Wednesday’s ETF To Watch: Global Agriculture ETF (PAGG)

by on October 6, 2010 | ETFs Mentioned:

This year has been a turbulent one for stock markets; we have seen equities remain stubborn for the majority of 2010, only to post record gains in one of the best Septembers the U.S. has ever seen. With these gains apparently carrying over into October, many investors are growing increasingly optimistic that the economy is beginning to show new signs of life and will manage to avoid the dreaded double-dip recession. However, investors are anxiously awaiting company earnings to see how some of the market bellwethers performed over the past quarter. This week kicks off earnings season, with several big names releasing their quarterly performance figures over the next few days [see also September ETF Data: Back On Track].

Today, Monsanto Company (MON) will release their earnings from their most recent quarter. Monsanto is the world’s leading producer of herbicide glyphosate, most commonly used in the weed-killing spray, “Roundup”. The company is also leads the world in the production of genetically engineered seeds, providing the technology for roughly 90% of the global market. Named company of the year by Forbes back in January, Monsanto is set to release their earnings before market open today, putting the entire agribusiness sector into focus [see also Active ETF Pipeline: Previewing Some Exciting Funds On The Horizon].

Analyst estimates peg the company as having a rough quarter, with an EPS estimate of -0.06, compared to the 0.02 earned a year ago by the seed firm. This stems from severe weakness in sales over the company’s new corn seed called ‘SmartStax‘. The new variety has failed to impress farmers and has not significantly improved crop yields as expected, despite the extra cost and development of the new strain.

So while commodity prices have been soaring across the board and investors and farmers have been scooping up agribusiness stocks and products, Monsanto has been left in the dust, slumping by more than 40% so far in 2010. This puts the company in a tough spot so all eyes will be on the company later today when they release their earnings and their guidance for 2011 which looks to be heavily impacted by this R&D disaster. “Technologically, they are still the market leader,” said Laurence Alexander, an analyst at Jefferies & Company. “The main issue going forward is do they get paid for the technology they deliver. The jury is still out on that one. It’s going to take a year or two of data to reassure people.”[see also Three ETFs George Soros Might Like].

In light of this major earnings report and recent troubles of the company, the PowerShares Global Agriculture Portfolio (PAGG) is today’s ETF to watch. Monsanto accounts for 8.5% of this ETF along with other big agricultural names like Potash, and Wilmar International Limited [see also Agribusiness ETF Soars On BHP’s Potash Play]. Despite weakness in MON, PAGG has had a solid year thus far, gaining nearly 4% with a strong dividend yield of 1.5%. If Monsanto’s report comes in negative or if the company posts weak guidance, look for this ETF to take a hit on the day. However, if the company is able to convince investors that the situation is under control and that growth will be in the near future, look for MON and PAGG to surge higher in Wednesday trading.

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Disclosure: No positions at time of writing.