ETF Trends... Bubble in Agriculture? (MOO, POT, MON, ADM, MOS, BHP)

Higher ethanol, potash demand, ag-super-mergers, surging food prices… and now an ETF crossing the $2 billion in assets mark.  You have to ask if a bubble is being formed in agriculture.  Today came news from Van Eck Global that its Market Vectors Agribusiness ETF (NYSE: MOO), the most targeted ETF solely to agriculture and farming that holds real share assets, has now reached the $2 billion mark in assets.  Before you think about this just on an ETF basis, there are direct and indirect ties here to Potash Corporation of Saskatchewan (NYSE: POT), Monsanto Company (NYSE: MON), Archer-Daniels-Midland Company (NYSE: ADM), The Mosaic Company  (NYSE: MOS), and many more companies.

What Van Eck tied to the growth of its ETF that tracks the DAXglobal® Agribusiness Index is that agriculture remains a fundamental cornerstone of the world economy.   Also cited was that basic demand is growing with the overall population and as personal income is growing. Chemicals and equipment were included, but also things like biofuel adding demand ahead.

Potash Corporation of Saskatchewan (NYSE: POT) has been THE catalyst for this sector behind the return of the global food demand story now that BHP Billiton plc (NYSE: BHP) has decided to try to acquire it.  With other rumors about a break-up and/or about it negotiating with other buyers, investors want to trade POT.  At $148.50 the merger-arbitrage is actually negative because so many investors are betting on a higher price than the formal $130.00 bid on the table.  The current market cap is now $44 billion.  52-week trading range here is $83.85 to $153.29.  Analyst targets do not really matter because so many downgrades came now that an arbitrage premium exists.  If you trust the Thomson Reuters estimates, which is hard to do after such a merger premium is there and after downgrades, it trades at 26-times expected 2010 earnings and at 19-times expected 2011 earnings expectations.

The Mosaic Company (NYSE: MOS) is often considered “The Smaller Potash Corp.” by investors.  While there are some differences, Mosaic hit 52-week highs today and its range of the last year is now $37.68 to $68.64.  When its earnings hit last week, shares were around $61.50 before the latest surge.  Valuations are elevated but not at nosebleed levels as the stock trades closer to 19-times next year’s earnings.  If Potash Corp. does manage to secure a higher bid, one might even be able to argue that this is cheap in comparison.  Still, Mosaic now has a $30 billion market cap.  The problem is that Thomson Reuters still lists the average analyst price target right above $63.50.

Where is there not a bubble?  Monsanto Company (NYSE: MON) is still worth about $29 billion in market cap despite having tanked this year as shares are around $54.00 and the 52-week trading range is $44.61 to $87.06.  The problem is a difficult one now that shares have recovered from lows and now that shares rallied after last week’s earnings.  The forward valuations are still steep compared to the market and peers on earnings, but that is easy to explain as that is what happens in large turnarounds where shares have gone awry.  The average analyst price target is still north of $60 for Monsanto.

Archer-Daniels-Midland Company (NYSE: ADM) is above $33.00 and near a 52-week high as the range of the last year has been $24.22 to $33.54.  If you take away share price there is not a valuation bubble here in this name despite a $21 billion market cap.  ADM is not expensive as forward earnings estimates from Thomson Reuters give this on close to 11-times forward earnings expectations.  The average analyst price target is $36.77 as of last look here.

These four companies alone tally up to about $125 billion in market cap, and the weighting total of the four combined comes to nearly 27% of the entire Market Vectors Agribusiness ETF (NYSE: MOO).  Having crossed over $2 billion in assets is technically not a bubble-ETF at all in weightings as there are other large components as well not included here.  Shares hit a new 52-week high of $50.00 and the highs were closer to $65.00 back when agriculture, fertilizer, and potash stocks were on fire in 2008 before the meltdown.  Even at a 52-week high, the ETF is up about 13% so far in 2010.

If the ETF was up 50% or 75%, then we could say that the asset size announcement of $2 billion was just due to performance.  Shares are up by about a third since the lows before the fourth of July, so recent performance has contributed.  Still, there has simply been more asset interest here from investors.  If we have to ask, “Is there a bubble?”, the answer is that this is NOT a bubble despite the 52-week highs.  Unfortunately, there is not a trend that exactly screams deep value here either for the sector ETF based upon these large agriculture names.

JON C. OGG