Lead-Lag Live

Jake Hanley and Sal Gilberti on Commodity Trading Dynamics, Agricultural Stability, and Strategic ETF Innovations

• Michael A. Gayed, CFA

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Unlock the secrets to navigating the complex world of commodity trading with insights from Jake Hanley and Sal Gilberti of Tucreum ETFs. As key industry voices, Jake and Sal dissect the intricate relationship between tariffs, the strength of the dollar, and their profound effects on capital markets, especially agricultural commodities. With the looming possibility of Donald Trump's re-election in 2024, they offer an analysis of potential tariff strategies and their impact on U.S. trade relations with global competitors like China. Gain a deeper understanding of how America's strategic advantages—such as its reserve currency status and natural resource wealth—play into market trends and shape investment strategies as we project towards 2025.

Discover the vital role of non-correlated returns in agriculture as we face a shifting bond market landscape. With traditional investment models feeling the strain, the pursuit of diversification becomes paramount. Hear how the Tucreum Agricultural Fund Benchmark Index exemplifies stability during market corrections, demonstrating agriculture's potential as a diversification tool. Jake and Sal shed light on the composition of the agricultural index, featuring staples like corn, soybeans, wheat, and sugar, and discuss these commodities' dynamic role in shaping the agricultural market and offering non-correlated returns in volatile economic times.

Get ready for the launch of an innovative broad-based ETF commodities model that promises diverse exposure to commodities ranging from oil and natural gas to gold and coffee. We delve into how this model aims to outperform broad market indices by strategically managing commodity exposure. With unique offerings that include metals like gold, silver, and copper, this model provides a comprehensive avenue for investors seeking single commodity exposure without the intricacies of futures markets. As we draw our session to a close, we extend gratitude to Jake, Sal, and our engaged audience, inviting you to revisit the insights via the Lead Lag Report YouTube channel.

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 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. Pl

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Speaker 1:

All right. Slowly but surely, the webinar will get full of very intelligent attendees. Those that are starting to come in. Give us just a minute. I want to make sure that we want to get this as full as possible. A lot of people registered for this webinar Roughly 162 is the number I just checked. This will be a good and really educational webinar with my friends at 2Cream. They're friends, but obviously they're also clients of mine.

Speaker 1:

I've known Sal and Jake for some time and I will say, on a personal note, I appreciate those that are attending these webinars as I run these for various clients. I hope that you come away with this one in particular with a lot of really interesting insights. We'll save the Q&A towards the end of the webinar, okay, so you know you can certainly put it in the chat and I'll mention it towards the end if you have something you want to say. Out of the gate, I am going to pop in and out with random questions that are on my mind and a lot of things tend to randomly be on my mind. For those that are attending this, for the CE credits from the CFP board, I will.

Speaker 1:

You got to stay to the end of the presentation, so roughly 55 minutes or so. I will email all of the webinar attendees If you are looking for the CE credits, the information that I need to be able to submit that to the CFP board. And aside from this webinar, I've got two other webinars that I've announced that are going to be coming out in the next 48 hours that I'm also live hosting. So I don't want to steal from Sal Gilberti's and Jake Hanley's thunder. I think you'll enjoy this PowerPoint presentation, this discussion, and with that said, I will step away. Jake, sal, all yours.

Speaker 2:

Mike, thank you. Pleasure to be here, happy to do this. This is the first webinar we've done with Lead Lag but, as Mike said, we go back a long way. It's funny. I think of you as a friend first and a partner second. Just a brief introduction to ourselves for anybody who doesn't know us Tucreum ETFs. We sponsor agricultural commodity ETFs and today we're going to talk a lot about commodities in general. Obviously, we're in a very unique time frame, both in market history and in the history of the United States, and there's some important things to pay attention to. My name is Jake Hanley, I am a Managing Director, chief Portfolio Specialist for 2GRIM, and Sal Gilberti is here too. For anybody who doesn't know Sal, you should look Sal up. Sal's the founder CEO of 2GRIM and Sal, if you just want to say hi for a second, make sure your audio works.

Speaker 3:

Yeah, if I get my mute off there, yeah, thanks, thanks, jake, and thank you, michael, for enabling this process. I'm going to let Jake lead Anything. This is interactive, so I think we're. You know we're taking a lot of questions, whatever. Whatever pops into somebody's mind, let us know and we'll try to get to it, but I'll let Jake lead Jake. Jake, have me tidy up and comment where you need. Yeah, perfect, Thanks.

Speaker 2:

Thanks, sal. So thank you everyone for joining Now. This presentation really is born from our 2025 outlook, which we published at the end of the year, and thinking about 2025, six weeks ago, really, we were thinking about what it means for capital markets in an American first world right and, in particular, the markets that we follow most closely being agriculture. And so you know, think back a few weeks ago. What was the biggest story of 2024? You know, at any given point you might have said it was the Mag 7, right or artificial intelligence. Those are the main themes, but really, I think, when we look back to 2024, it's mostly going to be known for the historic re-election of Donald J Trump. I'm pretty confident in that call, and so, when we think about Donald Trump and the Trump trade, there are two items that really jump out right away, and that is tariffs and the dollar, and so we're going to start there.

Speaker 2:

I will note that some of these charts again go back to our 2025 outlook, which are a little dated, so I'll just give you some updates, real time. What you see in front of you here is a chart plotting the Fed funds rate and the dollar index. The dollar index basically traded sideways from around the fourth quarter of 2022 through about the fourth quarter of 2024 and has broken out of that channel, even while interest rates have come down. And actually where we're priced right now? Today, live price is right around 108. So just about the same price that you see on the chart. Here is where the dollar index is today.

