[This ETF Industry Perspective is sponsored by Teucrium.]
Ask our founder and CEO Sal Gilbertie why he started Teucrium, and he will tell you, “… for such a market as this!” We launched our first fund in 2010, and fast-forward to 2022 and our ETFs have never been more popular.
Recently, most investors with whom we speak repeatedly point to one catalyst that brought them to consider our funds: inflation.
UN Food and Agriculture World Food Price Index. Source: Bloomberg Finance L.P., generated on 06/16/2022. This chart is for illustrative purposes only and is not indicative of any investment. Past performance does not guarantee future results.
Since bottoming in May 2020, world food prices are up nearly 73%.
Food prices reflect the reality of global supply and demand dynamics. Longtime readers will recall that the roots of today’s global food inflation stretch back to the 2019–2020 crop year. That year, the world consumed more corn and soybeans combined than were produced. The following year, the world consumed more wheat than was produced. As a result, global inventories were drawn down and farmers have been challenged by both weather and war as they attempt to rebuild stocks.
The Teucrium Agricultural Fund Index is up more than 114% over two years.
Teucrium Agricultural Fund Benchmark Index. Source: Bloomberg Finance L.P., generated on 06/15/2022. This chart is for illustrative purposes only and is not indicative of any investment. Past performance does not guarantee future results.
Two years ago, we would not have guessed that our Agricultural Fund Index would be up more than 114%.1 Still, the fundamental imbalance between supply and demand suggested that prices would likely be heading higher. In our 2020 Outlook published in December 2019, we wrote: “The fundamentals are promising … Decreasing supply in the face of rising demand eventually, we believe, will lead to higher grain prices.”2 The law of supply and demand is Econ 101, not rocket science. We were not going out on a limb saying that lower supply in the face of rising demand should be supportive of prices. Yet, to spot opportunities, like the one afforded to grain investors over the last couple of years, you must be paying attention. (You can subscribe to our newsletter here: www.teucrium.com.)
Grains In Your Portfolio
While commodity investors have had a good run over the past 24 months, traditional stock and bond investors are feeling the pain. Stocks and bonds have trended lower. Someone with the typical 60/40 stock-to-bond allocation has likely lost approximately 17% this year.3 The relative outperformance of the Teucrium Agricultural Fund Index should not come as a surprise given that corn, wheat, soybeans and sugar all historically have low correlations to stocks.
Additionally, the Teucrium Agricultural Fund Index has outperformed the S&P 500 Total Return Index in four out of the last five stock market corrections of 10% or more. Our data does not yet include the most recent equity downturn, which began in January 2022. We will update our data at the end of the current S&P 500 bear market. Notably, the Teucrium Agricultural Fund Index has thus far outperformed the S&P 500 Total Return Index in the current downturn.
Since the stock market peak on January 4, 2022, the S&P 500 Total Return Index has fallen 21.52%, whereas the Teucrium Agricultural Fund Index has gained 25.75%. In other words, the Teucrium Agricultural Fund Index has outperformed the S&P 500 Total Return Index by approximately 47% in the current stock market downturn.
Grain prices have had an impressive run over the past 24 months. As stated above, higher prices, by and large, reflect the uncertainty surrounding supply/demand imbalances.
However, wheat is trading in a wartime market, and we believe that current prices reflect a significant risk premium over and above ordinary wheat supply/demand fundamentals.
Corn prices also likely reflect uncertainty connected to the war in Ukraine, yet the trade’s focus will largely remain fixed on U.S. weather for the summer growing season.
U.S. weather will likely remain the primary focus for the soybean trade as well over the summer.
Bulls will point out that there is little room for error given tight global balance sheets. Unfavorable weather could lead to lower-than-expected U.S. crop production. There is the potential for prolonged war in Ukraine and for a further deterioration of relations between Russia and the West. Input costs, e.g., energy, fertilizer, etc., will likely remain elevated, providing further long-term support for grain prices.
Bears will point to seasonal price pressure (see our recent commentary Turning Point – A Top for Grain Prices?), and the fact that farmers across the globe are likely to continue their attempt to plant as much acreage as possible. The USDA is forecasting record global soybean production, and a near-record global corn and wheat production in the 2022-2023 crop year.4 Production is largely weather dependent, but after two consecutive years of unfavorable weather, the base case is that weather will cooperate in 2022-2023. Furthermore, while the Russian invasion of Ukraine has disrupted supply chains, wheat inventories remain at reasonable levels. Consider that the expected global stocks/use5 ratio for wheat in 2022-2023 is 33.95%. Compare that to the five-year average of 37.82%, and the 10-year low of 25.81% reached in the 2012-2013 crop year, and it’s clear that there is plenty of wheat in the world. It’s only a matter of getting it to market.
Current market conditions have made evident that prices of commodities in general, and agricultural commodities in particular, can zig when other assets zag. Low historical correlations and a history of outperformance during equity downturns contribute to the investment thesis of incorporating agriculture in a portfolio for the potential diversification benefits.
