Lead-Lag Live
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Lead-Lag Live
Jake Hanley on Soybean Biofuel Potential, Inflation Dynamics, and Agricultural Market Trends
Can the soybean market revolutionize biofuel production while taming inflationary pressures? Join us as we uncover the untapped potential of soybeans in the biofuel industry and the intricate dynamics influencing agricultural prices. We’re joined by Jake Hanley, who brings a fascinating perspective from his background in U.S. history to his current role in financial advisory, research, and portfolio allocation at 2Cream.
We dissect the pivotal role of biofuel policies, the Treasury Department, and the EPA in empowering farmers to capture biofuel credits. Explore how global events, like the Russia-Ukraine conflict, and natural phenomena, such as droughts in Brazil, are shaping the soybean and wheat markets. Delve into the "golden grain cycle" and the significant impact of agricultural subsidies on grain prices. We also shed light on the public’s perception of inflation, particularly how rising grocery prices contribute to the sentiment that the dollar just doesn’t stretch as far.
Lastly, we tackle the complexities of the agricultural commodity markets within economic cycles, from corn ETFs to currency fluctuations affecting U.S. exports. Jake brings invaluable insights into how political decisions, such as tariffs on China, influence agricultural trade and the essential role of futures contracts in risk management. Tune in to grasp the broader economic implications of money supply and inflation, drawing lessons from the COVID-19 pandemic to better navigate future market trends.
DISCLAIMER – PLEASE READ: This is a sponsored episode for which Lead-Lag Publishing, LLC has been paid a fee. Lead-Lag Publishing, LLC does not guarantee the accuracy or completeness of the information provided in the episode or make any representation as to its quality. All statements and expressions provided in this episode are the sole opinion of Teucrium Funds. and Lead-Lag Publishing, LLC expressly disclaims any responsibility for action taken in connection with the information provided in the discussion. The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.
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On that basis, I think soybeans are relatively rich compared to the other grains. But there is a fundamental story brewing right now in Brazil. You also have the fundamental story of biofuel policy, and so we have a lot of soybeans that we're growing in the United States right now where the hope is that we can crush those soybeans to produce biofuel. We're looking for some further help from the treasury department and we have to get the EPA on board and explain to farmers exactly what techniques they need to follow in order to capture these credits. And it gets a little in the weeds there, but you know that's another story to keep in mind for soybeans, because soybeans can be used, are used for renewable diesel fuel, and that could be a very big story moving forward. So another thing to keep an eye out.
Speaker 2:This conversation with my friend, mr Jake Hanley, is sponsored by the folks at 2Cream. I'm actually really excited for this conversation. There's been a lot of interesting things. I think that you will find interesting when it comes to my friend, mr Jake Hanley, is sponsored by the folks at 2Kream. I'm actually really excited for this conversation. There's been a lot of interesting things. I think that you will find interesting when it comes to playing the ag space, which was all the rage, obviously, when Russia went into Ukraine and now maybe all the rage yet again, because, believe it or not, inflation may not be dead. We're going to touch on that.
Speaker 2:If any of you want to engage and ask questions during this live conversation whether you're watching this on youtube, on x, on linkedin, you can comment. I can see your posts. Let's make this interactive as much as possible. Appreciate those that support the effort of lead lag live, given that I do this as a solo effort and it takes quite a bit of time and effort for me to do these shows and host them, obviously. So, with all that said, my name is michael guy at, publisher of the Lead Lagaport. Join me for the rough hour is Mr Jake Hanley of 2GRIM. Again, this video is interviewed, sponsored by 2GRIM. Jake, you and I know each other, but a lot of you may not be familiar with how awesome you are. Introduce yourself to the audience. Who are you? What's your background? Have you done the right of your career and what do?
Speaker 1:you do at 2GRIM. Sure. Thanks a lot, mike. It's awesome to be here and you are awesome, dude. So some people may or may not know, you and I attended Camp Kotak together a couple of weeks ago now, and when Michael says he will not relent, he will not relent. The man was up early exercising doing his thing. It was awesome to meet you in person. So you are the man, mike.
