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 (
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 (
TNH
)
,
CF Industries (
CF
)
, and
Agrium (
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.
Performance
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.
Want the latest recommendations from Zacks Investment
Research? Today, you can download
7 Best Stocks for the Next 30 Days
.
Click to get this free report >>
Follow
@Eric
Dutram
on Twitter
AGRIUM INC (AGU): Free Stock Analysis Report
CF INDUS HLDGS (CF): Free Stock Analysis
Report
MKT VEC-AGRIBUS (MOO): ETF Research Reports
PWRSH-GLBL AGRI (PAGG): ETF Research Reports
GLBL-X FERT/POT (SOIL): ETF Research Reports
(TNH): ETF Research Reports
To read this article on Zacks.com click here.
Zacks Investment
Research
Want the latest recommendations from Zacks
Investment Research? Today, you can download 7 Best Stocks for
the Next 30 Days. Click to get this free report