As the Russia-Ukraine war brings about a global food crisis, here’s an ETF that will benefit

Of late, food prices have risen dramatically, and fertilisers are a major reason why. The pandemic- induced supply bottlenecks and the rising cost of natural gas, a key production input, are amongst the factors sending fertiliser prices soaring.

Moreover, given that Russia is a major producer of agricultural inputs such as fertilisers, the Russia-Ukraine war has had an unsettling impact on the farming sector. With this in mind, we revisit the VanEck Vectors Agribusiness ETF (NYSE:MOO), which is showing strength amidst the Russia-Ukraine war (Figure 1).

Figure 1: Strong performance of MOO ETF 

Related article: Look out for this sector in face of rising inflation

Fertiliser prices were soaring even before the Russia-Ukraine war

Even before Russia invaded Ukraine, the prices of many agricultural commodities were on the rise due to supply shortages and growing demand for food as economies recover from Covid-19. The food-price index compiled by the Food and Agriculture Organisation (FAO), which tracks a basket of food commodities, reached an all-time high (Figure 2).

Figure 2: FAO Food Price Index 

A major reason behind why food prices have risen dramatically is none other than that of fertilisers. Fertilisers require vital nutrients or minerals such as potash, potassium, phosphorus, and nitrogen, and the prices of this farming input had increased due to rising energy and transport costs.

Sanctions imposed by the US in 2021 on Belarus’s potash industry, which produces 18% of the world’s potash (3rd largest producer), have also dealt a blow to the fertiliser supply. This came after the Belarusian leader’s brutal crackdown on widespread protests following a disputed presidential elections in 2020.

Moreover, as of last year, China tightened its controls on the exports of fertilisers, primarily nitrogen and phosphate, effectively shutting off the supply to the global market until June this year to try to limit a rise in domestic food prices. 

Russia-Ukraine conflict has added to these price pressures

The conflict between Russia and Ukraine, major global producers of commodities such as corn and wheat, have sent food prices soaring even higher amidst anticipation of greater supply shortages. Together, Russia and Ukraine account for about 30% of global wheat exports and 20% of corn exports.

Fertiliser prices continue to spike to records as Russia’s invasion of Ukraine puts a massive portion of the world’s fertiliser supply at risk, given that Russia is the largest global exporter of fertiliser and accounts for 20% of the global output. Russia is a major producer of potash, phosphate and nitrogen-containing fertilisers (Figure 3). The war is also pushing up the cost of natural gas—the main input for most nitrogen fertilisers.

Figure 3: Russia is amongst the world’s top potash producer 

To make matters worse, Russia is urging domestic producers to reduce exports of fertilisers, stoking fears of further shortages. In view of this, the Green Markets Weekly North America Fertilizer Price Index, which is constructed using the fertiliser benchmark prices of U.S. Gulf Coast Urea, U.S. Cornbelt Potash, and NOLA Barge DAP (New Orleans, Louisiana Barge Diammonium Phosphate) soared to a record high of USD 1270 in March this year (Figure 4).

Figure 4: Fertiliser prices have surged to a record high 

Fertilisers are key to keeping corn, soy, rice, and wheat yields high. The fertiliser crisis is in some respects very worrying because it could inhibit food production globally, leading to higher food inflation.

The VanEck Agribusiness ETF has benefitted from the fertiliser boom

The VanEck Agribusiness ETF (NYSE:MOO) has exposure to fertiliser companies such as Nutrien (NYSE:NTR), The Mosaic Company (NYSE:MOS), and CF Industries (NYSE:CF), which are the largest sellers of potash, phosphates, and nitrogen fertilisers globally respectively. The trio combines for nearly 13.6% of the fund's weight as of 12 April 2022. High demand for crop nutrients and a limited supply, have boosted the profit margins for these fertiliser companies.

Nutrien: Canadian fertiliser titan Nutrien, is one of the world’s largest fertiliser producer. The company is the world's largest potash producer with over 20 million tonnes of potash. Following Russia’s invasion of Ukraine Going forward, Nutrien is in the position to take advantage of the nitrogen and potash disruption in the European region. The company generated USD 3.4 billion in net earnings for 2021, which is a significant increase from USD 965.3 million in 2020.

The Mosaic Company: A leading integrated producer of concentrated phosphate and potash. In North America, Mosaic accounts for about 75% of annual phosphate production and about 35% of potash production. The company recorded a significant increase in net earnings from USD 166.1 million in 2020 to USD 1.8 billion in 2021.

CF Industries Holdings Inc: Engages in the manufacture of hydrogen and nitrogen products for various industrial applications. In fact, it is the largest ammonia producer in the US. On top of that, the company is looking to scale its ability to produce green and blue ammonia, which are more sustainable. The company’s earnings jumped significantly from USD 260.4 million in 2020 to 1.4 billion in 2021.

Table 1: Top holdings of MOO

Key investment risks

Variability in supply and demand dynamics: Changes in agricultural and trade policies, as well as gas prices affect the supply and demand dynamics of agricultural commodities such as fertilisers. Not to mention, the ongoing geopolitical tensions and its eventual outcome have the ability to greatly impact this market.

Volatility: Another thing to note is that commodities are cyclical, meaning that they are prone to booms and busts associated with the economic cycle. This means that while price changes can hit extremes to the upside, it can similarly hit these extremes to the downside, albeit with usually long spans between the two extremes thereby resulting in much volatility.

Ride on the growth in agribusiness

Investors can gain exposure to the agribusiness sector via the VanEck Agribusiness ETF (NYSE:MOO). This is the largest and most liquid pure equity-underlying ETF that provides a global agriculture exposure.

MOO is a diversified agribusiness play that provides exposure to companies in the farm equipment, seed and fertiliser, animal health, and food transport and processing industries, and member firms derive at least half their sales from agribusiness pursuits.

With food prices trending higher, companies that support food production would benefit, as rising prices lead to increased production. Consequently, higher production translates to an increase spending on seeds, fertilisers and farm machinery, benefiting companies higher up the agribusiness supply chain.

We maintain our fair PE multiple of 18.0X, but upgrade our 2023 target price to USD 135, following higher expected earnings for the agribusiness sector. This translates to an upside potential of 25%, based on the closing price of USD 107.80 on 13 April 2022.

Table 2: Earnings growth of the VanEck Agribusiness ETF

All in all, the war in Ukraine is already a tragedy. About 400 million people are dependent on Russia and Ukraine for food due to their significant roles within the global food supply chain. As the war ravages the world’s food supply, it reigns mayhem on the everyday lives of consumers, bringing to the forefront food security issues, and exposing the critical nature of the agriculture sector.

We believe that agricultural commodities and the companies within this sector present an exciting opportunity. Beyond benefiting from the current supply upheaval, their growth is also supported by strong underlying secular trends such as an increasing global population and income growth.

Related article: Ride on the rapidly growing demand for food with this ETF

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.