Article: Agriculture ETFs gone stale?

One of the key risks when investing in niche ETFs products is the provider losing patience and pulling the plug on a fund which has failed to gain traction with investors. On 31 August 2016 ETF Securities said it would scrap its ETFS S-Network Global Agri Business exchange-trade fund (ETF) citing its small size over an extended period of time and the associated costs involved in operating it. Investors who remained invested right up into the delisting will have their shares in the ETF compulsorily redeemed in cash (on or around 19 September 2016). When it was closed ETFS S-Network Global Agri Business had a mere £12.5 million asset under management. Coincidentally the closure of this fund comes amid speculation of a multi-billion dollar merger between Canadian fertiliser companies. Potash Corporation (POT:TSX) and Agrium (AGU:TSX). Potash prices have been under pressure for some time, prompting several bouts of M&A in the industry as companies join forces to survive. (Click on table to enlarge) ETFs table Long-term dynamics It would be wrong to assume the ETF closure and desperate corporate mergers imply that agriculture is a bad sector in which to invest. We still see it as attractive given some interesting long-term dynamics. Demand for food is inelastic and consumers will prioritise having enough to eat over luxuries such as cars, expensive clothes and holidays, in our opinion. There are an increasing numbers of mouths to feed. The 2010-2019 World Agricultural Report, prepared jointly by the Organisation for Economic Co-operation and Development (OECD) and the Food and Agriculture Organisation of the United Nations (FAO), estimates a 70% increase in world food production is required by 2050 to meet global food demand. Capacity to achieve such an increase in food output is under significant pressure. The FAO estimates the world’s arable land covers an area of 41.4 million square kilometres out of a total global land mass of 148.9 million square kilometres. More of this land is being lost to urban sprawl, erosion from industrial processes and desertification. (Click on chart to enlarge) ETFs pie Picks and shovels In the mid-1800s, during the California gold rush, thousands travelled West with the dream of making it rich. Few of them realised this ambition but those who sold them the picks and shovels made a killing in the interim. Investors looking for an alternative play on the agricultural markets could consider applying this principle in the 21st century and buying shares in the companies which provide the services and technology necessary for the effective exploitation of different crops. This could include companies from US tractor maker Deere & Company (DE:NYSE) through to UK-listed animal breeding specialist Genus (GNS). With the ETF Securities product gone, what options are there in terms of ETF exposure to this space? iShares Agribusiness (SPAG) is the largest agribusiness ETF listed in London. It has a total expense ratio (TER) of 0.55% and with assets of $56 million is less likely to befall the same fate as its outgoing counterpart. Among its largest holdings are genetically modified foods pioneer Monsanto (MON:NYSE), Deere & Company and Associated British Foods (ABF). US companies account for nearly half the fund. The other main UK-listed option is PowerShares Global Agriculture (PSGA) which has a higher TER of 0.75%. It tracks the NASDAQ OMX Global Agriculture Net Total Return Index which includes the largest firms engaged in farming related activities.