Agribusiness ETFs Could be in For Tough 2013
The Market Vectors Agribusiness ETF (NYSE: MOO) is up 10.5 percent this year. That would appear to be a decent gain, but when considering the SPDR S&P 500 (NYSE: 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 to China will do the same in January or February. Problem is 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 (NYSE: 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 percent 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 percent of MOO's weight and 19 percent of VEGI's weight.
Making matters potentially worse for poatsh producers is that the crop nutrient has come nowhere close to returning to its pre-financial crisis highs. Back then, potash traded traded over $800 per ton and even flirted with $900.
Of course it can be said that potash probably overshot on the way up and $800 per ton should have never been seen in the first place. However, potash prices are down this year despite higher grain prices.
"To see negative growth in a period of strong, albeit volatile, grain prices suggest to us that… there is lack of understanding of the merits of using potash in some developing markets, where the growth is supposed to come from," according to Credit Suisse. The bank is forecasting Vancouver spot potash prices of $445 per ton next year and in 2014.
Arguably, the market has already started pricing in rough times ahead for potash producers. On average, shares of Agrium, Mosaic and Potash have tumbled 4.83 percent in the past three months. MOO, by far the largest agribusiness ETF with $5.58 billion in assets under management, has risen 1.5 percent over that time. Still, that means investors would have been better off with a broader materials ETF such as the iShares S&P Global Materials Sector Index Fund (NYSE: MXI).
MXI, which does have some agribusiness exposure via Monsanto, Potash and others, is up nearly four percent over the past 90 days. Bottom line: Agribusiness ETFs may not be subject to massive declines in 2013, but with buyers holding the best cards in potash price negotiations, investors would do well to find materials ETFs with reduced potash exposure.
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