Speaker 2:

So trade and tariffs what's going on? Well, donald Trump makes you know he's not trying to hide anything. He thinks tariffs are big and beautiful, they're a wonderful tool to be used to negotiate US policy, and maybe he's right. It was effective with Canada and Mexico recently to bolster border protections. But here's the thing the US has several strategic advantages and President Trump is not shy about pressing those advantages. Number one we're the world's reserve currency. We have the wealthiest global consumer base. We have an abundance of natural resources, significant military power. So we're holding a lot of cards.

Speaker 2:

Now, when you look across the landscape, canada, mexico all right, that's one thing. European Union that's another. China is really the biggest competitor we have in this what might be tariff trade war 2.0. And China also has some significant strengths. You know, they have really amazing cyber warfare capabilities. I say amazing because they seem to have hacked the US Treasury Department not that long ago. We know they have a dominance in rare earth, minerals and metals and supplies, not just in China but in places where they have cozy relationships, in Africa and so forth. And of course they have the semiconductor manufacturing expertise and groundwork as well. So China is also going to press their advantages in this coming trade war, which hopefully can get resolved sooner rather than later.

Speaker 2:

Now what's interesting to me is when we're looking at tariffs and we see the dollar strengthen. We see the dollar strengthen. There's this idea that global international companies because the dollar is the world's reserve currency, global companies around the world likely have dollar obligations and they need to have dollars to meet those obligations. So if you're an exporting company outside of the United States, you're selling to America. When you sell your goods to America, you're taking in dollars and you need those dollars again to meet your obligations, right? Dollars are the world's reserve currency. Well, if tariffs are put in place and all of a sudden you're not selling as many goods into America, that means you're not getting as many dollars back, and that could be a problem again if you have dollar denominated liabilities, which most people do, most companies do. So what are you going to do? Well, you're going to end up selling some local currencies and, to the extent that you're selling the euro, the yen, the Canadian dollar, you're selling the currencies that are helping push the dollar index up. So tariffs are supportive for dollars, and that's just one fundamental reason why that's the case.

Speaker 2:

Now, if we look at commodity prices, if we're thinking of higher dollar, you know, a dollar strengthening, typically that's bad for commodities. Ok, and I say typically because it's not always the case, but typically that is the case. What you're looking at here is a chart of the Bloomberg Commodity Index. This is a production-weighted index, so it puts a lot of emphasis on oil, for example, because oil is produced in vast quantities compared to cocoa beans, and we'll get into that in a moment. But commodities in 2024 basically traded sideways. And when I say commodities, here again we're using this production weighted index of the BCOM. A lot of people think of commodities as just one basket. They lump all the commodities together and they'll look to these major indexes and say well, what are commodities doing? Well, the BCOM's moving sideways, so there's not a lot of action going on. You couldn't have been more wrong in 2024. We'll get into that in a second. You couldn't have been more wrong in 2024. We'll get into that in a second. But the BCOM went sideways in 2024.

Speaker 2:

We were all complaining about inflation and I say we all. I'm assuming any American on this phone who pays for goods and services is complaining that prices are high. And you're not wrong, you're absolutely correct. But it wasn't showing up in the BCOM. Last year Inflation was not showing up in the BCOM. Last year Inflation was not showing up in the Bloomberg Commodity Index. Now I will point out that where you see this trendline resistance in about June of 2024, just in the spring of 2024, we're back at those levels now on this index. As a matter of fact, that was right around 105, and we're right back to 105 today. So this has broken through this trendline resistance and is budding up closer to this red dotted line at 107, right about 105 right now.

Speaker 2:

Now again, I said this is the production weighted index, which was flat last year. Oops, sorry about that. Here's the equally weighted index. Also, the Bloomberg Commodities Index is the equally weighted index. Also, the Bloomberg Commodities Index, equally weighted, was up almost six and a half percent. And so when we say not all commodities are equal understand that the fundamental factors impacting the coffee market are different from those impacting the natural gas market, and so when you're looking at an equal weight index, this actually reflects some of those other opportunities that are otherwise under the radar. Cocoa was up 173% last year. Coffee was up 68%. Looking at the front month futures contracts, and when I say the fundamental differences impacting these commodities, really what we're talking about is weather. Really what we're talking about is weather, and this is an interesting thing to think about as you think about pricing of anything commodities, stocks, bonds, whatever it might be.

Speaker 2:

When you're dealing with commodities, people are demanding the actual underlying product. So if you're buying coffee, it's because you want the coffee right, or you want the price exposure to the coffee, but somebody eventually is going to get the coffee, and so you know demand for something like coffee or cocoa is really inelastic. I mean, I know some people that have pulled back on their coffee consumption not the quantity that they're consuming, but the brands right. So I don't care if you go to Starbucks usually and you switch to Dunkin' Donuts, you're still buying coffee. Valentine's Day is coming up. I bet everybody's still going to try to buy chocolate, no matter that it's a little more expensive. Okay.

Speaker 2:

This is an interesting concept to me because when you look at stocks, demand for stocks isn't driven by demand for the underlying. You could say, yeah, it's driven by demand for the underlying earnings. We'll get to that in a second. Really, the demand for stocks is driven by animal spirits and when we look at what the stock market has done over the last couple of years, you know animal spirits have been running high, okay, and that has left commodities competing for flows. Now we're an ETF shop and so we're looking at the last year's flows into commodities ETFs, equity ETFs and fixed income ETFs.

Speaker 2:

The green bars here are equity ETFs. They took in $707 billion last year. Fixed income that's showing up in the kind of orange color here. They took in $286 billion. Commodities only took in $4 billion. Commodity ETFs liquid alternative available for anybody out there looking for a non-correlated return took in only $4 billion.

