Grains Zig When Stocks Zag – Teucrium CEO Sal Gilbertie

Teucrium Trading operates several derivative and futures-based ETFs that allow investors to trade food commodities including wheat (NYSEARCA: NYSEARCA:WEAT), corn (NYSEARCA:CORN), soybeans (NYSEARCA: NYSEARCA:SOYB), and sugar (NYSEARCA: CANE) which Seeking Alpha’s Quant Rating rates as “buys” or “strong buys”.

CEO Sal Gilbertie updates us on what is happening in Ukraine and Russia, including July’s UN-backed grain export deal, Putin’s next steps, and why wheat prices have returned to pre-war levels despite the ongoing conflict. We also take a look at Teucrium’s two composite ETFs NYSEARCA:TAGS and NYSEARCA:TILL.

Why the world is dramatically underestimating the grain supply crisis in China. Global wheat production is at a record high, yet the world is using more than what can be produced (and why the world needs to pay close attention to this new “normal”). The effects of a rapidly growing middle class and how this global trend is influencing grain supply and prices.

• 2:47 – Russia & Ukraine War: impact on wheat and corn exports

• 8:52 – July’s grain export deal and Putin’s next play

• 10:53 – Why have grain commodities returned to pre-war levels despite the ongoing conflict?

• 12:52 – Are we underestimating a global shortage in this year’s crops?

• 18:47 – A case for grains in your portfolio

• 25:30 – Breakdown of Teucrium’s ETFs

Date of Interview: September 15th, 2022

Transcript

Rosemi Mederos: Welcome to Seeking Alpha. I’m your host, Rosemi Mederos. Today, I’m joined by Sal Gilbertie, founder of the CEO of Teucrium, the agriculture-only ETF provider. Sal, welcome to the show.

Sal Gilbertie: Thank you, Rosemi. Happy to be here.

RM: I want to hear your thoughts today about Russia’s invasion of Ukraine and what this war means for the world’s wheat supply, as well as your thoughts on other current events. But first, would you give us a brief overview about yourself? And could you describe Teucrium’s ETFs for anyone who might be hearing about you for the first time?

SG: Sure. I’m a commodities-centric person, so since I graduated from school, I’ve been thinking and working in the commodities space. And I got to a point where I realized when I found out what an ETF was, I had no idea, in the early 2000, what one was, I realized that this was a perfect tool and perfect mechanism for people to obtain exposure to commodities.

SG: And I think about commodities, but most people don’t. And I couldn’t believe that at the time, really all you could find were precious metals ETFs and energy ETFs and some broad basket ETFs, which is fine, but no one, no one really had a focus on agriculture. And we did launch some energy and agriculture ETFs. But you have to be first to market. So we closed our energy funds down. But we have, you know, the grain ETFs, the big four ags, is what we chose because that’s what’s interesting. It’s what’s macro, it’s what provides the most liquidity for ETF. So we started a corn fund, a soybean fund, a wheat fund and a sugar fund. And people ask us about coffee and cotton and things like that.

We just have those four main agricultural commodities and they’ve really done well. It’s been a long road. We’re 13 years now in this and people are finally starting to think about how important food and energy is not just in their lives, which most people take for granted, but also in their portfolios as well. So we started to grow and I started Teucrium to give people the opportunity to invest in these things in an easier way. You don’t have to have a futures account now to get exposure to these commodities and that’s really important.

RM: Yeah, I agree. And thank you for that. We’ll talk a little bit more about those ETFs a little later. Let’s talk first about the war between Ukraine and Russia. Ukraine is the fifth largest exporter of wheat and the fourth largest exporter of corn. Russia is the largest exporter of wheat. How has the Russia Ukraine war affected those exports?

SG: It has altered the world dramatically, obviously,. Between the two of them, in essence, when you combine Russia and Ukraine for exports of wheat, they dominate the world global trade of exports. And the war has basically locked in most of that wheat. It should not have locked in Russia’s wheat. So it’s really important that Ukraine and Russia both ship out through the Black Sea.