Speaker 1:Myself my background is a little bit unique relative to where I sit now. I went to college to become a history teacher, so I have a degree in history. My focus was on US history and I got really interested in central banking. Came from just an experience with my roommate at the time who was getting his master's in business. He was a great guy, but he wasn't too bright. He told me there were four branches of government. I could name the three, but he asked me well, what's the Federal Reserve? And I said what are you talking about? It's not a branch of government. He says well, what is it? And that sent me down a rabbit hole. So, long story short, when I graduated college, I had a lot of student loans. Becoming a teacher wasn't going to help me pay those off quickly. Plus, I had this like real natural interest in intrigue in finance and how money works and central banking and so forth. So I ended up writing a thesis paper on central banking history in the United States.
Speaker 1:I tried to weave my way into the financial industry with the history background. So a quick and easy way to do that is to join a brokerage firm as a financial advisor. I say quick and easy, it's neither of the above. It takes a lot of studying and time to build a book of business, as it were. I was successful enough at Merrill Lynch to build a book of business but then had a lifestyle change. My wife and I had our first daughter and decided to move away from Connecticut, where I grew up up to Vermont where I knew nobody but I knew that I liked to ski and I liked the mountains, so I got out of the wealth management business. It helps to have a network of people you know if you're going to be in wealth management, where I get to use my talents in what I think are good talents in research and my understanding of how the world works and how money works and try to help our audience, which is financial advisors and retail investors and traders make decisions about portfolio allocation, and so I'm excited about that.
Speaker 2:So the challenge talk to you, especially when I'm fasting, because two cream obviously focuses on the. What I know is the soft ag side, the green wheat corn, so on and so forth. You mentioned inflation. You mentioned the Federal Reserve. A lot of people look to oil as a driver of inflation and inflation expectations, but I think most people, when they think about inflation, they think about inflation at the grocery and they think about inflation from the standpoint of food. I want to hear your thoughts on anything that would suggest that ag prices are a leading indicator of inflation, or at least the way that people feel about inflation.
Speaker 1:Yeah, that's a really interesting point, mike, because let me address feeling first. It's a gut check when you go to the supermarket and when you leave the supermarket and you look at how much money you spend. Now we're a family of five, so I have three kids. I'll tell you what it's expensive to feed them and you know that feeling of your dollar not going as far as it used to. By the way, that's based in reality your dollar's not going as far as it used to.
Speaker 1:Addressing the other part of your comments, it's not necessarily that agriculture prices will lead inflation. I think there's sometimes a misunderstanding between what inflation is and what can just be known as higher prices. Right, and same thing. On the other side, you could call something deflation, but is it deflation truly, or are we just talking about lower prices? And in the commodity space, we know that the Federal Reserve strips out oil and food and they focus on core prices. Right, and there's a reason that they do that. That reason is simple utility around energy and food based on supply and demand in those markets where the Fed doesn't really have any control.
Speaker 1:So for agriculture in particular, you have weather as a main variable that determines your production. So in years where production is good, weather cooperates, we have plenty of corn wheat, soybeans. That's going to add to supply. So you have a situation where you have plenty of supply. When you have plenty of supply, demand just remains normal. Prices are going to naturally go down. Now, if you have bad weather and typically you know we see that in the form of drought, la Niñas can be a climate pattern that helps cause drought in key growing areas that's when you're going to see production take a hit. And if production takes a hit now, you have demand remaining steady or growing.
Speaker 1:We know historically demand for corn wheat and soybeans continues to grow year over year. Each year is either a record or a second record, only to be a record again next year, and so demand is stagnant and growing. So demand is always there. So when you don't have a good production year, you have a supply-demand imbalance and then prices go up. So, yes, grains can be a symptom of inflation. Higher grain prices can be a symptom of inflation, but I won't go so far as to say that it's a driver or a leading symptom of inflation. Higher grain prices can be a symptom of inflation, but I won't go so far as to say that it's a driver or a leading indicator for inflation, and same thing for energy, stu.
Speaker 2:I think the one thing that we can say pretty confidently, though, is that there, like everything else, there are cycles, right, cycles where equities go up and down, cycles when bonds go up and down, certainly cycles when it comes to wheat and ag. So I'm looking at the Europe to Korean wheat funds ETF, which I will show momentarily here, and if I pull it out and look from 20 into what happened today, zooming in on this part, obviously wheat had a nice run post-COVID. Here's the invasion of Russia into Ukraine, and then, you know, largely around trip, as everyone was freaking out about food prices back then. But I look at this and it looks actually like it could be bottoming. Not financial advice, but I am curious to hear your thoughts on the supply demand imbalance, if it's getting more imbalanced in favor of higher prices, given what looks like some kind of a turning point.