Speaker 2:

And if you ask me why, I'm going to say it's because most people are looking at these broad based indexes saying, hey, prices aren't going anywhere. Why do I want any commodity exposure? We're missing the key points. So you look at that and you say, well, good, I get it. Stocks were screaming in 2024. We've had back-to-back great years of stock market performance. Of course, stocks are taking in all that money. Well, the stock market, of course, will go up until it doesn't.

Speaker 2:

I don't know how many folks on this call were at the desk working in asset management in the year 2000. It was 25 years ago. You would remember that, after the period of 95 to 2000, which was a terrific year for stock market investors, you're up 250% in that five-year timeframe. You had back-to-back years over a two-year period 2000 through 2002, where the market was down roughly 33%. That hurts. Could that happen again? Yeah, it could absolutely happen again. And where are we now? Well, we're not in the 1995 type of period here, but we have gone up 54% in the past two years, which again this was going back to the 2025 outlook. We started to see these headlines. Investors hope for US stock market trifecta. Us stocks soar more than 20% for the second year in a row. So all those flows into equity ETFs make sense, given that's where the returns have been.

Speaker 2:

But this, of course, begs the question is it time for a correction Now? This data that you're looking at here comes from Yardeni Research. This is the S&P 500. In the red bars, you have bear markets. In the blue bars you have corrections, and a stock market correction is defined as a pullback of 10% or more from the highs Based on history. We can expect the correction every two and a half years. Now it's only been 14 months since the previous correction. So, based on the averages, we're not due at the moment and this market very well could have legs. Do at the moment and this market very well could have legs. It's a volatile session today, but this market still could have legs.

Speaker 2:

All that said, when you look at where we are from a valuation perspective for anyone who puts weight on trivial matters such as corporate earnings, we indeed are breathing rare air right now. This chart shows you the S&P 500 price to earnings ratio. It goes back and encapsulates that period of 95 through 2000. And this is trailing PE ratios. Where we are today. We've reached this level two other times, reached this level two other times the peak of the tech market bubble and during the COVID stimulus-fueled market in 2020. So when I say price-earnings ratios are breathing rare air, that's what I'm talking about. So earnings growth is needed to justify these current valuations again, if valuations actually matter anymore, and so, of course it's possible that earnings catch up, but historically high P-E ratios of this magnitude have led to stock market corrections and bear markets, like we saw in 2000 and 2022.

Speaker 2:

So where are you going to go? We saw the fixed income flows were $286 billion dollars and that's just fixed income, etfs, mind you. Okay, so when you look at mutual funds, that's that's going to be different, obviously a bigger number. So if you're looking at bonds for diversification, I just ask, you know, anybody who is, who is operating in the 70s would have an idea of of what to do. Perhaps, but otherwise, you know, none of the market participants today have ever experienced what we're experiencing now. We had a 40-year bull market in bonds from 1980 right down through to 2015, where we broke out of that green channel that you see there, and I've been moving roughly sideways ever since. So 4.6, I think we're roughly sideways ever since, right, so 4.6, I think we're about at that same level. You know, right now, this morning, looking to push through the upper side of that red channel that you see with an obvious, the dotted line is showing you some positive trend line support here. Okay, so the idea is as rates go up, as interest rates go up. Idea is, as rates go up, as interest rates go up, bonds are going to go down. So bonds have not been that place to hide during stock market volatility. It's just not the case anymore and of course, you've seen all the headlines. As I have asking, is 60-40 dead? What are we going to do? Well, the answer to what to do is to consider non-correlated returns. I don't think there's a surprise there. I think you had a feeling this idea was coming right.

Speaker 2:

So look at commodities, look at agriculture in particular and I wanted to strip agriculture out here because it really tells a story when we use agriculture on this chart. We're talking about the Tucreum Agricultural Fund Benchmark Index. This is our own proprietary index, which was launched in 2012. Stocks here are the S&P 500. Bonds are the Barclays Ag. Gold is gold. Commodities are the Bloomberg Commodities Index, the production-weighted index that we saw first. Look across the top at agriculture. Correlating to stocks very low, 0.14. Correlating to bonds just call that zero. There's no correlation there. Okay, this is important. Contrast that with commodities, all the way at the bottom, on the first column there, and look across with commodities, commodities have a 0.4 correlation to stocks. And why is that higher? Well, because the BCOM, again, production rated, has things like energy, natural gas. You know the items, the commodities that are cyclically tied to growth. Agriculture marches to its own beat okay. So, again, when you strip out agriculture from the broad-based commodity index, you can see the potential benefits and the low correlation that comes along with exposure to that asset class.

Speaker 2:

When it matters the most is during those stock market corrections. And so you see, here we're going back, using Yardeni's research. The gray bars are the S&P 500 total return during periods of stock market corrections of 10% or more. The green bar is the agricultural fund index, our own index, and the orange bar is the relative performance, the outperformance of the Ag Fund Index relative to the S&P 500. So since 2012, there have been one, two, three, four, five, six, seven times that the S&P has experienced a drawdown of 10% or more and every single one of those times the Agricultural Fund Index has outperformed the S&P. There have been years where agriculture was down negative returns. Certainly in 2020, the COVID peak, agriculture prices were down, but not down the 33% that stocks were right. So there's that relative outperformance.

Speaker 2:

This really matters to financial advisors, folks on the line who care about having something that zigs when the major asset classes are zagging. We say this is diversification when it matters the most. This is the entire idea around having non-correlated returns and assets in your portfolio that can generate those non-correlated returns, uncorrelated returns. So I want to pause right there for a second because I think in the next couple of slides we're going to get into the fundamental factors behind agriculture and why these returns aren't correlated. But just to see, sal, if you had something to add there, or Mike, if you had any wisdom or things that you want to point out, I think you covered it.