That’s where the bulk of these things go. They go through shipping. So you’ve got to get through Turkey and in the straits there in Turkey. And Turkey controls those straits. We’ve seen the deal that that Russia and Ukraine agreed to. But that’s really I call it a four for me, one for you kind of deal. Russia this year is projected to export four times more than Ukraine, so Russia benefits more. But remember, it’s food, so no one gets penalized for buying Russian grain or Ukrainian grain. It doesn’t matter. You can buy either one. Ukraine has difficulty getting it out because their ports were mined and Russia was bombing their export facilities. Russia has no problem getting its grain out except that because there’s a war in the Black Sea, shipping rates are higher.

Insurance rates are higher. Russia’s trying to fix that. That’s the reason they they agreed to this deal. They didn’t agree to the deal. They help Ukraine or even, I would submit, to help the world get more wheat. They did the deal to help the world get more Russian. Russia is inn this for Russia. People should be very clear about that and understand that what impact it had.

We saw the price of wheat, which was going up anyway because the year prior to the war, the world used more wheat than it than it produced. And this coming year will be the third year that we do that. So you have what they call a declining wheat balance sheet. The leftover supply of wheat is getting smaller and smaller each year and you have to grow. So it’s critical to keep in mind …all agriculture …you plant in the spring, whatever hemisphere you’re in, you wait for this stuff to grow during the summer, you wait for it to ripen in the autumn. You harvest it. And then there’s a big giant pile. And that’s all you have until the next year’s harvest. You have to wait a year. You have to wait for winter when nothing’s growing. Spring, when you plant, summer when it grows, autumn when it ripens, you have to wait another year and that pile gets smaller and smaller and smaller while you’re waiting that year. Well, this will be the third year in a row that the pile actually gets smaller than it was the prior year. That’s pretty nerve racking, especially when you’re talking about wheat, which it’s number one use is for humans.

And that’s it’s kind of unique. Corn’s number one use is to feed animals and to make fuel depending on which which country you’re in. Soybeans feed the animals and some people, but basically corn and soybeans feed people indirectly. Wheat and sugar are consumed directly by humans. So it’s really important that when you you have a disruption in the global supply like the Russian Ukraine conflict has caused. That’s why you’ve seen wheat prices go up and they’ll probably stay elevated for a while because of the war.

RM: And you mentioned about, you know, it’s for human consumption, but after it’s been harvested and it’s sitting for a while, it no longer is fit for human consumption. So some of what Ukraine has finally been able to move is not going to go to feed humans.

SG: That’s a good point. Now, 95% of what’s grown in Russia and Ukraine is called winter wheat. And winter wheat is planted right now, planted in the autumn. It starts to grow and then it goes to sleep over the winter, wakes up in the spring, and grows and is harvested in early midsummer. So the war started on February 24th, which means this year’s crop that was harvested in Ukraine was already in the ground.

It was already planted. So when you look at the world supply numbers, it shows that we have plenty of wheat through this year. Well, that’s true on a global basis. There’s plenty of wheat sitting here. But to your point, on February 24th, this year’s wheat crop was in the fields. Last year’s wheat crop was in storage and being shipped out of Ukraine when that shipping route was disrupted.

That wheat is backed up in the whole supply system. This year’s wheat, which was harvested in June and July, had nowhere to go. So it’s literally in the fields or in suboptimal storage conditions. You can keep grains for 2 to 5 years, let’s say, in perfect conditions. But if you’re storing grain outside just covered, that’s not going to happen.

So we’re going to lose a good amount of the wheat that was grown in Russia. And I don’t think people are realizing that when the USDA puts out its official estimates of wheat supplies, which are really high right now, next year, when they realize a lot of the wheat in Ukraine is just gone because it’s spoiled and couldn’t get out, that that’s going to lower the supply of wheat that’s left over.

And because of the conflict, Ukraine should be planting right now and they’re going to plant supposedly 30% less. They produced 40% less last year because the harvest was disrupted and all that. So if you just used straight USDA numbers, which are overestimated in our opinion, you’ve got a 40% decline from last year. You’re going to have a 30% decline this year.