Speaker 1:Yeah, that's awesome, mike, you know, and it's. It's awesome because you pulled up wheat Now you could have pulled up corn or soybeans. It you pulled up wheat Now you could have pulled up corn or soybeans. It's a very similar chart. What's unique about wheat right now is that the global supply demand situation is actually tightening. So you know, if you didn't know that you're looking at this chart saying you know we must have plenty of wheat in the world, which we do. There's enough wheat, okay, but you would assume that supply must be growing. You know leaps and bounds. That's not the case. Supply must be growing. You know leaps and bounds. That's not the case. On a global basis, wheat supply relative to demand is shrinking. It's tightening. So if there is going to be a shock in the world like we saw in 2022, russia invading Ukraine the wheat markets are susceptible to those shocks. When you talk about cycles, you know we have something that we call the golden grain cycle. Okay, you've heard this before, mike. I can tell you.
Speaker 2:I mean, it's such a you know I have a thing for framing things dramatically. Yes, that's up my wheel. I like that way that's framed.
Speaker 1:It's the golden grain cycle and I will tell you it actually has nothing to do with gold. It's golden because if you follow it, anyone who follows it has potential to profit from it. When we are looking at the golden grain cycle, you have to start with the understanding that grain prices generally are going to trade at or near their cost of production for an extended period of time. Very simple reason for that, and that is the agriculture is subsidized around the globe. So in the United States we have federally subsidized crop insurance programs. Long story short, all that does is help give farmers the incentive they need to plant every year, because there's a lot of risks, as you can imagine buying the fertilizer, buying the seed up front and planting the crop right, and so typically you're going to see grain prices trading at or near their cost of production for an extended period of time. That's stage one. Stage two is when you have that supply demand imbalance, bad weather, war, whatever it might be, there's a supply shock and it scares the market. We've seen that happen three times in the last 17 years. So you have the chart up now. This is front month corn futures prices. So this is the generic front month contract. And when I say we've seen it spike three times from the right around where we're trading right now, that cost of production level being around that $3.50 mark, futures equivalent that's a national average we say is around the cost of production, those spikes occurring three times in the last 17 years. Those peaks are more than double. So that's going above $7 a bushel, usually in somewhere around $8 a bushel. Okay, that's stage two. Stage three now is when supplies catch back up with demand. So farmers in the United States, all over the world, are going to plant as much as they can to help try to capture that revenue with these high prices and eventually supply catches back up and prices go back down to trade near the cost of production. And what's so interesting about where we are in the markets today?
Speaker 1:Even as you were looking at the wheat chart a moment ago, we're right around those levels where there's historically very limited downside in those prices. What's fascinating to me is I looked up at a chart. I forget what year it was, but it was one of those times where oil got back below $40 a barrel. And in that timeframe where oil got under $40 a barrel, there's a very well-known ETF that took in like $3 billion in flows. Right. Why? Because oil at $40 a barrel is right around where the cost of production is right. So investors looking at that, traders looking at that, say, hey, look, there's limited downside here. I'm going to put some oil in my portfolio because I think oil can go higher. But even if it doesn't, I know there's limited downside, right. So put aside the fact that oil went negative at one point, but that was an extreme anomaly.
Speaker 1:With the grains, we see corn trading below $4 a bushel. That's like oil below 40. And so you know, in my mind I'm sitting here thinking anyone who trades gold, anyone who invests in oil, should add grains to their list. The same supply demand fundamentals work in the grain markets as they do in the other commodity markets. And here you have something that's trading at or near its cost of production. Yes, there is downside. Okay, there absolutely is room to go down from here, but we know historically that downside is limited. And so that's the golden grain cycle. We are anticipating that we're in stage one. We're getting back to that stage one right now where prices are going to trade, or should trade, we expect, near the cost of production for some time, and then there's going to be a disruption of some sort. What it's going to be, I don't know, likely weather, but the geopolitical situation is not great right now either. So we'll see.
Speaker 2:Yeah, we'll definitely touch on that. What's interesting to me and look at this is that it seems like traders are aware of this when you look at short positioning. You got a post I'm going to show in a second on the 2KRM ETF's handle on X that showed fund traders reducing their net short position in corn futures by 50% since July. So presumably we match this point about cycles. Some of that big money knows that we're probably towards a turning point.