Additionally, commodities may provide shelter from the “inflation storm.” Agricultural investments offer investors an alternative to stocks and bonds – assets that have not held up as well during this latest bout with inflation.
To all investors, past and present, thank you for your interest in our funds. These funds were built with you in mind, for such a market as this.
Please note that options are available on CORN, WEAT, SOYB, CANE, TILL and TAGS. Please consult your broker for more information.
(For a larger view, click on the image above)
1 The Teucrium Agricultural Fund (ticker: TAGS) is benchmarked to the Teucrium Agricultural Fund Benchmark Index. The index represents an equal weighting to our four individual commodity funds, the Teucrium Corn Fund (CORN), the Teucrium Wheat Fund (WEAT), the Teucrium Soybean Fund (SOYB) and the Teucrium Sugar Fund (CANE). Performance data provided by Bloomberg Finance L.P. using <TTAGS Index Go> as of 06/15/2022.
2 You can read our 2020 Outlook here: http://www.teucrium.com/news-insights/146
3 Data Source: Bloomberg Finance L.P. 60% SPY and 40% AGG YTD percentage performance as of 06/13/2022
4 Corn production expected to be the second highest ever globally, slightly trailing last crop year’s record. Wheat production is expected to be the third highest ever and still only 1% lower than last year’s record.
5 Stocks/Use Ratio: Ending stocks (i.e., the amount of crop available at the end of the crop year, given the estimated or actual beginning stocks, production and usage) divided by total usage.
Risks and Disclosures
Read the prospectus carefully before investing.
A copy of the prospectus may be obtained at: www.teucrium.com
The expressed views were those of Teucrium Trading, LLC as of 06/15/2022 and may not reflect the views of Teucrium on the date the material is first published or any time thereafter. These views are intended to assist in understanding certain factors that may contribute to the price of agricultural commodities or commodity futures such as corn, wheat, soybean and sugar cane. In no way do the views expressed constitute investment advice, and this document should not be considered as an offer to sell or a solicitation of an offer to buy securities outside of the United States of America. Any decision to purchase or sell as a result of any information or opinions expressed in this communication will be the full responsibility of the person authorizing such transaction. An investor should consider investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other information.
The Teucrium Corn, Sugar, Soybean, Wheat and Agricultural Funds (the “Funds”) are not mutual funds or any other type of Investment Company within the meaning of the Investment Company Act of 1940, as amended, and are not subject to regulation thereunder. The funds are commodity pools. Investors may choose to use the Funds as a vehicle to hedge against the risk of loss, and there are risks involved in such hedging activities. Unlike mutual funds, the Funds generally will not distribute dividends to its shareholders. Investors may choose to use the Funds as a means of investing indirectly in corn, soybeans, wheat or sugar cane. There are risks involved in such investments. Shares of the Funds are not FDIC insured and may lose value and have no bank guarantee.
The Teucrium Agricultural Strategy No K-1 ETF (Ticker: TILL) is a “non-diversified” investment company under the Investment Company Act of 1940, as amended and, therefore, may invest a greater percentage of its assets in a particular security than a diversified fund. TILL is a commodity pool regulated by the CFTC. TILL is new and has limited operating history.
The funds invest in corresponding commodity futures contracts, cash and cash equivalents and are not intended to directly track the spot price of a particular commodity (such as corn, wheat, soybeans or sugar cane).
Futures Risks: Commodities and futures generally are volatile and are not suitable for all investors.
Futures investing is highly speculative and involves a high degree of risk. An investor may lose all or substantially all of an investment. Investing in commodity interests subject each Fund to the risks of its related industry. These risks could result in large fluctuations in the price of a particular Fund's respective shares. Funds that focus on a single sector generally experience greater volatility. For further discussion of these and additional risks associated with an investment in the Funds please read the respective Fund Prospectus before investing.
Futures may be affected by Backwardation: a market condition in which a futures price is lower in the distant delivery months than in the near delivery months. As a result, the fund may benefit because it would be selling more expensive contracts and buying less expensive ones on an ongoing basis; and Contango: A condition in which distant delivery prices for futures exceeds spot prices, often due to costs of storage and insuring the underlying commodity. Opposite of backwardation. As a result, the Fund’s total return may be lower than might otherwise be the case because it would be selling less expensive contracts and buying more expensive ones.
Past performance is not necessarily indicative of future results. Diversification does not ensure a profit or protect against loss.
Foreside Fund Services, LLC is the distributor for the Teucrium Funds.
This material must be preceded or accompanied by a prospectus.
Teucrium Investment Advisors, LLC is an investment adviser in Burlington, Vermont and is a wholly owned limited liability company of Teucrium Trading, LLC. Teucrium Investment Advisors, LLC is registered with the Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. Teucrium Investment Advisors, LLC only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Teucrium Investment Advisors, LLC’s current written disclosure brochure filed with the SEC which discusses among other things, Teucrium Investment Advisors, LLC’s business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov.
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