Agribusiness ETFs Could Be in for Tough 2013
A case can be made that some agribusiness ETFs are laggards relative to the risks this sub-sector presents.
Editor's Note: This content was originally published on Benzinga.com by The ETF Professor, Benzinga Staff Writer.
The Market Vectors Agribusiness ETF (NYSEARCA:MOO) is up 10.5% this year. That would appear to be a decent gain, but when considering the SPDR S&P 500 (NYSEARCA:SPY) has outperformed MOO by nearly 300 basis points with 430 basis points less in volatility, a case can be made that some agribusiness ETFs are laggards relative to the risks this sub-sector presents.
That laggard status could be reborn next year amid expectations for lower potash prices. China and India, the world's two largest consumers of the crop nutrient, have been delaying signing new contracts with North American suppliers, some of which are constituents in MOO and rival agribusiness ETFs.
India has started negotiations with potash producers and it is expected that China will do the same in January or February. Problem is that the two emerging markets economic superpowers are poised to get their largest potash price reduction in three years, Bloomberg reported.
Analysts at Credit Agricole Securities USA, Dahlman Rose & Co., and Goldman Sachs expect China and India could pay as little as $430 per ton for potash next year, according to Bloomberg. That is down from the current level of $490 per ton paid by India and $470 per ton paid by China.
Should China and India be successful in negotiating their potash prices down to $430 per ton (or lower), that news could present a near-term cap on upside for MOO and the rival iShares MSCI Global Agriculture Producers Fund (NYSEARCA:VEGI).
To be fair to MOO, the ETF is home to 51 stocks and non-potash holdings include Monsanto (NYSE:MON), Deere (NYSE:DE), and Archer-Daniels Midland (NYSE:ADM). That trio represents 19.5% of MOO's weight. VEGI, which debuted in January and is home to 135 stocks, allocates about a quarter of its weight to that trio.
That is to say both ETFs have some insulation from fluctuating potash prices. "Fluctuating" might be too kind of an assessment. Potash prices flirted with $485 per ton earlier this year, but now reside closer to $425.
Potash Corp. of Saskatchewan (NYSE:POT), the world's largest producer of its namesake fertilizer, Russia's Uralkali, Mosaic (NYSE:MOS), and Agrium (NYSE:AGU) combine for about 21% of MOO's weight and 19% of VEGI's weight.
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