Speaker 1:Yeah, the big money knows, Mike, that's right in line with the seasonals, right? You know that's right in line with the seasonals, right? So I think in the same post we put up a chart and the charts from David Sednaw at Signal Trading. He does some really good work. But the seasonals on corn, typically you see the annual price lows right around August and then retested in October, and what you have here is a chart from Standard Grain. This is Joe Vaclavik at Standard Grain. For anybody that's looking for information, he's a really good follow there. So what Joe is showing you is the net position in the futures markets. And these are commercial, excuse me, these are traders, these are spec traders and we have actually pared back the shorts by about 50%. So the shorts made some money. You know, from July till now prices went down, but we should be seeing that seasonal low settle in October. 1st would be, you know, my best guess as to when we are actually in that stage. One done with this stage. Three downtrend.
Speaker 2:Do those stages coincide at all with where we are in the broader economy, where equities are? Is there any link at all to the ag cycle, with risk on cycles?
Speaker 1:Yes, mathematically it's very small. And so and I say yes because you can you can always form a narrative. For example, I'll give you one. You know, if you look at livestock, for example, cattles are pretty cyclical and trade with equities, right, when stocks are doing well, you know, it's a good sign for the meat market. People are going to go buy more steak, right, and so cattle prices will typically mirror the risk on, risk off type of approach.
Speaker 1:But the correlation for the grain commodities, it's not really there, you know, and you can see big days where you have stocks and bonds down at the same time. In those massive risk off days, yeah, you're going to see the grains down and it's because everybody's taking money off the board. However, what we have seen going back to, well, boys, we launched the index in 2012. So, the last seven stock market corrections of 10% or more, our agricultural fund index, the Two Cream Agricultural Fund Index, has outperformed stocks 10 out of 10 times. So in other words, when stocks are collapsing at 10% correction, okay, we're worse. The grains our Two Cream Agricultural Fund Index has outperformed the general stock market, and so we say that's diversification when it matters most. So sometimes that means that the agriculture. Prices are going down, but just not down as much. And actually I think I have a stat here so, yeah, so, for example, in March of 2020, right, that was the big COVID crash and everything was down In that period where you went from peak to trough okay, and this is actually this is information that we have coming from Yardeni Yardeni's identifying the peak and the trough on.
Speaker 1:Okay, and this is actually, this is information that we have coming from Yardeni Yardeni's identifying the peak in the trough. On the stock market, s&p 500 total return was down almost 25%. The agricultural fund index was up 18%, right, so that was a relative outperformance of a pretty big magnitude. And so there are times when the ag is down as well. And then you can go back to 2015, where stocks were down like 12% and the agricultural fund was down 8%. So the relative outperformance was still there, still positive 3%, but agriculture was down as well. To your point, I think you could draw parallels and say, okay, risk on, risk off and massive sell-off days yeah, everything's correlated together at those points, but in just regular ups and downs of the markets, no, I think you have diversification from agriculture.
Speaker 2:So I think that's a great argument for financial advisors, asset allocators, who are thinking long-term. What about for traders? Is it more a function of geopolitical events that causes money to flow into the ag side? Is it more catalyst-driven in that sense?
Speaker 1:Yeah, so for the traders that we speak with most regularly, it's just the technicals. There's a lot of momentum trading that's going on. The big flows that we saw in 2022 were absolutely headline driven, and so that was just a fundamental story that was easy for everyone to understand. You know, front page of the New York Times and just about every market channel was talking about the fact that Russia and Ukraine account for roughly a third of global wheat exports. Well, if there's a war breaking out in an area that represents roughly a third of the market, that's a bullish narrative for the grain, and so I think that that was really a headline driven trade.
Speaker 1:But on a regular basis, the traders are paying attention to the momentum indicators and even on a daily basis, some of the pivot points, and certainly we have volume in our funds. Every day People are in and out. I'll mention you know we have volume in our funds. Every day People are in and out. I'll mention too, even when you're in a stage one for corn prices, for example, that stage one moving roughly sideways where we draw that line at 350, you know that low could be $3 and that high is over four. So you have substantial room there to trade within that range and potentially profit, if you're comfortable trading that way, right? I think a lot of people prefer to trade for the momentum. We have a clear trend line and, again, the momentum's on your side and that's where we see most of the traders.
Speaker 2:So I'm looking at some of the charts of some of the offerings on your end and it looks like the soybeans tracking side of things actually held up fairly well compared to other ag plays. Is there something unique going on with soybeans in particular versus wheat, versus corn?
