Cocktail Investing Ep 15: Separating The Wheat From The Chaff In Agricultural Commodity Investing With Teucrium Trading

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Includes: DE, DPZ, HRL, HSY, PPC, SAFM, SBUX, TSN
by: Tematica Research

Summary

Why do investors focus on gold and oil when thinking of commodities, but not grains?

The world’s population is increasing by about 214,000 every day, which means the demand for food is only increasing, while the amount of arable land for crops is decreasing.

Most investors focus on commodities as a company cost that can impact margins and earnings, but new ETFs can allow investors the ability profit from corn, wheat and soybean cycles.

In this week's program Tematica's cocktail mixologists, Chris Versace and Lenore Hawkins, speak with Sal Gilbertie, President, Chief Investment Office and co-founder of Teucrium Trading, who explains how individual investors can invest in agricultural commodities such as wheat, corn, soybeans and sugar through Exchange Traded Funds (ETFs) and why these types of investing vehicles are something to consider.

Following the theory of buy-what-you-know, investing in agricultural products makes sense given the exposure we all have on a daily basis. Traditionally trading commodities has only been feasible with futures, which introduces a level of complexity that many investors - professional and individual - understandably opt to avoid. However, agricultural commodities have unique attributes that we find appealing, for example, they have historically had very low correlation with the equity markets, in particular grain commodities, which tend to move counter-cyclical to their related equities and can help stabilize an investor's overall portfolio.

One of the key takeaways from our talk with Sal is most investors tend to focus on gold and energy when contemplating commodities. When we look at it through our Scarce Resources lens, we see a wider investing landscape that includes water and yes, grains. Perhaps the biggest question coming out of our talk with Sal is, why aren't grains a part of your portfolio?

Grains are a part of our daily lives with prospects for increasing demand given the two fold punch of a growing global population, but also rising disposable income in the emerging markets. The latter makes grains like corn, wheat and soybeans a contender for our Rise & Fall of the Middle Class investing theme here at Tematica.

The primary investing theme for those commodities as well as others such as coffee, cocoa, sugar, cotton and others is our Scare Resources investing theme. In it, we primarily look for companies positioned to benefit from a scarce resource or those that could see their margins and earnings come under pressure as key input prices escalate.

Another reason we find investing in The thing is, individual investors tend to invest in commodities based on headlines usually from a rising cost perspective and what it may mean for companies like Starbucks (NASDAQ:SBUX), The Hershey Company (NYSE:HSY), and Domino's Pizza (NYSE:DPZ) for example. This perspective is usually shorter-term in focus putting them in trading mode rather than investing. Sadly enough as it tends to be the case, individual investors tend to lag professional investors, which have already made their moves before the headlines break.

By using an ETF that focuses on grains rather than futures, investors, both individual and professional are better able to made a tactical portfolio allocation, rather than a short-term trading bet.

For those that are interested, here are some things to consider:

The world's population is increasing by about 214,000 every day, which means the demand for food is only increasing, while the amount of arable land for crops is decreasing. The annual consumption, per person, is roughly five bushels of corn, four bushels of wheat and two bushels of soybeans. The rising population means that every year an additional 1/8th the size of California needs to be added to farmable land. If you're thinking this means arable farm land is a Scarce Resource contender, you'd be right.

Grain commodities are really pretty simple, either enough is produced or there isn't. It is a finite resource that cannot be stored for any material length of time.

Corn and wheat supplies can be unpredictable given they are subject to the weather and provide just one harvest a year while nearly 100% of the crops are consumed each year. Interestingly, with corn and wheat, we tend to see a weather interruption which diminishes supply every five to seven years and today, wheat prices are roughly at the cost of production. The issue is it takes about one year for high prices to correct, which makes sense given the the cyclical nature of agriculture, but it those price fluctuations can impact margins and earnings in the short-term.

Corn is the largest of U.S. agricultural commodities and its number of uses is vast. As you can see in the table below, it's uses range from, fuel, starch, sweeteners and plastics to makeup, paper and batteries. It's biggest use is as animal feed and we were astounded to learn that it take ten pounds of corn to make one pound of beef and three pounds of corn to make one pound of chicken. This means the outlook for corn prices are something to watch when assessing Tyson Foods (NYSE:TSN), Pilgrim's Pride (NYSE:PPC), Sanderson Farms (NASDAQ:SAFM) and Hormel Foods (NYSE:HRL).

Something else we found rather interesting was corn prices tend to have seasonal lows just before harvest as global supply begins to come online. Roughly 45 percent of corn's last 28 seasonal price lows were set in the last one-third of the calendar year, just ahead of the peak harvest season in North America.

World wheat demand is expected to expand by nearly 16 percent by 2025, in part due to the shift away from rice in Asian countries as incomes rise. Soybean demand is expected to rise by around 22 percent by 2025 as it is used as feed in China's swine, poultry and acquaculture sectors.

One of the key takeaways from our talk with Sal is most investors tend to focus on gold and energy when contemplating commodities. When we look at it through our Scarce Resources lens, we see a wider investing landscape that includes water and yes, grains. Perhaps the biggest question coming out of our talk with Sal is, why aren't grains a part of your portfolio?

Resources for this podcast

  • Teucrium Trading - http://teucrium.com
  • Chris Versace - @_ChrisVersace
  • Lenore Hawkins - @EllesEconomy
  • Tematica Research - https://www.tematicaresearch.com
  • Cocktail Investing Podcast - https://www.tematicaresearch.com/cocktail-investing/

Companies mentioned on the Podcast

  • Deere & Co. (NYSE:DE)
  • Domino's Pizza
  • Hormel Foods
  • Pilgrim's Pride
  • Sanderson Farms
  • Starbucks ,
  • The Hershey Company
  • Tyson Foods

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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