Will Commodity Slump Weigh On Agribusiness?

Agricultural commodities performed impressively in the first four months of 2014 helped by a weaker dollar, adverse weather and greater demand. However, the space snapped the trend soon to reflect a benign weather outlook and accelerated crop plantation that exceeded demand.

If this was not enough, the six-year high U.S. dollar against the yen put pressure on commodity prices. Sluggish global demand thanks to rough global recovery has also been playing a crucial role in pulling down agricultural commodity prices. Some crops including corn, soybeans and wheat are expected (by market participants) to leave the year with huge inventories.

This trend has also been replicated in agribusiness companies such as  manufacturers of seeds and fertilizers, chemicals and farm-machinery firms.  The sector thrives on demand for food and the resultant price trends (read: 3 Agricultural Commodity ETFs Slumping in July).

A notable company in this space is Monsanto Company (NYSE:MON), which sells seeds to farmers. Another company, Deere & Company (NYSE:DE), is a renowned manufacturer of agricultural equipment. Now that most of the agro-based product prices are going downhill due to soft demand, we expect these companies to suffer in the coming weeks from a declining pricing power.

Food-Price Trends

Per USDA’s forecast (as of August 25), consumer price inflation for 2015 will likely decline to the 2─3% range from an expected 2.5─3.5% for this year. Meat prices that have shot up this year will likely return to normal levels next year. USDA estimates that meat price inflation will hover around 3─4% range next year, down from the 5─6% range likely to be noticed this year (read: Beef Up Your Portfolio with These Livestock ETFs).

The fresh fruit price index is likely to register another steep decline in the 2.5─3.5% range from 5─6% this year, per USDA. Corn and soybean prices slid to 4-year lows. Wheat is also hovering around the same lows. All these should mar farmers’ interest in further planting and using products that enhance yields such as fertilizers and machinery.  

This trend gives an ominous signal to the broader agribusiness ETFs in the market. These funds have plunged in recent trading, and could face more trouble if the broad-based commodity weakness continues.

However, investors should note that the agricultural space is somewhat volatile and depends largely on weather conditions. Any adverse weather condition might open up an opportunity to buy the agribusiness ETFs. Below, we have discussed some of the available products in detail.

• Market Vectors-Agribusiness ETF (NYSE:MOO)

This fund provides exposure to the global agribusiness industry by tracking the Market Vectors Global Agribusiness Index. It is a pretty popular choice in the space with AUM of over $1.66 billion. The ETF charges 55 bps in annual fees (read: Monsanto Stock Strength Is Great for These ETFs).
 
In total, the fund holds 56 securities in its basket. Of these firms, the stock under consideration – Monsanto – takes the first place, making up roughly 8.16% of total assets. In terms of country allocation, U.S. (49.1%), Canada (10.6%) and Switzerland (7.7%) occupy the top spots. The fund has lost 2% in the year-to-date time frame.

• PowerShares Global Agriculture Fund (NASDAQ:PAGG)

This product provides global exposure to companies engaged in agriculture and farming-related activities. It follows the Nasdaq OMX Global Agriculture Index and has $69.4 million in AUM while trades in paltry volumes. PAGG charges 76 bps in fees per year.
 
Holding 43 securities, the fund is concentrated on the top three firms – Archer-Daniels-Midland (NYSE:ADM), Potash Corporation (NYSE:POT) and Monsanto (NYSE:MON) – with 8% share each. U.S. firms dominate the fund’s return with 40% of assets, followed by Canada (12%) and Malaysia (9%). The product is tilted toward large caps at about 80% of assets while mid and small caps take the remaining portion in the basket. The ETF has added just 0.9% in the year-to-date time frame. 

• MSCI Global Agriculture Producers ETF (NYSE:VEGI)

This global ETF looks to track the MSCI ACWI Select Agriculture Producers Investable Market Index and invests about $45.7 million of assets. In its 122-stock portfolio, the in-focus Monsanto takes the top spot with 15.26% allocation.

Sector-wise, materials take the top position with 50.44% share followed by food and beverages (21.7%). Country-wise, the U.S. accounts for about half of the portfolio while Canada (11.1%) and Switzerland (7.8%) occupy the next positions.

The ETF charges about 39 bps in fees a year and has a dividend yield of 2.05%. The fund has lost about 0.6% in the year-to-date time frame.

Bottom Line

Though the agribusiness space is presently going through a rough patch, having hardly witnessed gains in the year-to-date frame, long-term drivers seem to be in place mainly due to the ballooning global population. As soon as the global economy revives, be it China or the Euro zone, we believe that the demand profile will pick up (read: Reap Long Term Returns from These Agribusiness ETFs).