Speaker 1:Yeah, that's interesting because soybeans have fundamentally the worst balance sheet right now. The most bearish balance sheet we are on a global basis, either the third, I think it's the third highest supply relative to demand in soybeans. So what's going on with beans? Why is it catching a bit? There's a lot of stories out there. One that is developing that everyone should pay close attention to is weather in Brazil. Brazil is having a significant drought. We've seen that impact. You know coffee prices, sugar prices, et cetera. It bears watching as Brazil is now moving into planting soybeans. They are the largest producer and the largest exporter of soybeans in the world, and so keep an eye on the Brazilian weather as it moves forward. Of course, we help you do that, right, if you subscribe to the 2GRIM newsletter and follow us on X and so forth, but you also see that pattern there.
Speaker 1:Mike, I love this chart. What's the timeframe you have on this chart? This is a weekly, boris. Yeah, so look at that support coming in, right where you would expect to see support, right. By the way, mentioning that if it doesn't hold that support, there's some downside available. Okay, and so this does cut both ways.
Speaker 1:Soybeans on the futures side of things. Look for prices more in that 880 level is right around where I would say that your national futures equivalent cost of production it might be, you know more or less, you know five, 10, 10 cents or so forth, but so we are elevated relative to what I would expect the cost of production to be for soybeans. And there could be some farmers listening right now that say, hey, what's this guy talking about? That's nowhere near what my cost of production is. It's all geographical, it's all based on the previous trends and what we can see on the charts. So your local cost of production is going to be higher or lower, whenever it might be, but that's the general rule. So on that basis, I think soybeans are relatively rich compared to the other grains.
Speaker 1:But there is a fundamental story brewing right now in Brazil. You also have the fundamental story of biofuel policy, and so we have a lot of soybeans that we're growing in the United States right now where the hope is that we can crush those soybeans to produce biofuel. We're looking for some further help from the treasury department and we have to get the EPA on board and explain to farmers exactly what techniques they need to follow in order to capture these credits. And it gets a little in the weeds there. But you know that's another story to keep in mind for soybeans, because soybeans can be used, are used for renewable diesel fuel and that could be a very big story moving forward. So another thing to keep an eye on.
Speaker 2:I'm glad you went in that direction, because it sounds to me like a Harris administration might be making more favorable right from that perspective. Maybe I'm wrong, but how does the sort of political landscape depending on who's president, factor into that supply and demand imbalance?
Speaker 1:Yeah you, know I'm worried about the political landscape, not saying Harris or Trump. Both have been talking a lot about tariffs. In fact, I don't know. I've been in the weeds working on some things today, but I think we're expecting to hear some final details around the White House, the Biden White House having tariffs announced on China and EVs and this sort of thing. And look, we got into a trade war with China when President Trump was in office and that was not good for soybean prices. Soybean prices sold off hard during that timeframe, and so tariffs are on the board, no matter who wins can't say right or wrong.
Speaker 1:It doesn't look like the United States and China have very warm fuzzy feelings toward each other right now, and the fact is is that China is a major importer and they're very important for US agriculture, and so China not buying our soybeans or China not buying our corn? That would be a big deal. I think China still needs to buy our soybeans. You know the United States is, I believe, still number two, the second largest producers of soybeans in the world, and so China needs our soybeans. We'll just be the market of last resort.
Speaker 1:That's not true for corn. China does not need US corn. In fact, they've been getting corn from Ukraine, and so that's an important story. When you look at Ukrainian production, not a lot of people realize Ukraine exports more corn at this point than they do wheat on the global relative scale. So they export about 10% of the global corn exports come from Ukraine. Less than 5% of global wheat exports come from Ukraine currently. You know that's what worries me most is this idea of tariffs impacting our trade relations and leaving us you know us with more crops than we care to hold on to.
Speaker 2:I want to take a step back for the audience and talk about futures, because, as you and I know, you can't necessarily obviously invest in spot. Same thing with oil, right, when it comes to some of these funds that are tracking. This explain, I guess, at a very basic level, what futures are, and are there certain ag morgues where futures tend to correlate closer to spot than others?
Speaker 1:Oh, that's interesting. Let me take the first one, so that's an easier question what are futures? Right? So futures contracts were designed originally to help for farmers and end users lock in prices and manage risk. So, at a very simple example, let's assume that, mike, you are a cereal producer. You make cereals like General Mills, for example. Right? So you're a cereal producer and you're going to need wheat. Well, if you want to take delivery of wheat, but you don't need it now, you need it in December. Okay, here we are, we're sitting near the beginning of September, but you like the price that you see today. You can buy the December contract at the price you see on the board today and lock in your cost.