Speaker 3:

I'll see what Mike has to say covered it.

Speaker 1:

I'll see what Mike has to say. Yeah, I mean, look. So you guys know that I'm a fan of that correlation dynamic more than anything else. I always go back to you want as much correlation towards the end of a bear market, you want as little correlation towards the end of a bull market. The challenge there is you don't know when the end is right, so that's always the hard thing to kind of figure out. But one thing we can say with some degree of certainty is that the longer bull market persists and the more extreme it is, the more likely you're going to have some kind of turn right, that things just kind of fall under their own weight eventually, which means you want to tilt more towards non-correlation, and it so happens that you know ag fits that bill quite nicely.

Speaker 3:

It does. And I just want to point out the ag index that we're talking about. And, jake, I don't know if I'm jumping ahead of you or what, but it's 25% of the biggest agricultural commodities corn, soybeans, wheat and sugar. That's what it is. It's equally weighted corn, soybeans, wheat and sugar. That is the two-gram agricultural fund index. Those are the components and the weightings. Some people argue that coffee is right up there in terms of big ags, but the most accessible to investors and the most. They're just big King. Corn controls the ag markets, and by ags we mean the big row crops and sugar. Everything else is what they call a soft. So you're talking cocoa and coffee, and those are. Some people classify sugar as a soft, but we're talking about the big giant commodities, agricultural commodities, whose demand is inelastic.

Speaker 2:

Yeah, absolutely. Commodities, agricultural commodities whose demand is inelastic yeah, absolutely so. Corn, wheat, soybeans and sugar, which is, say, the grains plus sugar. Those are the markets that we follow the most closely, and we do spend a lot of time on grain sale, right. So sugar is a little bit of an outlier. It's a wonderful futures market to trade. I don't know if I can say it's a wonderful ETF to trade. Compliance might take an issue with that. So I will say it's a wonderful futures market to trade.

Speaker 2:

And when you look at corn, wheat and soybeans, however, the fundamentals really tie together for those particular commodities. And corn and know we're not talking about the corn that you eat at 4th of July, we're not talking about the edamame in your, in your soup, okay. What we're talking about is mostly animal feed. In the United States it's also biofuels, ethanol and so forth, okay. And so corn and soybeans primarily used around the world to feed animals. Wheat number one's use is to feed humans. So we're talking about food. This chart here is showing you the growth in usage consumption of corn, wheat and soybeans worldwide, going back to 1960. No surprise there's more people in the world. People are getting wealthier. The global middle class is increasing, which means people are eating more animal protein. The more animal protein you consume, the more corn and soybeans you have to grow to feed the hogs and the bulls. To grow to feed the hogs and the bulls, okay, so you're looking at demand increasing substantially between 1960 and 2024. And it's not quite a straight line, but it could almost be a straight line.

Speaker 3:

Okay. So there's a nuance in there that you can't see just by eyeballing it, and that is that every single year, the combined use of corn, soybean and wheat globally is either a record or it misses by a little bit, and so it's the second highest ever. Every single year since 1960, it's either a record or it's the second highest ever. That's it. It's consistent. Consistent growth in demand.

Speaker 2:

So demand does not abate. Production, however, is variable Because, again, we're talking about agricultural commodities. They're weather dependent and, thankfully, production has largely kept up. This is the orange line, okay, going back all the way to 1960. And there are periods where you can see here where production has surpassed consumption. In those years, you have a bumper crop and you're building your excess supplies. We call those ending stocks, okay, let's give you a little terminology here. So you're building your supplies, but then, of course, there are years where you produce less than you consume, ok, and in those years, you're drawing down those excess reserves from prior years and so the supply is actually diminishing in years where you consume more than you produce. And we can see those years flagged here with these little red flags.

Speaker 2:

Interestingly enough, 2020 hit. We had COVID, we had the inflation concerns, printing a whole bunch of money. At the same time, we had an issue with weather and we did not excuse me, I'll put it in this pause we consumed more grain than we produced, ok, so while that inflationary scare was happening, while we're dealing with COVID and so forth, so while that inflationary scare was happening, while we're dealing with COVID and so forth, grain prices were heading higher because we still consumed more than we were able to produce those years and we've been trying to catch up ever since. So that's a really fundamental, important point to keep in mind that production does not always keep up with consumption and in those years where you consume more than you produce, you're putting stress, you're diminishing your supplies and that is supporting prices. So keep that in mind as we keep moving forward. So I just saw you, did you look like you wanted to?

Speaker 3:

add something I did remember to sit down and see what the next slide breaks.

Speaker 2:

Okay, all right.

Speaker 3:

Should we get a?

Speaker 2:

drum roll for the next slide. What's it going to bring here? What do we got, oh boy?

Speaker 3:

This is a fun one.

Speaker 2:

A lot of detail here. Green bars, that's consumption, that's usage. Okay, this is a shorter timeframe. We're only going back to 2024. We're looking at the last 10 years roughly in grain consumption. Green bars, again, as Sal said, record high, record high. Record high. Dip down, record high, record high. Record high. Dip down. Record high, record high, record high. Dip down. Record high, record high. Okay, you get the idea. The orange bars here are the combined ending stocks. Again, think of that as your excess supply. That's your bumper crop that you're carrying over from year to year.

Speaker 2:

There's one fundamental data point that, if you're going to pay attention to the grains at all, write this down. It's called the stocks use ratio. It's here in the yellow line. This is the bottom line. This is the fundamental factor that tells you immediately how tight a balance sheet is.

Speaker 2:

What is your supply demand situation? Okay, the higher this yellow line goes, the better. That means you have a supply that is relatively high compared to anticipated demand. That's good. That's going to put downward pressure on prices. However, as the stock's use ratio tightens and gets lower, that's going to be price supportive. Okay, because what you're saying is we have fewer supplies available relative to anticipated usage.