Ukraine, as you said, fifth-largest wheat exporter… they’re going down the list fast and that’s a big part of the world’s global wheat availability that’s just off the market and probably will be for 2 to 5 years.

RM:

And so the Istanbul Grain Accord has been signed, but it’s only enforced for 120 days, correct?

SG: Yes. You know, when I put my despotic dictator hat on and think, what’s Putin going to do in November when this thing expires? If I were Putin, I would either renew it or simply ,Putin has to renew it. Let’s let’s put it this way. He could just ignore it, but he has to renew it because he’s got to get those shipping and insurance rates down through the straits so that things can get out of the Black Sea.

And remember, for every one bushel of Ukrainian wheat that leaves the Black Sea, four bushels of Russian wheat can leave the Black Sea. And the world needs Russia’s wheat. Russia’s wheat is the most expensive in the world right now, Russia and Ukraine, because of those shipping rates and all that. So that’s why their exports are down. That’s why Ukrainian exports are down. They got a lot of press. Putin is a master at manipulating the press and saying that most of the wheat coming out of Ukraine didn’t go to poor countries, it went to EU countries. Well, guess what? That’s normal because Ukraine is right next to the EU. It’s cheaper wheat, it’s easier and cheaper to get your wheat from Ukraine if you’re in the EU.

So that’s just normal economics. He’s completely painting a false narrative to paint it for his benefit. And in fact, a lot of wheat is going to poor nations that normally do buy from Ukraine. It’s just a lot less of it. They can’t get it out.

RM: Yeah. And Putin is also saying that there have only been two ships that are blocked. He’s underestimating how many ships have actually locked on. The economists are saying it’s like 30% of what needs to go out has been out already. So it’s a little concerning, like what his agenda is when it comes time to renew. Is he going to ask for something different?

SG: I think people just need to keep in mind Putin’s agenda is for Russian dominance of the Black Sea’s agricultural export market, and he will not do anything that benefits Ukraine unless it benefits Russia more, which is why we have the grain accord. Four for them, one for Ukraine. That’s how it works.

RM: Yeah. And so that Ukraine Russia war continues. Yet the price of wheat, corn and soybean have returned to their pre-war prices. What accounts for that?

SG: The fact that the world realized that because that grain isn’t available, we still have enough. So in agriculture, there are two forms. Generally, you don’t ever run out of food. You either have plenty, which is the normal state of affairs, because every government in the world subsidizes its farmers. No government wants their people to be hungry because they’ll lose power, and they’ll be overthrown.So every government subsidizes agriculture. Agriculture has become used to, because of those subsidies, operating at break even. And so the natural price for agricultural commodities is actually the cost of production. That’s where it stays. And if you look back at, say, wheat, the last ten years, eight of the last ten years, the first eight of those years, it it was sitting around its cost of production of futures equivalent in the United States say $4 to $4.50 a bushel. When you had this supply disruption, and we were again, because the balance sheet was tightening before the war (and the world was using more wheat than it produces), prices were going up, getting off that cost of production. And so when the war came, people panicked. Oh, my goodness. There won’t be enough! Well, there is enough. There’s just not plenty. And that’s what the world was getting used to. And what is that adjusted price? So I think the world is going to have to get used to elevated prices above the old break even. And it’s the old break even. The old break-even of $4 to $4.50 futures equivalent per bushel of wheat in the US is gone because the price of fertilizers, the price of energy, the price of everything is up.

The University of Illinois when we look at their studies, they’re saying that costs are up 20% to 30%. So, you know, you can add $0.80 to a dollar a bushel break even for wheat in the US, maybe closer to $5 and $4 right now. And it may stay there for quite some time. That’s what people need to keep an eye on.

RM: So Russia also had good weather for wheat this year, but the United States, Europe, and China are experiencing droughts in farming areas. Are we underestimating the shortage in this year’s crops? And might some countries withhold exports the way Indonesia did with palm oil earlier this year?