Speaker 1:Likewise, let's assume that I'm the wheat farmer and I want to sell a crop and I can store it until December. I'm happy to sell it to you at the price that I get in December. Today. I can lock in my price to you at the price that I get in December today. I can lock in my price as well, with the contract saying that I will deliver it to you in December. And so you have this function in the futures markets where there are contract months where the commodity is deliverable against that contract month on its expiration. And so in wheat markets you have five different contract months available that allow both again, the commercials and farmers to spread out their risk and determine their delivery time. That, if I buy the Chicago wheat contract, I'm going to get the quality of wheat that I expect, and it's going to be delivered at a certain location and I know where I'm going to get it, et cetera.
Speaker 1:Okay, so all that is all that's answered for you. All that risk is managed and that's really helpful and has actually, you know, been the bedrock for trading in societies around the world. Without that risk management, we would not have the lifestyles that we all get to live and enjoy today. I will also say that traders okay, also known as speculators can step in and trade those contracts, and so what a farmer and a commercial end user might think is a good price that they want to agree on, I as a speculator might think that that's undervalued or over. Agree on. I as a speculator might think that that's undervalued or overvalued. So I'm welcome to step into the market as well and participate.
Speaker 1:Now, that adds liquidity, and speculators play a really important role in these markets and that is again adding the liquidity. So let's assume that you're a commercial buyer, mike, and I'm ready to sell my wheat December wheat at current prices, but you think you're going to hold out and get a better price. There might be a spec out there who says you know what? That's a fair enough price to me. I think the commercial buyer might be wrong. I'm going to buy it at this price today and sell it to the commercial buyer later. Okay, so there's competition in these markets. Speculators help, you know. Add that liquidity, which is a really important function. I want to get to the other question you asked. You said is there one or are there commodities where the futures correlate better to spot, was that?
Speaker 2:Yeah, exactly, and this is really more of my own curiosity right, if they're being again, you're directionally still going to get the trend rights right. You're tracking. I guess you're charting the spot right.
Speaker 1:The futures are still largely directionally in the same place, but is there tighter tracking around some commodities than others? You know there probably is. I don't know how to answer that question. What I can tell you is that when you look at the corn ETF, for example, the corn ETF holds three different futures contracts. It owns the second to expire, the third to expire and then a December following the third to expire. I know that sounds like a mouthful, but remember there's different contract dates for any futures contract.
Speaker 1:Spot is always the one that's going to mature next. We use the term spot. It's actually referred to as the front month contract. The corn ETF, the wheat ETF, the soybean ETF, the sugar ETF will never own that front month contract. There's a couple of reasons there, but most ETF the soybean ETF, the sugar ETF will never own that front month contract. There's a couple of reasons there, but most importantly, it's a very volatile contract. It's the one that goes into delivery, right. So if you forget to sell it for some reason, you're going to end up with a whole bunch of corn on your funds. Yeah, so we don't own the front month contract.
Speaker 1:Okay, when you own the second and the third and the December following which you have, there is a situation where those contracts are going to move with front month right, the front month goes up, the rest of the curve will typically go up as well. Front month goes down, the rest of the curve will go down, but you have less volatility. So I get the question. Sometimes you know somebody will call in and say, Jake, I'm watching CNBC, they say that corn prices are up 2% today.
Speaker 1:Sometimes you know somebody will call in and say, Jake, I'm watching CNBC, they say that corn prices are up 2% today. My corn ETF is only up one and a quarter. What's going on? I say, well, CNBC is only quoting the front months. Remember, you're diversified across the curve. It's not as volatile as a holding. Because of that, I never get the call. When you know the corn ETF is only down one and a quarter and corn front month corn futures are down 2%, Nobody calls and says, hey, this is great, Thanks. But that's just the fact that the further you go out the curves, typically, the less volatile, less volatility you have.
Speaker 2:We haven't talked about currency movement and I feel like that's kind of an interesting thing because, you know, I think most people think about the interaction of you know, the dollar against oil, right, but what about dollar movement broadly against the ag space?
Speaker 1:Yeah. So you know, when you look at dollar strength, you have to look at a relative basis to the buyer, and so you know, when you're thinking of US ag exports, who is the buyer and they're paying in dollars. Ok, so what's that relative currency valuation? Now there is the old rule of thumb, and you'll hear this all the time. People say, well, the dollar index is lower, that's good for US exports. I'm probably guilty of even saying that sometimes because it is a rule of thumb and, frankly, traders will pay attention to that.
