Agribusiness ETF Soars On BHP’s Potash Play

by on August 17, 2010 | ETFs Mentioned:

Although equity markets have been under pressure for some time now thanks to weak levels of growth and high unemployment, some industries have been surging higher and seem to be well on the way to recovery. With a weakening dollar and bulging world populations, the agribusiness sector has been in focus in recent weeks thanks to the wheat crisis in Europe and declining corn yields across much of North America. This trend reversal, which comes after almost two years of weakness in commodity prices, has spurred one of the world’s largest mining companies, BHP Billiton (BHP), to make a nearly $40 billion offer for the world’s largest potash maker, the Potash Corp of Saskatchewan (POT).

The offer of $130/share, which represented a 16% premium over the company’s Monday close, was swiftly rejected by Potash, who called the offer “grossly inadequate.”  This news sent shares of POT skyrocketing higher, up more than $28/share in early New York trading, representing a 25% gain for the Canadian company. Meanwhile, shares of BHP were off roughly 2.2% in early morning trading, hanging just above the $70 mark for much of the session.

Potash Corp Chairman Dallas Howe said in a statement that the BHP proposal substantially undervalues the company and that the company has adopted a shareholder rights plan to guard against any hostile moves, arguing that it was not in the best interests to enter talks with BHP. According to Reuters, Potash Corp, which set the trigger at 20 percent under the rights plan, said the board authorized the issuance of one share purchase right for each common share of Potash Corp outstanding as of the close of business on Aug. 16. “We believe the timing of your proposal is highly opportunistic given that, among other things, the industry is still in the early stages of a recovery,” Howe said [also read Three ETFs To Invest Like Marc Faber].

Agribusiness ETFs in Focus

In addition to being great news for Potash Corp shareholders, the announcement has helped to boost the agribusiness sector as a whole; many analysts predicted that a wave of M&A activity will soon sweep over the industry. Potash companies have already been hot targets this year with CF Industries buying up Terra Industries and rapid consolidation in the Russian market. Should this trend continue into the rest of the agribusiness industry, it could be welcomed news for the sector and help to send share prices even higher heading into the fall [also read Russian Wheat Crisis: Great News For Agribusiness ETFs?].

Below, we profile two ETFs that have seen the biggest gain in today’s trading thanks to these bullish developments:

Market Vectors Agribusiness ETF (MOO)

This fund is one of the most liquid and widely held in the Commodity Producers ETFdb Category, with over $1.7 billion in assets under management and over 600,000 shares trading hands every day. MOO tracks the DAXglobal Agribusiness Index, a benchmark that provides exposure to publicly traded companies worldwide that derive at least 50% of their revenues from the business of agriculture. MOO holds 44 securities in total and offers close to 36% exposure to the U.S., 16% to Europe, and 13% to Canadian firms. The fund holds 8% of its assets in POT and was up just over 5% in Tuesday trading. MOO charges an expense ratio of 59 basis points [see holdings of MOO here].

PowerShares Global Agriculture Portfolio (PAGG)

This PowerShares ETF tracks the NASDAQ OMX Global Agriculture Index, a benchmark designed to measure the overall performance of globally traded securities of the largest and most liquid companies involved in agriculture and farming-related activities. The fund holds just over a quarter of its assets in U.S. securities, with large allocations also going towards Canada (12%), Singapore (10%) and Malaysia (9%). PAGG holds 7.3% of its assets in POT and was up close to 5.8% in Tuesday afternoon trading. The fund charges an expense ratio of 75 basis points [see more fundamentals of PAGG here].

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Disclosure: No positions at time of writing.