SG: All right. That’s a loaded question. Let’s go one at a time. In fact, I’ll go backward. I think that countries will limit their exports when they believe they don’t have enough domestically, but they won’t do that for long. Most countries that are in the export business, it’s a big part of their economy. It’s a big part of their agricultural economy. They don’t want to fray those relationships with their farmers and with they don’t want to break the production chain because then they themselves won’t have food. So I think any food disrupt export disruption is always temporary. And we’ve seen that happen with India, with wheat, India now with rice. They’re temporary. They impose them, but then they’re temporary in terms of how they. Are we underestimating the potential crisis? Yes, I think China is being underestimated dramatically. China is in big trouble. One of the main reasons wheat prices tightened up before the war, and pre-war, was because China had a complete disaster in terms of too much rain and flooding in their wheat-growing area. And they imported more wheat than they imported, I think, except for one year before that happened in the nineties. And they literally tightened up the world’s wheat supply because they bought all the excess wheat and China, they drew down all their stocks of their corn. They drew down all their stocks of their soybean. Then suddenly they imported an amount of wheat. That was stunning. It was two years ago. China has not had the weather that we could see to allow them to replenish, nor have they had the level of imports to allow them to replenish their corn, soybeans, or wheat.

So we think China is running on the edge. You’ll never get a good number from China. But what you do get are market prices and they don’t lie. And market prices are running at an extreme premium to the rest of the world, which means China is short food. That doesn’t go away. That takes, for all agriculture, that takes at least one growing season. to catch up.We think we’re at two or three growing seasons before we catch up. Worth noting here is that this will be the third year in a row, as we’ve said, that the world will use more wheat than it produces, but this year that we’re in, and next year, this year that we’re in, we produce more wheat than ever before.

Globally, we produced a record amount of wheat, yet we’re using more than we produce. That’s really significant. That is something everyone in the world should take note of and not ignore. That means wheat and food has a demand factor that isn’t going away. And with climate impacts and now impacts of the war you’re talking about, agriculture has to be watched closely because we use more than we produce and we’re producing record amounts now.

RM: And another impact of the war is gas prices obviously going up. And so now nitrogen fertilizer prices have more than doubled due to the rising costs of natural gas. What would happen if farmers find that they have to use less fertilizer?

SG: Yields go down. And so across the board yields, yields will go down. That is a big concern right now for Brazil. Brazil steps in and basically can make up the world supplies of both soybeans and corn. Their production has been rising and it will continue to rise. They literally are the stopgap for the world. And if they use less fertilizer and have a yield impact this coming year…and they’re just starting the plant right now, that could have significant implications.

SG: And there’s no way to tell if they get perfect weather. It could overcome a little bit of their, you know, diminished fertilizer use. If they get nominal weather or bad weather and diminished fertilizer use, then you can’t count on Brazil to replenish supplies that would be very impactful to world markets.

RM: And I guess it’s interesting, it only takes like one season of bad farming to really have this huge worldwide impact. But regardless of all of that, overall farming costs keep rising. So how does that feed through to agricultural commodity prices?

SG: It feeds straight. The number one thing agricultural commodity prices are linked to because remember, their normal state is trading at breakeven is cost of production as we referenced earlier. So as cost of production goes up because energy prices are high, that’s a very big deal. Natural gas prices, you know, in Europe are really, really high. And that’s going to impact the rest of the world. The ancillary impact of that is people know they’re not going to get natural gas, say, in Germany, who is completely reliant on Russia for gas. They’re going to switch to coal, to diesel and to nuclear. Well, coal and diesel are arbitrage. Okay. It’s just an energy content. Coal, diesel and LNG, liquefied natural gas, are arbitraged. So the high price of natural gas in Europe is going to have a ripple effect where the diesel part of the crude oil barrel is going to be very valuable because everybody’s looking for diesel and heating oil. And of course, coal is going to be valuable as well. Those are fungible commodities all around the world. That’s going to raise prices for everyone. The only respite is if Germany economy collapses during the winter and the price that causes a ripple effect around the world. And you may see crude oil prices come down. That actually could offset doomsday scenario, basically, but it could happen.

