, largely thanks to weakened emerging markets. Commodity focused investments are usually hit hard in risk off environments too, so during uncertain economic times fertilizer and potash stocks could be harder hit than some of the more diversified plays in the agricultural market (read Four Ways to Play Rising Food Prices with ETFs).
Still, the long term potential of fertilizer and potash companies is hard to deny. This is especially true for those who are bullish on the continued rise of emerging market consumers entering the middle class, and the potential world-altering impact that these citizens could have on the global food picture in the years and decades ahead.
How to Play
While fertilizer and potash stocks make up a decent component of a number of more popular agricultural ETFs, namely MOO and PAGG, they are the sole focus of only one ETF on the market today, the Global X Fertilizers and Potash ETF (NYSEARCA:SOIL). Although this fund may not have much in assets and may be too concentrated for some, it could be an interesting—and well-positioned—way to play the crop crisis in the coming years.
For investors intrigued by this often overlooked approach, we have highlighted some of the key details below of SOIL, arguably the best way to tap into the fertilizer and potash market in ETF form:
The ETF holds about 23 stocks in its basket, tracking the Solactive Global Fertilizers and Potash Index. This looks to focus in on the largest and most liquid global firms that are active in some aspect of the fertilizer industry (see Three Great ETFs for Your IRA).
The exposure to this niche market isn’t cheap at 69 basis points a year in fees, but as we discussed earlier, it is one of the only ways to obtain the segment in concentrated form. Additionally, it should be noted that the market cap for the fund is below $30 million and volume is low, so bid ask spreads could add to total costs for this unique fund.
Large caps constitute about half the total assets, with mid caps and small caps dividing up the rest evenly. Country exposure is tilted to the U.S. with 25% while Australia, Canada, Israel, and China each receive about 10% as well.
Individual securities are pretty well spread out as 5 stocks make up at least 5% of total assets, including big names Terra Nitrogen (NYSE:TNH), CF Industries (NSYE:CF), and Agrium (NYSE:AGU). Investors should also take a closer look at some of the valuation metrics on this holdings profile as the PE is below 12.5 and the P/B is under 1.75, suggesting decent value for this concentrated ETF.
From a performance look, the ETF is relatively favorable when compared to others in the industry this year. Although it should be pointed out that the fund can see extreme levels of volatility in very short time periods both in terms of going up and when plunging.
Against the S&P 500 YTD it has performance more or less in line, although with significantly more volatility. Meanwhile, against top agricultural ETFs like MOO and PAGG, it has barely edged them out in YTD terms although it has lagged in shorter time periods (see Volatility ETFs Winning on Fiscal Cliff Turmoil).
This is likely due to the more rocky nature of SOIL and its ability to surge or fall in large amounts during short time periods. This suggests that if investors are willing to stomach volatility and believe in the long term agricultural story, SOIL could be a great pick, but if you can’t deal with big moves and if you are looking at a short-time horizon, another agricultural ETF could be the way to go in this space.
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