Global X notched another ETF industry first on Thursday, debuting a fund that focuses on companies globally that are engaged in some aspect of the fertilizer industry. The Global X Fertilizers/Potash ETF (SOIL) seeks to replicate the Solactive Global Fertilizers/Potash Index, a benchmark that includes about 29 companies from both developed and emerging markets.
U.S. stocks account for about 22% of the index underlying SOIL, followed by Israel (14%), Canada (12%) and Australia (9%). The largest individual allocations in the underlying benchmark go to Illinois-based fertilizer manufacturer CF Industries (CF) (5.3%), Norwegian fertilizer producer Yara International (OTCPK:YARIY) (5%) and Australian chemicals and explosives manufacturer Incitec Pivot Ltd. (OTC:ICPVF) (4.9%).
Case for Fertilizers
Like many products in the Global X ETF lineup, SOIL is based on an investment theme related to increased consumption and ongoing urbanization in emerging markets. Fertilizers are materials that are capable of increasing yields of various crops by supplying nutrients needed for plant growth. While many may be most familiar with fertilizers as a lawn care tool, production of fertilizers used in the agribusiness space is a global multi-billion dollar business.
As populations in developing markets continue to shift from rural areas to urban settings, discretionary income and quality of living have been on the rise. That trend leads to an increased demand for nutrients and generally higher quality food sources. Many emerging markets have struggled to keep up with the growing demand for agricultural populations from their increasingly large and increasingly wealthy populations; China recently became a net importer of corn, and is now projected to purchase close to 2 million metric tons of corn for the year ending June 30, according to the United Nations Food & Agricultural Organization.
Additionally, the huge run-ups in prices of agricultural commodity prices over the last year have increased demand for products capable of increasing crop yields - thereby increasing total revenues earned by farms. While the fertilizer market may be close to saturated in the U.S. and other developed markets, tremendous opportunities exist overseas - particularly in emerging economies. Grain yields in India are less than half of those in the U.S., with a big portion of that gap attributable to improper or insufficient fertilization. China and India account for more than 40% of global fertilizer use, and consumption is expected to climb significantly in those market in coming years as populations continue to grow and urbanize.
“As the population in emerging economies continues to increase their food consumption and purchasing power, these nations have to increase farming yields,” said CEO of Global X Funds, Bruno del Ama. “We are starting to see how these fertilizer and potash companies stand to benefit from this demand.”
Food ETFs in Focus
There are a number of exchange-traded products that offer exposure to various segments of the food supply chain. Global X recently debuted a Food ETF (EATX) and PowerShares offers a similar product (the cleverly-named PBJ). While those ETFs focus on stocks of companies that supply end users with food and beverages (such as Nestle (OTCPK:NSRGY) and General Mills (GIS)), SOIL taps into a much earlier stage of the food production process by investing in companies that provide materials to farmers to facilitate efficient crop growth and harvest. Given the link between crop prices and fertilizer demand, a fund like SOIL is more likely to be impacted by commodity demand and prices. ETFs like PBJ and EATX focus more on providers of consumer staples.
As such, SOIL may be useful as either a means of establishing a short-term tactical tilt toward a commodity-related industry, or as a smaller allocation within a long-term portfolio for those who believe that ongoing increase in demand for food resources will result in strong performance in coming years. Some of the stocks that make up SOIL overlap with agribusiness ETFs such as MOO and PAGG, but those more broadly-based funds generally have little allocation to the “pure play” fertilizer stocks found in the new fertilizer ETF.
Disclosure: No positions at time of writing.
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