Yet diesel prices relative to crude are still going to be very high because everybody’s going to need that diesel to stay warm.

RM: So you said agriculture commodities trade at their cost of production, except when supply concerns arise. But that also means that there’s a low historical correlation with equities. Right? Even lower than with Gold.

SG: Absolutely. In fact, nine of the last ten stock market pullbacks of 10% or more , grains have outperformed. And you can look at whatever grain index you like. We have a Teucrium index that is is part of our TAGS fund, which is a fund of funds. It has 25% of each of our four underlying funds in it corn, soybeans, wheat and sugar.

And when you compare the price performance of that to the S&P 500, 9 out of the last ten, 10% or more pullbacks in the S&P 500, grains outperform and sometimes they’re even positive. I mean, the other day we had the stock market down 4%. And if I’m not mistaken, grains were up that day. And, you know, when I looked at my portfolio, everything was red except the grains.

And so it’s a great diversifier. We always say when it doesn’t rain, where they grow wheat, no one stops eating their bagel or their pasta. And so the demand stays constant. It doesn’t matter who the president is, it doesn’t matter what the latest iPhone is. It nothing matters. You’re still going to eat. You’re still going to use those grains, which makes them, as Jake Hanley says, our analyst here in Teucrium, “when grains zig, stocks zag” and that’s what you want to diversify your portfolio and that’s that’s how our products are being used right now. Some people trade them, that’s fine, but we put these out here in a good format that is conducive to people being able to allocate some portion of their portfolio to grains to stabilize it. And if you look at over time and these charts are on our website where you look at history, where you’re sitting across the production, say, for corn or wheat and you went that way for 5 to 8 years.

And the natural cycle is 3 to 7 years where all of a sudden it doesn’t rain somewhere important. So if you see grains trading at the break even and they’re just flat lining at a lower cost, you can just take that as a given. The market is determined or break even price layering them into your portfolio. We’ve seen advisors call us and say, you know what, I put 1% of my portfolio into your Corn Fund. And two years later it doubled. And wow, I’m so happy, you were right. We love to hear those stories. That’s fantastic.

RM:

Actually, you have great information on your website and on your Twitter account. And this week you posted an insightful reaction to the USDA’s most recent WASDE the report. One of the top takeaways is that U.S. corn and soybean balance sheets are tightening because production is not keeping up with usage. Could you expand on that?

SG:

Sure. As we said, using wheat as the example, even though the world is producing a record amount of wheat, the world is using more. Soybeans, they have had bad weather. They had really bad weather in southern Brazil this year. And the U.S. crop isn’t what we thought it would be. But soybeans took a hit and with soybeans, you run a pretty tight, especially in the US.

And China is the world’s largest importer of soybeans. So to feed their swine herd, primarily, they’re the largest consumer of pork and hogs eat soybean meal. And so, you know, it’s all related. You’ve also got soybean used for soybean oil, which is used in biodiesel and all the alternate forms of energy. Corn is used in ethanol. So the usage for all these these commodities is going up. And importantly, the usage is going up because of the growing middle class. And this chart is on our website as well. There’s a study that we that we post with the chart. Between 2020, and we’re two years into it now, and 2030, the global middle class is projected to increase by a billion people. And what happens when you when you get out of sustenance, living, when you’re really, really poor, you’re just concerned about food, getting enough food and shelter.

You don’t use much stuff. But the next step up, which in some countries is is as little as $10 extra a day. The first thing people do, there’s study after study confirming this, is they increase the meat in their diet, they increase their animal protein intake. That’s grains number one use. And so the demand for grains is rising because of this global middle class and that is coming! And that’s coming and nothing can stop that.