Speaker 1:However, when you really want to get down to it, the dollar index doesn't really matter. I mean, the currency pairs that matter a lot are US and Brazil, usd Rial, usd Renminbi or Yuan. You know those are big drivers for us. That's just because of the export market, right? So as a different currency appreciates against the dollar, that makes the goods that they're buying, priced in dollars, relatively cheaper. Right, and so I would pay close attention to those pairs. But, in broadly speaking, yes, a lower dollar index is supportive for US goods and services and exports in general, but it's the actual pairs that matter more.
Speaker 2:I want to take this conversation around economic cycles. The old adage is even if it's a recession, still got to eat, right, unless you're fasting, in which case expansion or not you're not going to eat, it doesn't matter. It doesn't matter at that point. But listen, I mean we should talk about the state of the economy, how that might impact the ag space, because now I'll be on inversion right. You've got unemployment rising, the Fed's starting to cut. Usually, when they cut, it's not historically, on average, a good sign in terms of where we are on the cycle. So let's do a little scenario analysis. Let's say soft landing versus recession. Okay, how do different parts of the ag market respond based on soft landing versus recession? And then, further to that, I would think, because of the diversification benefits, you actually really want these in recessionary periods.
Speaker 1:Here's the thing with diversification. Diversification, just generally speaking. Right, it's all about opportunity costs. Okay, so we just talked about the fact that some of these prices are expected to move sideways for an extended period. Your cost there is your opportunity cost. So whether you have a soft landing that tells me that there's not a lot of other exciting investments out there, or a recession that tells me you want to be in something that's at its cost of production or around there right, because there's limited downside the fact of the matter is that these are very inelastic types of goods. So nobody in New York City is going to skip their morning bagel because it's a soft landing. In a recession, they might not add cream cheese, but they're still going to get the bagel, and so you're still going to have demand for these products, which makes them again an attractive place to potentially park money for diversification purposes. The idea of a soft landing to me it still looks possible. It all depends on how well the Fed can thread the needle here with interest rates, which I have come around to the idea that they've been too slow to lower interest rates. I don't think we're going to see a 50 basis point cut here coming up, but there is room to move rates lower. That begs the question will lower rates and easing into a soft landing and or recession ignite inflation? To be determined? Right, but I don't think that rates alone are going to be the catalyst for that.
Speaker 1:In all my studies and reading and I've come to understand the world and participating in these commodity markets, and what we saw from COVID, which was a great learning experience in a terrifying period, is the power of money supply and where that money supply lands. And so what we saw in COVID is that money supply didn't go to the banks like it did in QE in 2008, 2009, 2011,. Right, it went directly into consumers' pockets, and so the key number to watch as you're trying to anticipate inflation or judge if there truly are inflationary pressures in the market, is M1, right, that's the money supply. You can find it on Fred, the Fed's St Louis Research Department Watch M1 levels and watch the velocity of M1. M1 velocity measures how fast the dollar is moving throughout the economy, to the extent that M1 is growing and the velocity is picking up. That tells you you have hot money. That tells you you have inflationary pressures.
Speaker 1:Now, remember, you can have a weather event, you can have war, you can have some type of supply disruption that creates a supply demand imbalance and that will lead to higher commodity prices, higher corn prices, higher wheat prices, whatever it might be. But unless you have money in the system, those higher prices cannot be supported. So you need to have money supply, more money in the system, and that's where you're going to get the inflation. Money supply, more money in the system and that's where you're going to get the inflation. And so what worries me is that we don't have a soft landing, but rather we have a recession and, to put this lightly, we've become wimps.
Speaker 1:Okay, any whiff of a recession and we seem to want to open the purse right away and try to support as much as we can. We go over our eyeballs in debt. When you do that and you're creating new money to support the economy, that's where you're going to get inflation to get. Can we get a soft landing with the Fed adjusting interest rates and kind of keeping the money supply increase to as propriety demands, right, so somebody goes to the bank, takes out a loan for a business in Denver. That's a propriety demand for money that might keep inflation, keep a lid on inflation for time being, but to the extent we have to ramp up the printing press again look out those lower rates.
Speaker 2:so how does that impact the supply side? Because I would think cheaper capital is great for farmers, right?
