Those looking for an easy answer as to why the Market Vectors Agribusiness ETF (MOO), the largest equity-based agribusiness ETF on the market today, is down more than 8% in the past month would be apt to blame that glum performance on "risk on" being turned off. All commodities are being smacked they might say. High beta is yesterday's news they might opine. Emerging markets are a problem, too, that could add pressure.
They would be correct in all of those explanations. However, all of those explanations overlook the primary reason why MOO and its constituents such as Potash (POT), Mosaic (MOS) and Agrium (AGU) have been taken to the woodshed. The reason is soaring natural gas prices. NYMEX-traded natural gas futures have climbed about 40% in the past five weeks and in the past four weeks, the U.S. Natural Gas Fund (UNG), the ETF that tracks those futures, is up more than 27%.
This conundrum is easy to explain. Production of anhydrous ammonia fertilizer requires natural gas; in fact, lots of it. Not all fertilizer makers producer that type of fertilizer and some that do don't produce as much ammonia fertilizer as they potash or phosphate, but the way the market often works to throw the babies out with the bathwater and sort out the mess later.
Resurgent natural gas prices do explain the 12.4% tumble in the past month for CF Industries (CF), largest U.S. nitrogen fertilizer producer. To produce 1 ton of anhydrous ammonia fertilizer requires 33,500 cubic feet of natural gas. That is to say if natural gas prices can muster the strength to climb to $3 per thousand cubic, the input costs for fertilizer producers would soar.
In turn, those higher costs would have to be passed along to the farmers that purchase nitrogen-based fertilizer and there are plenty of those farmers around the world. As one example, corn is one of the most nitrogen-intensive crops out there. And whom do the farmers pass their higher costs along to? Consumers.
As we noted earlier, little shelter from the nitrogen-based fertilizer storm can be found with companies that don't produce much of that particular variety. One glaring example is Potash, the world's largest fertilizer. This Canadian company produces more of its namesake fertilizer than it does nitrogen-based products and that namesake fertilizer is less gas-intensive. Still, the stock is down more than 9% in the past month.
Bottom line: The factors mentioned here lead to one conclusion. Long-term investors in MOO or fertilizer stocks should consider hedging that position with UNG.