Speaker 2:

Remember, in the United States we have one growing season every year, and so if that growing season is good, great. If that growing season has a problem, that means you're going to be dipping into your supplies. What are those supplies relative to your anticipated usage? That's your stocks use ratio. And we've seen the stocks use ratio continue to be in a downtrend ever since, actually going all the way back to 2017, 2018, call it right before we got into that first trade war with China and we've continued to be trending lower. So the balance sheet combined balance sheet for corn, wheat and soybeans continues to tighten. There are some nuances in each of those markets individually which we'd be happy to speak to if anybody wants to get into those details in a separate phone call, but by and large, this is the key point for these markets.

Speaker 3:

Yeah, I just want to step in and just kind of say it another way. That yellow line, if you look at this, so we've got a 65 year history of the green bars being record, near record, record, near record, record, near record. You see that upward slope. When you look down at those orange ending stocks bars, you know, just eyeballing it, they're flat. Well, you know, just eyeballing it, they're flat. Well, you know, when you've got demand rising for 65 consecutive years, it's going to keep rising. Okay, we're, you know, definitive statements. But come on, the world is growing, we're finding more uses for these things. Demand, historically, is ruthlessly rising and yet, in essence, by those orange bars are flat. So you know, it doesn't take a rocket scientist and you know your basic supply demand economics to see what will happen if there's a weather event in some major producing area of the world for one of these commodities. That's just said another way what Jake said.

Speaker 2:

Yeah, and Sal before, because I think you can talk to this slide here, but I just want to tee this up and tie it to the rest of the conversation thus far. When we were looking at the Agricultural Fund Index, I mentioned how that's a really important concept for anybody who's looking for non-correlated returns. You're looking at a portfolio structure, long-term investor, et cetera. We are talking about commodities. Commodities are volatile. Typically, it's the realm of active traders, and so if that's you, if you're really interested in pursuing an active trading methodology where you're buying, you're selling, you're making timing decisions based on prices, based on momentum, based on technicals by the way, you're speaking my language, right, I love that stuff. Here's an idea where you can potentially derive some alpha from the agriculture sector, you know, instead of just having that kind of beta variant that helps you save money in a downturn for stocks, right? Okay, and so this is what we call the golden grain cycle.

Speaker 2:

I'm going to turn over to Sal to talk about the three stages of the golden grain cycle. I just want to note this is corn futures. On this chart, we have a similar chart for wheat and soybeans. I don't believe it's part of this deck, but it's a very similar chart for both corn excuse me, for wheat and soybeans as well, because these concepts are fundamental for grains. So, sal, do you want to talk to this briefly?

Speaker 3:

Sure, and I'd add that this is for a strategic allocator as well. As you can see, this is an 18-year chart and in a nutshell, it basically says corn prices have doubled three times in 18 years three separate times, but from the same price level. So the wonderful part about agricultural commodities is that they're subsidized. Every country in the world subsidizes its agricultural sector because you don't want your people to be hungry. What that means for big farmers okay, farmers that are growing enormous crops like corn in this slide is that they get used to operating at breakeven. Okay, well, every farmer has its own breakeven cost. Luckily, we have very transparent, highly liquid futures markets that can tell us what the effective breakeven costs is for every farm. So it converts to a futures price and over history and this chart starts in 2007 for a reason the Renewable Fuels Act was passed in 2006, and that changed everything structurally for the use of commodities and these big row crops, for fuels as well, and so it kind of shifted everything higher. But the same patterns were prevalent for the prior 60 years, or 70 or 80 years, I guess, just at different price levels. So in the last 18 years, the futures equivalent break even for corn, using the same data, bloomberg Professional says it's $3.75. We'll just OK, fine, call it $3.75. Between $3.50 and $4, that is the futures equivalent break even of corn. Do you need to be paying attention Only to futures markets? They tell you when corn's at its break eveneven price, which you can see clearly here, is 350 or slightly higher. What happens is when you, when you farmers, get used to operating at break-even, they're producing a lot. When there is a supply disruption, people panic because those those tiny little orange bars that we saw on a couple of slides ago of the ending stocks.

Speaker 3:

As Jake said, using the US as an example, we have one growing season. So you plant the seeds in the spring, you wait for them to grow all summer, you harvest them in the autumn and then you wait all winter to be able to put seeds in the ground. Ok, so basically, all your supply comes in the autumn and there is a seasonal low that happens around the 1st of October. It happens between August and September generally, and the first week of October is the seasonal low for corn, because all the corn that's harvested in the northern hemisphere in essence just to simplify, it is in a big pot, and then for the rest of the year, all winter, all spring, all summer, while the new crop grows, until the autumn crop is harvested, you're taken out of that pile. That pile is getting smaller and smaller and smaller.

Speaker 3:

If something happens in the middle of the growing season, as happened in 2007, that first green circle there on the left-hand side of the chart, that was when there was a drought and we could see a drought coming in the US. You see it coming at the end of June, july, prices spike because people panic because that little orange bar gets smaller, the little orange bar, and you don't want to run out of food. Well, what happens when prices spike? Every farmer in the world just plants more of whatever they need. That following spring and they did Prices went right back down. We had adequate supplies.

Speaker 3:

If you go back and look at 07, I think that orange bar was a little higher than normal and so people were very comfortable. Two years later you had another drought. You saw higher highs. And why is that? That's twofold. One is droughts come every four and a half years on average in the US, and so to have one only two years after you know that's recent memory. People got a little bit panicky and usage is higher. So you're using more. Anyway.