Not even a global recession can stop that because there are just economies that are just being built out now. And again, we’re a few hundred million people into this billion people this decade that are coming in. Once they get above ” now I’m eating more meat” I got another $10 a day. They start buying stuff. As we say, they buy things like Americans buy things and they use a lot of commodities. And that ups the demand for commodities and grains are interrelated. now in our food markets, in our energy markets, they’re used for everything. And that means the demand for grains is rising because of this unseen, unspoken about rising number of middle class people in the world. And that’s a really big deal. The demand doesn’t stop. And in fact, it’s growing. Since 1960, the combined use of corn, soybeans and wheat in the world every year either sets a record or it misses it by one year. So it’s either the second highest ever or it’s a new record since 1960 that hasn’t stopped. So we need to continue producing those grains at a high rate. And it’s hard. Our farmers have done it so far, but it’s hard.

RM:

But even as people as people get wealthier and their families do get smaller. But if you’re saying that how much they consume gets bigger.

SG:

That’s right. The families get smaller, but it depends on which country, the global population is still growing, and that’s what matters. You have to look at the total population and the total use. One country or another may amend its usage for whatever reason. But overall, the global population is using the amount of grains produced on the globe. And, you know, this year, third year in a row, more wheat will be consumed and produced. And we’re producing a record amount. For me, that’s the most important factor out here. People need to understand demand is rising.

RM:

Yeah. Yeah. And like you said, there’s expanding uses for grain and for corn. So it’s not just what we’re eating. So in December of 2020, you spoke with Jonathan Liss of Seeking Alpha on his Let’s Talk ETFs podcast about Teucrium. And I encourage investors to listen to that interview to learn even more about their exchange traded products. But you’ve added a new one since then. And so let’s go through them again before I let you go. Seeking Alpha lists CANE as a buy with a quant rating of 3.51. And that one is sugarcane, correct?

SG:

That’s correct.

RM:

So. So then it’s all sugar. Okay. And then there’s wheat, $WEAT as a strong buy with a quant rating of 4.83. Soybean, $SOYB is a strong buy with a quant rating of 4.9 and that’s soybean. Corn, $CORN is a strong buy with a rating of 4.96 and actually, earlier this month, Katie Stockton, the founder of Fairlead Strategies, told Seeking Alpha she was recommending $CORN to her clients is a long idea.

SG:

Yeah, that’s terrific. We love to hear that. And that’s fine. Everybody can use these as they want. I would caution investors to remember these are not stocks. They’re not companies with earnings. These are the commodities themselves. If you think the commodities going up or remaining stable, you need to buy these and and, you know, depending upon your needs.

And if you think it’s going down, you go don’t buy them or sell them. You can sell them short options, trade on all of them. But these are good allocation products. Again, as we said, they stabilize the portfolio, they zig when the stock market zags and they have a long term history of doing that, which is which is really good.It’s a reliable history of,very low correlation with the S&P 500.

RM: And you also have TAGS, TAGS with a strong buy and a quant rating of 4.9. And there’s new one which is TILL. Tell us about that one.

SG: Sure, TILL is our first 40-act fund and it’s just a different tax structure. So some investors don’t want to receive a K-1 and in particular, a lot of managed account platforms., people check the No K-1 box so they can’t get exposure if the fund generates a K-1 and all of our funds generate a K-1 except for TILL, which does not. And TILL is in essence like TAG. It’s allocated the same across the commodity spectrum. It has 25% corn, soybeans, wheat and sugar, the big four ags. And it’s just a different tax structure. It’s become very popular. It’s over $80 million in less than four months time, which is extremely successful by any standard on an ETF. I think the number of ETFs that end up after the first year with more than 25 million is pretty minimal.

So we’re very happy about TILL. Investors have contacted us they’re very happy about TILL, you know people who don’t mind a K-1 probably trade TAGS. People who don’t want a K-1 trade TILL. You’re getting 25% exposure slightly differently. The TAGS actually is a fund of funds. It holds 25%. of each of our underlying four funds. TILL holds the futures tracks directly in each of those, but the allocation across the commodities is the same .25% each for the big four great.

RM:

Great, thank you for walking us through that. So investors, follow Teucrium ETF on Seeking Alpha.com to stay up to date. Sal, it was a pleasure speaking with you today. Thank you for your time.

SG:

My pleasure, Rosemi. Anytime.