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The Globe and Mail

A seasonal trade in the fertilizer sector

Fertilizer equities and related Exchange Traded Funds have a history of moving higher from the end of June to the end of December. Thackray's 2012 Investor's Guide notes that Potash Corp., the largest fertilizer producer in the world, has a period of seasonal strength from June 23 to Jan. 11. The trade has been profitable during 18 of the past 20 periods. Average return per period was 23.1 per cent. What are the prospects for the sector this year?

An important influence on the seasonal trade is grain prices. Higher grain prices generate more cash for grain farmers who, in turn, will purchase more fertilizer for the following crop year. Soybean, corn and wheat prices bottomed this year in the first week of June and already have gained 10 per cent. Crop conditions in the U.S. Midwest and Canadian prairies have been ideal. U.S. grain production this year could be the largest in history if weather conditions remain favourable. However, hot dry weather in the U.S. mid-west and Canadian prairies this past week could have a negative impact if extended.

Grain prices are impacted by supply and demand inside as well as outside of North America. Supply from Eastern Europe and Russia has been curtailed by record cold weather last winter that damaged the winter wheat crop. Demand from China is soaring at a time when its inventories are below normal.

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Monitoring a basket of grain prices is easy. iPath DJ-AIG Grains Exchange Traded Notes track a basket of grain futures contracts that is weighted one third in corn, one third in soybeans and one third in wheat. Units have traded in a range between $43.21 and $48.57 during the past five months. A break above $48.57 implies upside potential to $54.60 where previous resistance exists. Fertilizer equity prices and related ETFs have a high correlation to this ETN.

The easiest way to invest in the fertilizer sector is through the Global X Fertilizer/Potash ETF. The ETF, launched last year, holds a basket of 29 international fertilizer stocks including CF Industries, Mosaic, Agrium, Terra Nitrogen and Potash Corp. Management expense ratio is 0.69 per cent.

On the charts, the ETF is showing early technical signs of bottoming. Units found support at the beginning of June at $11.50 and subsequently formed a trading range between $11.50 and $12.68. Short term momentum indicators are trending higher. Strength relative to the S&P 500 Index turned positive two weeks ago.

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