Speaker 1:Cheaper capital is great for farmers. They love cheaper capital and just having some conversations with folks right now, those farmers need to free up some of their credit lines as we get into the harvest year and so lower rates are going to be a welcome sign. It helps, but it's not really a production driver. The production driver is pretty simple the farmer has a whole bunch of land. There's a couple of things he can do with that land. Right, he can put solar panels up, he can plant corn, he can plant some type of carbon capture cover crop, can plant soybeans. Beyond that, you know, I guess he could build a golf course. Okay so, and I would say that because the farmer is going to plant, because you have these crop federally subsidized crop insurance, the downside is known for the farmer and the farmer can make you know the risk management decisions based upon that. So the farmer is going to plant.
Speaker 1:We see acreage switch year to year and it's important to know corn and soybeans are grown on the same acres. So one year a farmer will plant corn. The next year he might decide to plant soybeans. Maybe he'll go two years planting corn and then go to soybeans. The reason for that is that corn extracts nitrogen from the soil. Soybeans fix nitrogen back into the soil so there's a natural reason to rotate the crop. So you can see the acreage in the United States switch from year to year Corn crops over 90 million, less than 90 million, so forth. But we're only talking a spread of maybe 10 million acres on corn planting. So farmers are going to plant regardless of what interest rates are. It's more a function for John Deere. Is a farmer going to buy new equipment because interest rates are lower and their profit margins are higher?
Speaker 2:He talks to a lot of financial advisors, jake, as I do. What do you find, on average, advisors do with the soft commodity side Meaning? Are they putting 5%, 10%? I mean what? Is it considered? More of a satellite type of investment, more alternative? What's the allocation look like?
Speaker 1:Yeah, no, that's a great question, thank you. So it differs, obviously, from person to person, and there are some advisors out there who are doing the trend following strategies, right, who are looking for opportunistic trend following trades. But for the allocators which I think you're speaking to, it starts with deciding to allocate to commodities, right. So we see folks increasing their commodity exposure, especially on the heels of 2022. And that exposure is somewhere in the range of 10 to 15%. So that's an alternative asset class.
Speaker 1:Until recently, bonds didn't look too attractive, right, and there was jitters about valuations and stocks. So advisors are looking for alternative markets, commodities being an alternative market. We are seeing folks come around to the idea of including grains, or agriculture in general, as a sleeve of their commodity exposure, and it's really important. If you look at that major commodity indices, or even some of the more well-known actively managed commodity mutual funds, you'll find that most of those are overweight in energies, and that's just a function. People are familiar with oil, they're familiar with, and so what we are having conversations with the advisor with all the time is the diversification, potential diversification benefits of agriculture in your portfolio, to carve out a sleeve in your commodities holdings for grains. And so that conversation puts you at somewhere between three and 5% for agriculture from the people that we speak with.
Speaker 2:Jake, any other interesting kind of developments or things that 2Creum broadly is working on that you're trying to spotlight, that people should be aware of, separate from the vehicles that you have out there?
Speaker 1:Well, we went over the golden grain cycle and you know, just in general, the idea of inflation, I think, is really important in commodities as well as policy. We're really interested in trade policy, we're really interested in the concepts of inflation and deflation and education around the commodity markets as they relate to your portfolio, and so you'll find myself and Sal Gilberti, quoted in publications, often talking about other commodities that aren't in our wheelhouse, such as, you know, coffee or copper and gold. I personally am very fond of talking about gold and precious metals, and so those are other things that we help investors, you know, focus on because they're related. Right, they're not exactly our book, we don't always need to talk our book, but we want to help investors overall understand the world, how it works, and those are important topics to us.
Speaker 2:As we wrap up here, Jake, where people find more information on investing in the ag space. How do people learn more about what you guys are doing?
Speaker 1:Yeah, 2creamcom. So this virtual office. Michael, this is your design. I love this. So 2Cream T-E-U-C-R-I-U-Mcom is a great place. Sign up for the newsletter. Typically, I'm writing those newsletters so you can get our thinking in there. Follow us on Twitter X at 2CreamETFs, and myself at MacroViewJake on Twitter, and Sal Gilberti as well at GilbertiSal.
Speaker 2:Hopefully we'll get Sal on for the next episode of Lead Lag Live. Appreciate those that watch this live. Again, this will be an edited podcast. This is sponsored by 2Cream. Take a look at their various products and I appreciate those that continue to support this effort. Thank you, Jake, Appreciate it. Thanks.
Speaker 1:Mike, fun seeing you.
