Russian Wheat Crisis: Great News For Agribusiness ETFs?

by on August 12, 2010 | ETFs Mentioned:

For much of the year, commodity prices have been remarkably stable as investor fears over a double dip recession and even deflationary concerns have moved into the spotlight. These issues have created a ceiling for many natural resource prices, while relatively strong current demand has prevented prices from falling considerably. This flat trend was disrupted partially last week when news broke that the world’s third biggest exporter of wheat, Russia, would be halting all future shipments of the staple food crop out of the country. This news sent wheat prices surging across the world, and further underscored the potentially significant impact of extreme weather in a single country on global commodity markets [read more about the wheat crisis here].

While an increase in wheat prices could have a negative impact on low-income consumers and large companies that use wheat as a main ingredient in their products, farmers not impacted by the fire (such as those in the U.S.) seem likely to benefit from the increased prices that have resulted from this disaster. And in order to capitalize off of this trend higher in prices, farmers around the world will likely demand need more products from the agribusiness industry in order to reap a record harvest and cash in on the wheat crisis [also read Ultimate Guide To Agricultural ETFs].

With dramatically higher prices, farmers will be compelled to plant more wheat and attempt to maximize their yield from elevated wheat prices (which were recently at a two year high). Increasing current crop yields required buying more fertilizer which could bode well for the potash and fertilizer industries that stand to benefit from increased demand around the world. For ETF investors, there are two funds that offer exposure to this important sector: the Market Vectors Agribusiness ETF (MOO) and the PowerShares Global Agriculture Portfolio (PAGG). Below, we highlight a few key differences between the two increasingly in-focus funds [for a more in-depth discussion of the differences between the two funds see Agribusiness ETFs Head-To-Head]:

  • MOO: This fund is the second most widely-held ETF in the Commodity Producers Equities ETFdb Category, with over $1.6 billion in assets under management and average daily volume of over 600,000 shares. In addition to a 35% weighting to the U.S., MOO allocates about 13% of assets to Canada and another 13% to Singapore, ensuring that the fund is well-diversified among developed markets. Its top holdings include Wilmar International (8.7%), Potash Corp of Saskatchewan (8%), and Syngenta AG (7.7%). MOO is up 11% over the past month. MOO charges an expense ratio of 59 basis points [also read What Every Investor Should Know About Commodity ETF Investing].
  • PAGG: Although much smaller in terms of assets than its Market Vectors counterpart, PAGG offers investors greater exposure to the international market, allocating just 27% of its assets to the U.S. The fund also offers a greater level of emerging market exposure as well, allocating 9% to Malaysia and 5% to China (among others) to give the fund nearly one-quarter exposure to emerging markets in total. PAGG charges an expense ratio of 75 basis points, and has surged by about 12% over the past month as the crop crisis has intensified [see Potash Boosts MOO, PAGG].

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Disclosure: No positions at time of writing.