By ETF Heat Map Team
Agrium Inc. and Potash Corp, two Canadian players, made it public that they are holding discussions with an intention of possibly merging. Since the news broke, Potash has experienced an increase in shares by around 12% and Agrium by around 8%. Without a doubt, this deal is expected to make a lot of sense if finalized (by both parties, shareholders and board members) and approved by regulators.
There are quite a few agriculture related ETFs available for investors to play, as the market rebounds. These agriculture ETFs attempt to give investors exposure to the investment results of an index composed of either global or North American companies primarily engaged in the agriculture business. We quickly preview certain agriculture ETFs available in the ETF Heat Map screener and database:
- VEGI – iShares MSCI Global Agriculture Producers ETF
- PAGG – PowerShares Global Agriculture Portfolio ETF
- FTAG – First Trust Indxx Global Agriculture ETF
PAGG, a PowerShares product, attempts to provide exposure to the overall performance of the most liquid, globally traded companies involved in agriculture and farming-related activities. It’s top two holdings include Potash Corp and Agrium Inc., which make up approximately 16% of the ETF’s holdings. It has a 30 day SEC yield of approximately 1.6% and has an expense ratio of 0.75%.
VEGI, an iShares product, provides exposure to companies that produce fertilizers and agricultural chemicals, farm machinery, and packaged foods, and meats. It holdings include approximately 8% combined on both Agrium Inc. and Potash Corp. It currently has a 30 Day SEC dividend yield of 2.3% and has an expense ratio of 0.39%. It has returns have been meager at best (returning only 3.93% YTD and approximately 0.2% since inception), which is not surprising considering the industry’s woes.
If the merger does actually happen, the new entity will be in a better competitive position, given the issues facing the industry. Potash Corp is the world’s biggest producer of nutrient form potassium (potash) and it also produces phosphorus and nitrogen contained in triumvirate fertilizer. Agrium on the other hand produces a substantial amount of Nitrogen along with a decent amount of Potash and Phosphorus. It also owns a chain of agricultural stores in North America.
Potash would specifically gain by diversifying its sources of revenue. It would also get a chance to penetrate the US market where Agrium owns a number of retail stores. Agrium on the other hand would increase its production capacity. This is over and above the normal benefits of mergers which include cost reductions, possible synergies, access to new markets / verticals, and increased efficiencies among others.
Regardless of the merger outcome between these two entities, there are many long term long term fundamental reasons in investing in agriculture. The world’s population is increasing and land for food production is not proportionate relative to the population. According to the World Bank, each person on earth occupied 0.37 hectares of farm land 55 years ago, in contrast to the 0.2 hectares per person in 2013, which is approximately 46% decrease. In India the situation is worse since the figure has reduced by around 65% for the same period.
Fertilizer’s have greatly helped the world deal with this specific problem. From 2002 to 2013, the consumption of fertilizer globally has gone up by 17.5% per hectare of farm land. This figure is even higher in developing countries since the increase has been approximately 27% in China, 46% in Brazil and 57.5% in India, which is according to a report released by the World Bank.
This trend is expected to continue because as the population increases the demand for food will rise. Furthermore, since arable land is declining, the pressure to produce more becomes higher given an increase in the demand for fertilizer. These ETFs are an opportunity for medium to long term investors who in the next few years believe the industry will rebound and certain players will lead the growth going forward.