Speaker 3:

In 2010, 11, you saw those highs. You doubled again from that 350 number up to I think you went above 750 at that time, of 750 at that time. And then prices didn't quite pull back during that growing season because people were panicky that it was going to be dry and we had drawn stocks down. The little orange bars were getting short and people panicked and it looked like there was going to be another drought. It was dry going into the beginning of July in 2012. That's that double high there, that double top inside the second green circle from the left. And then it ranked and prices took two years to go back down to break even. It took two years to replenish supplies to where people thought were comfortable and then it went sideways for five years. But you stayed in that break even area. So anybody accumulating in there they didn't get hurt too badly.

Speaker 3:

Corn prices, you know, have limited downside when you're buying at break even. And then, of course, you had 2020, the weather hit and then the war hit in 21. And we saw prices spike again and what happened? Higher highs again because usage is going up, so usage is going up. You kind of have the same inventory levels. With higher usage, people start to panic. You need a higher price to motivate more production and we're on our way down.

Speaker 3:

So it was a two-year bull market. We've been in a two and a half year bear market. We touched $4. I think it was August, jake. For three days, I think for three days we were under $4. There were some articles put out by MarketWatch and others basically saying that corn under $4 was the equivalent of oil under $40. When oil goes under $40, a lot of money pours into oil markets, people who are strategically allocating or just short and midterm trading. They buy oil at $40 and history tells us it's going to go back to 60, 80, 100 at some point, and they know that. Well, the same thing happens with corn and people just don't think about corn. But they should because it's everywhere. And so what this chart reflects are the real, true, basic, literally cosmic fundamentals which have to do with the growing season of supply and demand. And they show you.

Speaker 3:

We had an advisor call us and he said look, I put 1% of my portfolio in corn. I've been doing it for years. When it gets down towards 350, I weight W-E-I-G-H-T 1% into my portfolio, then I weight W-A-I-T for a drought and then I get out. His slogan was weight, weight, drought out. And he said look, in those years when it's just going sideways or even dips a hair corn goes down from $3.50 to $3.00, my clients come in. Here's my non-correlated asset that affected their portfolio by a tenth of a percent, I don't care, in the years that it doubles. I just turned a 8% or 9% or 10% target portfolio into a 9% or 10% or 11% portfolio and I'm a hero and it doesn't correlate. So you know, I think that's it in a nutshell, jake.

Speaker 2:

If I missed anything, Michael, if that's true, no, it's awesome. I just had this idea live here. As I'm looking at this, remember how I said the stock-to-use ratio is the most important fundamental thing to pay attention to it occurs to me that we should put the stocks use ratio down here on this chart so you can see, because, for example, I'm going back to 2011 and 12, and I just double checked the stocks use ratio back then was 9% and 8%. Okay, the stocks use ratio when corn was moving sideways, it got as high as 16%, basically balanced between 13 and 16%. Okay, so that's moving sideways 13 to 16%. Right now we're at 10.1. Okay, so you know you have these big spikes when you're at 9% and 8%. Our stocks use ratio right now is 10.1. And that's coming down from last year. So US corn balance sheet is tightening relative to last year. Our stocks use ratio is relatively tight, which justifies the price here. I mean, it's like you said. I think I heard you say it's not rocket science.

Speaker 3:

Yeah, well, I mean, that's why I got into it. It's just, commodities are supplying to me and they're a lot easier for me than equities, where there are a whole bunch more variables. Yeah, yeah, that's awesome.

Speaker 2:

So you know a couple of things that I think that's a good lead into something else that we were talking about earlier. But you know there's upside potential, right? If you're following the golden grain cycle, and you know Sal gave that example wait, wait, drought out, right, there's a strategy there to follow. But there's also that non-correlated return story from you know, agriculture exposure corn wheat, soybeans and sugar. And so, again, etf company. No surprise, we say there's an ETF for that, okay. So, taking in the order that we went through the presentation, if you're looking for that non-correlated exposure to corn wheat, soybeans and sugar, there are two ETFs to consider. One is TAGS. Tags has been around since 2012. It is a fund of funds Okay, so it owns corn wheat, soybeans and sugar. We have single commodity ETFs. I'll show you that in a moment. Tags is our fund of funds. And then there's also TIL. Til gives you exposure to the same markets, but it owns the futures outright.

Speaker 2:

Okay, and that is going to matter for anybody who wants to avoid a K-1. Tags issues a K-1. It's a 33-act fund. It's been around since 2012, when that was the only way to do it Okay, so it's got the track history. The no K-1 fund came out a couple of years ago. It's a 40-act. You get a 1099. It invests in the same markets but it owns the futures directly.

Speaker 2:

Okay, here's an important point those non-correlated charts that we showed you, that's for the Tucreum Agricultural Fund Index. That is the benchmark for TAGS. Tags is designed to track that index net of fees. Okay, so if TAGS is doing its job, the performance is going to look very similar to those non-correlated performances that you saw. Till again, it's the same markets, equally weighted to those same futures markets, a little bit different, and there's a slight active overlay here.

Speaker 2:

When it comes time to rebalance till, we have some discretion over which futures contract we want to own. I won't get into the complexities of managing futures, but having that active management allows us to potentially help the long-term return for the till strategy. So those are your two diversified ways to get exposure to the markets. As I mentioned, we have single commodity ETFs corn, sal Gilberti, best ticker on the street corn, c-o-r-n, wheat without the H-W-E-A-T, s-o-b for soybeans, and cane C-A-N-E, also a really good ticker for sugar. And then we recently again for those who are interested in trading, day trading or being an active trader we recently launched 2X Daily Corn.

