The Overlooked Asset That Is Probably Not (Yet) In Your Allocation Mix

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Includes: CORN, DBA, JJA, JJGTF, TAGS
by: Teucrium

Summary

The asset is pervasive and widely used throughout the global economy.

There is a multi-decade long history of rising demand.

Current price levels have been holding at or slightly below cost-of-production.

In the past decade there have been two separate 100% price appreciation events from the very same cost-of-production price levels we see today.

Consider giving this asset a place in your allocation model.

An asset with a historic pattern of consistently growing annual demand is currently trading at the same price level from which it has previously doubled two separate times in the past ten years.

Because of global demographics and the pervasiveness of the asset, private and government forecasts predict that demand is unlikely to stop rising. In each of the past six decades demand for this asset has grown. No matter what the status of the economy, no matter what stock or bond markets are doing, no matter what the latest technologic breakthroughs might be, no matter what the political climate, no matter what the weather brings, forecasters believe demand will likely be steady and, over time, continue to rise to new annual usage records.

This vital asset is something just about every person on the planet uses every day. Its top four uses, in order, are: (1) as feed to the herds and flocks that supply the animal proteins we humans (and our pets) consume, (2) as a major component of motor fuel, (3) as a sweetener for food and beverages, and, (4) it is used in a myriad of things needing to be held together with starch (think paper). Source data from the USDA. [i]

We have yet to find a government or private grain analyst who believes that anyone will decrease their use of corn if it doesn’t happen to rain in some far away field in future growing seasons. That’s right, corn. Corn's pervasiveness in our lives ranks right up there with oil; both are in an astonishing number of things we use every day, but oil is probably far more likely to be a component of your investment portfolio than corn.

It was fascinating to watch investment dollars pour into oil related Exchange Traded Products when oil prices were perceived to be at or near their cost of production (see our previous "Billions of Inflows..." Seeking Alpha article)[ii], but the same has not usually happened when corn trades at or near its cost of production, which is hard to understand given the fundamental macroeconomic similarities and vital economic importance of both oil and corn.

Excluding corn from your allocation mix could be a mistake, because corn is a lot like oil: over time it has shown steady/rising demand, it has a cost of production below which it may not go or stay for long (farmers can simply stop planting), and it has historically experienced significant upside price movements due to supply interruptions – interruptions that history tells us inevitably occur due to drought in one place or another.

Steady demand coupled with uncertain supply is an Econ 101 Professor’s dream – it’s a simple, easy to understand recipe for higher prices when a supply disruption event occurs. And weather disruptions have occurred in agricultural markets more frequently than one might suspect. In fact, the past ten years have seen three separate weather events – all of which drove corn prices significantly higher – two of which started from the very same price levels at which corn is trading now.

The chart below illustrates how the spot price of corn has doubled two separate times in the past 10 years (2007 and 2010) from the same approximate price level: spot prices moved from about $3.50 per bushel to about $7.00 a bushel both times. Another rally in 2012 saw the spot price of corn rise approximately 45% to $8.065 per bushel, a price from which corn has since fallen back to its persistent approximate breakeven price level of around $3.50 per bushel. It’s worth reiterating that all three of these price appreciation events occurred because of weather related events in the past ten years - and that the only prediction anyone can reliably make about the weather is that it will be unpredictable.

Can someone accurately predict the next drought that will affect corn prices? No. Therefore it is equally unlikely that anyone will be able to predict with certainty the next time corn prices will double or significantly appreciate due to a weather event. But if the ten-year spot corn price history and the current multi-decades long corn demand patterns are any guide, the clock appears to be ticking toward a time when the next possible doubling of corn prices might occur.

A long-term investor using prudent asset allocation strategies could potentially benefit handsomely from corn’s unique long-term pricing patterns. History clearly shows us that corn sits at its cost of production, sometimes for lengthy periods of time (like now), until it is propelled higher by a weather event.

Asset Allocators and long-term investors looking to add corn to their investment mix appear to have two seeming advantages; corn prices are at or near their cost-of-production, which could limit downside price potential, and the Autumn Harvest of the Northern Hemisphere’s corn crop is now complete, which means the world must rely on inventories from this point onward until a new crop is planted, grows, and is successfully harvested. This has often created a seasonal price pattern in corn that can be advantageous to an investor looking to establish or increase an allocation to corn in their portfolio. (See our previous “Seasonal Corn Price Patterns” Seeking Alpha article.)[iii]

As of this writing, prices are both at their cost-of-production baseline lows as well as at a historically seasonally favorable time on the calendar, which leads us to believe this could be an advantageous time to consider an investment allocation to such a vital commodity as corn. Speak to your financial advisor seriously about risks and advantages of establishing, and rebalancing over time, a corn allocation in your portfolio.

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The views in this newsletter were those of Teucrium Trading, LLC as of December 5th, 2017, 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 readers in understanding commodities and do not constitute investment advice. This material is not an offer or solicitation of any kind to buy or sell any securities outside of the United States of America. The data and charts contained herein were created on a Bloomberg terminal and are based upon publicly available data sourced from the USDA and the CME Group.

Investing in a Fund subjects an investor to the risks of the applicable commodity market, which investment could result in substantial fluctuations in the price of Fund shares. Unlike mutual funds, the Funds generally will not distribute dividends to shareholders. The Sponsor has limited experience operating commodity pools; a commodity pool is defined as an enterprise in which several individuals contribute funds in order to trade futures or futures options collectively. Investors may choose to use a Fund as a vehicle to hedge against the risk of loss, and there are risks involved in hedging activities. Commodities and futures generally are volatile and are not suitable for all investors. 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. For a complete description of the risks associated with the Funds, please refer to the applicable prospectus.

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CANE

CORN

SOYB

TAGS

WEAT


[i] USDA ERS - Background

[ii] Billions Of Inflows In 2016: First Gold, Then Oil; Are Grains Next?

[iii] Seasonal Price Patterns And How They Relate To The Northern Hemisphere's Autumn Corn Harvest

Disclosure: I am/we are long CORN, TAGS, JJG.

Business relationship disclosure: Sal Gilbertie is the Founder, President, and CIO of Teucrium Trading, LLC, the Sponsor of the Teucrium CORN Fund ETP (NYSE Ticker "CORN") and other agricultural ETPs listed on the NYSE.

Additional disclosure: I am long other agricultural ETP products and agriculturally related securities, but I have specifically disclosed only those holdings that include direct exposure to corn.