After years being caught in what can best described as a death
spiral, the likes of which multiple reverse splits could not fix,
the U.S. Natural Gas Fund (NYSE:
UNG
) has started to perk up recently. In fact, the ETF which at one
point earlier this year had lost almost 96% of its value since
its 2007 debut, has jumped 7.3% in the past week.
The reason for the bullishness? The U.S. Energy Information
Administration cut its 2012 production outlook for the
clean-burning fuel while dramatically increasing its demand
forecast. Good news
UNG and other ETFs that are heavily exposed to
the nat gas trade
.
But this is bad news for one specific group of funds:
Agribusiness ETFs. With a quick chemistry lesson, we'll explain
why: Natural gas is an integral component in the production of
nitrogen-based fertilizers. Simply put, the price of nitrogen
fertilizer is intimately correlated to the price of natural
gas.
Consider the following from the
Samuel Roberts Noble Foundation
"Manufacturing 1 ton of anhydrous ammonia fertilizer requires
33,500 cubic feet of natural gas. This cost represents most of
the costs associated with manufacturing anhydrous ammonia. When
natural gas prices are $2.50 per thousand cubic feet, the natural
gas used to manufacture 1 ton of anhydrous ammonia fertilizer
costs $83.75. If the price rises to $7.00 per thousand cubic feet
of natural gas, the cost of natural gas used in manufacturing
that ton of anhydrous ammonia rises to $234.50, an increase to
the manufacturer of $150.75."
In other words, it's not a bold statement to say the reason CF
Industries (NYSE:
CF
), the largest U.S. nitrogen fertilizer producer, is down 9% in
the past week is because UNG is up 7.3% over the same time.
Predictably, natural gas' climb has also been bad news for the
likes of the Market Vectors Agribusiness ETF (NYSE:
MOO
) and its new, unheralded rival, the iShares MSCI Global
Agriculture Producers Fund (NYSE:
VEGI
).
The Global X Fertilizers/Potash ETF (NYSE:
SOIL
) isn't escaping the carnage either. SOIL's
nitrogen
heavy lineup has dragged the ETF down more than 5% in the past
week
. CF accounts for almost 6% of SOIL's weight and is the fund's
second-largest holding.
CF Industries accounts for barely more 3% of the overall
weights of MOO and VEGI, but that's just one stock. Agrium (NYSE:
AGU
) and Yara International also have nitrogen exposure and both are
held by both ETFs. Potash Corp. (NYSE:
POT
), the second-largest holding in both ETFs, is obviously known
more for its namesake crop nutrient, but the company controlled
2% of global nitrogen production at the end of 2010, according to
its Facebook page.
Clearly, from the equities side, higher natural gas prices are
problematic for MOO, VEGI and some of their constituents. On the
futures side, the Teucrium Corn ETF (NYSE:
CORN
) has slid almost 5% in the past week,. Again, it's easy to see
why: Corn is one of the most nitrogen-intensive crops to
produce.
It's certainly not everyone's cup of tea, nor should it be,
but perhaps the current state of affairs with ETFs such as MOO
and VEGI calls for a look at the Direxion Daily Agribusiness Bear
3X Shares (NYSE:
COWS
), a thinly-traded, triple-leveraged bearish play on agribusiness
stocks. Consider COWS as a short-term hedge on agribusiness funds
or as a pairs trade with UNG or the First Trust ISE-Revere
Natural Gas Index Fund (NYSE:
FCG
).
For more on energy ETFs, please click
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.
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