Speaker 2:

That ETF it's a leveraged ETF is CXRN and 2X Daily Wheat, leveraged WXET. Again, these are daily leveraged products. So if you're not familiar with those products, please give us a call, read the prospectuses, all those things you're supposed to do for any investment. But that's our lineup that we have to offer folks interested in agriculture and the commodities. But I do just want to say too, before before we see Mike, if you have questions or you want to drill into anything, the number one feedback we've gotten over the years is from advisors. Ok so, financial advisors, professional investors, asset managers who say I get it, but I just don't understand how to do it, and we'll say well, we just spent 45 minutes going over.

Speaker 2:

You know, here's the golden grain cycle, right, and there's still. There's something that's missing. It's usually Jake. I have enough time dealing with, you know, my client's financial planning and keeping it in my eye on should I sell NVIDIA or not.

Speaker 2:

I'm not paying attention to this. So we are in the works right now of publishing a model. It is a broad-based ETF commodities model that will include exposure to oil, natural gas, gold, silver, copper. We have ways to get exposure to coffee and cocoa, as well as our funds, and this strategy will incorporate our funds, based on this model that we put together when we think it's appropriate, right, and so sometimes it will own corn, sometimes it won't, sometimes it will own wheat and sometimes it won't, and the big idea here is to try to outperform these broad market indices.

Speaker 2:

As we mentioned, the BCOM was flat last year, but there was so much going on in the commodity space for anybody who was paying attention. You left some non-correlated returns on the table by not having a strategy to manage that commodity exposure in a way that we think is appropriate, and so we are going to start publishing this model. It's free for anybody who's interested in following it. It's not all set up yet, so if you would like to kind of get the early subscription to it, we just ask that you go to our contact us page, fill out the contact us email and in the comment just write subscribe to model.

Speaker 2:

Subscribe to model, and I'll make sure that when we do launch, which is probably in another week and a half, maybe two weeks, you'll get that model sent to you. And again, it's agnostic it's going to be a commodities ETF model using other commodities ETFs. When the time is right, it will incorporate the agricultural commodities that we have and, by the way, we're the only ones who have a corn, a wheat, a soybean and a sugar ETF and so I just want to share that with you there, in case you thought this was really interesting, but you're not sure how to implement it. We'll have something for you to check out.

Speaker 3:

And, Jake, I'd also add that we, you know you published on July 26, the fact that corn was approaching a really, really sweet spot in terms of both seasonally and price, and that you know it didn't correlate very well, and that's published on our website. I think you probably sent that out to our subscribers. And again, if you're on our mailing list, we put stuff out maybe twice a month. We do not pound you, we don't harass you at all. We're doing this for educational purposes. So if you sign up for our newsletter, you'll get a heads up. You can also sign up for our newsletter. You'll get a heads up. You can also sign up for our model and that gives you a direct heads up. We can go to some questions. I think they're all.

Speaker 1:

Yeah, it looks like quite a few here. One that's on the compare and contrast against DBC and DBA. I think you may have touched on a tiny bit, but that's from George.

Speaker 2:

George, awesome. So DBA, I had a conversation with an advisor early in January and, george, if it was, you sorry to rehash it, but thanks for the question in public and if it wasn't, you, george, call we can have a deeper conversation. But here's the thing DBA did really, really, really well last year. Dba has exposure to coffee and cocoa, and DBA is one of the components that we are including in our model, which we again will plan to publish in the next couple of weeks. Dba is a great fund.

Speaker 2:

However, there are times where DBA works against itself. For example, it owns cattle and corn. Well, you know corn is an input to feed, right? So the higher the corn prices go, you know that hurts your cattle prices. It's diversified to the point where it sometimes misses those opportunities. And so our TAGS fund, til ETF it is actually the historical DBA. Dba started out. It was just corn, wheat, soybeans and sugar when that strategy was first launched. So we have a much more focused exposure where, when those prices are taken off, you're going to experience that alpha. Sometimes we're going to underperform and that's because of those other markets, and that's just how it works. So I think DBA has a place in the portfolio, but there are certainly nuances, given our hyper-focus on corn, wheat, soybeans and sugar where our funds can be complementary and add some value to Sal.

Speaker 3:

anything to add to that? I think that was know. Dba is a multi-commodity fund. That is in our model. It's one of the funds we don't own it. We don't get anything for including it in, it's just we're picking the components we think will work best. And there's another question about metals. Yes, we do trade metals and Jake has got some things included in our model. That what gold, silver?

Speaker 2:

Yeah, we trade metals. We do not have an offering for metals, so again in the model we include gold, silver and copper. We're not into palladium or anything of that nature, but certainly the big metals. There and this is a key point. We want to create a model for ETF investors people who aren't going to go out there and buy the futures themselves, and to the extent that you can get single commodity exposure in an ETF, that allows us commodities people right to get that exposure when we want it and, you know, go flat when we don't want it right or choose something else when we don't want it. Dba is in our model because there is no standalone coffee or cocoa ETF out there, right, and so that's an important point here.

Speaker 2:

But yes the model will incorporate the precious metals gold and silver, as well as copper, but we do not have an offering in that space.

Speaker 3:

I would also add there's a question on DBC. In our opinion, everybody should have a commodities allocation and whatever that is 1%, 5%, 15%, whatever you decide and when you're not overweighting with these single commodities, which our model does, you should have an exposure to a broad based commodities fund. Dbc is, I think, the biggest out there and, and it's quite a good one, everybody's got their own favorite. We happen to license the BCOM, so we use use that in our examples. We use a different broad based commodity fund in our model and you know it's up to you. But if you agree you should have commodity exposure. You need to start with a broad-based index, which Tukrim does not offer, so you got to pick your own. That's fine.

