Agribusiness ETF Should Benefit From Potash Recovery

January 22nd at 7:00am by Tom Lydon

A deal between potash producer Uralkali (URALL) and China may set a price floor for the recovery in the potash soil nutrient industry, along with related agribusiness exchange traded funds.

Uralkali agreed cut its potash price to China by 24%, selling the soil nutrient for $305 per ton for the first half of 2014, Bloomberg reports.

“It’s a definitive price point that people can look at and use as some sort of floor price,” Peter Prattas, a Toronto-based analyst at Cantor Fitzgerald LP, said in a telephone interview. “Buyers have been waiting for something like this as a catalyst so they can start buying again.”

With the deal in place, J.P. Morgan upgraded Uralkali to neutral as Uralkali under goes its “‘maximum volumes’ strategy attempting to regain its lost market share,” reports Shuli Ren for Barron’s.

“There is hope that with the Chinese benchmark price now established, a price bottom has been set for potash,” TD Securities analyst Greg Barnes said in a Financial Post article.

Morgan Stanley, though, warns that the second half of the year will see lower demand and greater incentive for price undercutting again.

“Debate will now shift to what happens in 2H14,” Morgan Stanley analysts said. “The first half of the year is the seasonally strongest, and product should flow in earnest to all global markets with confidence in the price they pay. However, as has also been the case for the past three years, bins may be empty again at the end of 1H, which begs the question whether the typical 2H destocking, price weakness, and contract standoff pattern will repeat in 2H14 for the fourth year in a row.”

Potash Corporation of Saskatchewan (NYSE: POT), the largest North American potash producer, has been under stress, following the Belaruskali and Uralkali pressures. However, Potash shows a strong gross profit margin and below average debt-to-equity ratio, reports Vanessa Youngs for TheStreet.

“Potash Corp.’s high-quality, long-life potash reserves lie at the lower end of the cost curve, which should enable the company to withstand a protracted period of low potash prices,” Barnes added in the Financial Post article.

Investors can gain exposure to the agribusiness, fertilizer industry through the Market Vectors Agribusiness ETF (NYSEArca: MOO) or the PowerShares Global Agriculture Portfolio (Nasdaq GIDS: PAGG).

Potash is the largest holding in PAGG at 8.7% and makes up 6.5% of MOO. MOO also has a smaller 2.3% weight toward Uralkali.

Potential investors should be aware that agribusiness stocks and agricultural commodity prices may diverge. For example, environmental impact that causes low harvests and higher grain prices may also mean that farmers won’t have enough to pay for extra materials and equipment for the next season.

For more information on the agribusiness industry, visit our agribusiness category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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