Speaker 3:

There's another question about TIL, the performance of TIL. You cannot time. When you launch an ETF, you get through, you respond to customers and we launched till in May of 2022 at the absolute highs of the agricultural market. So, again, these are not things you're buying like a stock fund where it's going to generate, where you're looking to generate long-term alpha and things like that. If you buy them strategically right, seasonally, in price right, you can do that, no question, very effectively, as that 18-year slide showed, but these are products that are, you know, tactically traded. You got to be really really on it if you're short-term trading. But these are, these are. This is about allocation diversification, and our model is about optimizing your commodity allocation inside your portfolio when you don't have time to track commodities by yourself where you should be.

Speaker 2:

Yeah, really important. I want to just say TIL has an active component which again relates to the futures selection when it comes time to rebalance. We are not actively managing till for alpha. Okay, so till is a long, only relatively equal weight corn wheat, soybeans and sugar, and that's not. We don't have any plans to change that, so you're going to get full beta in those markets.

Speaker 1:

By the way, I see a question from Kathleen. I will email everybody to get their CFP board ID and all the information related to that. So you'll get that probably the next hour hour and a half. I'm actually doing a podcast after this, so as soon as I get that done, you'll get an email from Michael Guyad at bleedlagmediacom. So just look out for that everybody.

Speaker 2:

Awesome. Good I do as far as yeah, go ahead.

Speaker 1:

No, I was going to say, just looking at other questions, I think we covered the metals point DBC, dba, anything that. What's sort of the main takeaway you think attendees should walk away with?

Speaker 2:

Thanks for teeing that up. I do want to touch on this tariff question in here from Mark, real brief, just because I do think this is a key takeaway for the whole presentation. Right, it's agriculture and commodities in an America-first world. The question is will tariffs by US cause a destruction of international demand of US commodities? Well, we have history here Trade War I.

Speaker 2:

We saw soybean prices tank when China launched retaliatory tariffs on the United States. Ok, here's the key point All the agriculture that is grown and in storage doesn't disappear and so, as long as demand remains, those products are going to find a market. If it's not sorry, I'm shaking my desk, my camera's changed because I get animated about this If our soybeans aren't going to China, they are going to go somewhere else. There is a bit of a price discovery related with that, because China is the largest importer of soybeans. So in the near term there will be, we would expect, just like we saw some pressure for commodities, in particular the ones that China targets directly. We saw it with soybeans. However, in the long term and I say long term, it could be a year, could be six months, could be 14 months those beans, or whatever commodity it is, is going to find a home Because again, think about that 1960 chart with demand, it keeps going up, so they're going to go somewhere.

Speaker 2:

There's a price discovery that has to go on because these are physical products that have to get shipped around the world.

Speaker 2:

It's not as easy to just flip the switch and say, ok, they're not going to China anymore, we're going to send them to Poland, so it will take time, but that demand keeps going up, and so that's just an important point to keep in mind there. So I think really overall, as we've seen volatility in the recent days and everything that Department of Government Efficiency is doing, department of Government Efficiency is doing and I mean there's a lot that's going on that I think markets have been right to focus on things that matter, like tax policy and deregulation, and that's certainly helping asset prices. But boy oh boy, I mean it's not just domestically. Look internationally and some of these tensions we still have around the world, be it Russia and Ukraine or even in the Middle East right now, I do think capital markets overall, I would expect increased volatility from here on out and I believe through my core, based on historical evidence that we have here in this deck, that commodities and agriculture can be a really important diversifier, particularly in times like this.

Speaker 3:

Absolutely. Let me just jump in. My commodities trading background is kicking in. Tariffs are an opportunity. Any government, particularly in times like this, Absolutely. Let me just jump in that the commodities you know my commodities trading background is kicking in. Tariffs are an opportunity. Any government intervention is an opportunity.

Speaker 3:

Those tiny little orange bars mean that we barely have enough each year. You sometimes go down to six weeks supply of corn or beans. You sometimes go down to a four month versus six month supply globally of wheat. There aren't enough food commodities if you, if you stop growing them and you can't stop buying them.

Speaker 3:

All of the soybeans planted in the world, 90 something percent of them get sold. So if the US is exporting whatever they're exporting 40 percent of the exportable soybeans China can slap a tariff and be mad, and this happened before. So US farmers see price pressure. You see the soybeans go down because China's not buying from us, because there's a tariff. Guess what? Brazil runs out of soybeans. Everybody else selling soybeans runs out. You need everybody's food. Every supplier and exporter of food that food is needed. You'll just buy it last. So when a tariff gets slapped on which is what happened last time soybeans were a buying opportunity, they went down towards their cost of production. The people who were smart enough to buy that, knowing those soybeans are going to get bought because they need them, the world needs them they did well and so remember any government intervention is an opportunity in markets.

Speaker 2:

Boom. And Sal, that was beautiful. You put a nice ball on it. I don't want to ruin it, but I just want to say, christian, I just read your question. That performance that you see on TIL is related to a one-time distribution. Give us a call, contact us, I'll tell you about that. That wasn't actually the NAV. There was a distribution paid, okay. So that's why you see that big number and you'll see that on the chart too if you go back a couple of years, that distribution in December. But sorry to ruin that beautiful bow you put on the whole thing, sal, I just want to address Christian Michael, can you put a better bow on it now?

Speaker 1:

Well, the best bow I can say is thank you everybody for attending the webinar. Appreciate those that are here. Hopefully you enjoyed it. I will have a replay of this, once edited, probably next week, on the Lead Lag Report YouTube channel. And again, for those that want to see credits, you'll get an email from me in the next hour and a half two hours with whatever details are needed for me to submit that. Thank you, jake, thank you Sal and thank you everybody for attending.

Speaker 2:

Thanks Michael, thanks Michael.

Speaker 1:

Cheers.

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Michael A. Gayed, CFA

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