Analysis: DE BOXD

We recently had the chance to chat with Sal Gilbertie, the CEO of Teucrium Trading, the company behind exchange-traded funds that focus on agricultural commodities. Similar to what we did with the Chieh Huang, the CEO of Boxed (BOXD) , we're providing AAP members our exclusive and full conversation with Gilbertie. We think you'll find it insightful.

We discussed the factors that have historically influenced the pricing of agricultural commodities and also the recent spike that has been tied to the Russia-Ukraine war. Gilbertie also explained that in response to those factors as well as others unfolding in the ag commodity space farmers are likely to upgrade to precision ag equipment.

In our view, Gilbertie's perspective solidifies our upbeat view on Deere (DE) . However, according to Gilbertie, while the market is focused on wheat, the potentially greater threat to the food industry is a looming shortage in soybeans, a key ingredient in animal protein costs.

KATHERINE ROSS: Oil, and we have been in focus following Russia's invasion of Ukraine. The commodities have been directly reacting to the headlines out of Eastern Europe as the situation over there develops. Joining me today are Action Alerts Plus co-portfolio manager, Chris Versace, and President of Teucrium trading, Sal Gilbertie. First Sal, can you outline which commodities are being impacted by the current situation in Russia and in Ukraine? And what that means for investors?

SAL GILBERTIE: Sure. The big commodities affected are the energy and the grains. And fertilizer, as well. Russia, that's related to energy. Russia's an enormous exporter of oil and natural gas, as you've heard in the headlines. They also account for most of the world's wheat. Between Russia and Ukraine, they account for 30% of the exported wheat available. Ukraine accounts for, I think, 16% of the exported corn available.

None of those are going to be available. That has probably the biggest impact on those markets than anything else. And taking barrels of oil, natural gas, corn, and wheat off the market, and sun seeds, sunflower seeds, sunflower oil. It's an enormous impact across the world.

CHRIS VERSACE: Now, Sal, when we see that start to happen, there's always a knee jerk reaction in terms of pricing. How, based on the data that you're looking at, how baked in is the removal of those ags from the global stage into the current prices? In other words, do we have more to go?

SAL GILBERTIE: I think we do. And the reason is, it's a twofold bake. One is, remember, it's winter there. So the ags that are off the market, the export ags, were already harvested last autumn. And they are sitting in storage. And so the wheat and corn and some seed products that were not yet shipped, that were harvested last year, they're still there. They haven't disappeared, they're still in global inventories. But no one can get at them. So that, I think, is what's been priced in right now.

What still has to be priced in, and won't be able to be priced in until probably mid-summer, is the new planting this year. So wheat is a winter crop. It's planted in the autumn. Their winter wheat crop is planted in the autumn. It's asleep in the fields right now. It's going to grow, whether they're fighting or not. That wheat is all going to grow and it will be there to be harvested. As soon as it warms up, that wheat'll grow. So there's a question in the wheat markets, will the wheat be harvested and will it be exported? Those questions are not priced in yet.

In terms of corn and sunflowers, those are not winter crops, they're spring crops, meaning you have to plant them in the spring. In about mid or April, they start planting very actively over there. And will they plant? Will the corn and in the sun seed crops ever be planted? And if they're not, that's going to have a permanent effect on inventories. Whereas, the wheat inventories are still on the books. They're still reflected in global statistics. The corn inventories, a year from now, if they don't get planted, won't be there. They'll be gone. And the market hasn't priced either of those two things in yet.

CHRIS VERSACE: We're approaching the spring planting season here in the States, correct? Now, as we were to compare, contrast a little bit, what does that mean for farmers, and when will we get a sense as to how abundant the US forecasted crops might be relative to expectations? And how that might impact the world stage.

SAL GILBERTIE: I think that the United States will plant, farmers are going to rip up their flower beds and plant in the cracks of their sidewalks. You're going to see record crops planted and harvested, if the weather cooperates, in the United States. This is a tremendous benefit to US farmers, it's a tremendous benefit to South American farmers. And Australian farmers had their best wheat crop ever last year, and they're waiting to sell to the world. So all of those places are going to benefit a great deal from this.

KATHERINE ROSS: So let's focus this on the consumer. What kind of impact could that have? Are we going to see pasta prices maybe not increase by the summer, but by maybe fall could we see those increase? And sunflower butter, for example, as well?

SAL GILBERTIE: I think, yes, you will see all of that, because of the disruptions in grain production. I think the consumers are going to see an immediate impact, because most of the price of, say, your box of corn flakes, is actually energy and packaging, plastic and paper, and transportation. And with the high energy costs, that's going to be affected. So consumers are going to see a sustained increase in prices. The immediate one is because of logistics and energy prices going up, and shortages. And then there's going to be a prolonged time when the trickle effect of the high price of the actually input of the grains is going to be affected, as well.

CHRIS VERSACE: Now, Sal, is there been any point in time where we've seen something comparable to this? And if we have, how bad did pricing get? Any sense?

SAL GILBERTIE: Two times come to mind. I was not actively trading, but I was alive in 1972 during the Great Russian grain robbery, they called it. And that's when Russia, they didn't have a reporting system of how much grains were sold out in the United States every day, and Russia came in and bought it all, because they knew they had a bad crop. So I think this, in terms of the impact on the globe, is probably like that. But in reverse, the United States supply was removed from the global stage, versus this time, the Russian supplies were removed.

And then the drought of 2006 and 7 in Australia, actually caused wheat prices to peak in 2008. Higher than, I believe, they peaked even so far here today on certain exchanges like Minneapolis, or this week. And that was simply because Australia had a back to back drought. And again, just because it doesn't rain in Australia or the Dakotas, no one in New York City skips their morning bagel. People keep eating no matter what. When you have a supply disruption in grains, this is why you see price spikes. The demand is quite inelastic. And I've not seen anything comparable. I will say that we haven't yet hit the record wheat prices in some places that we saw in 2007, 2008.

KATHERINE ROSS: And with that, the volatility that we're seeing in wheat, too. I mean, is that a concern for you at all, Sal?

SAL GILBERTIE: You know, it is in terms of the investors that probably aren't experienced with volatile markets. Or some are going to have big gains and some are going to have big, big losses. Our products provide people with the tool. And they will move with the volatility of the futures they hold. So even though we issue ETFs, and it's traded on the New York Stock Exchange, it will be no less volatile than if you were trading futures on the Chicago exchanges, or elsewhere. So that's what people have to keep in mind.

The volatility is tough for planners. It's tough for farmers to lock things in. But with volatility is opportunity, so, and it'll go away. It'll decline eventually.

CHRIS VERSACE: And Sal, when we think about farmers. These are the guys who are driving the fields, planting the crops, packaging the crops, and all that. What do these record prices mean or near-record prices mean for farmers?

SAL GILBERTIE: It's a good thing for farmers. They'll be buying new equipment, they'll be buying new land. They'll be paying down any debt that they may have, and positioning themselves for strength. Make no mistake, farmers are some of the most resilient people around. And agriculture trades, its natural state is trading at its cost of production, because farmers around the world are subsidized so that we don't have food shortages. And so it may take longer. It may take more than a year or two to replenish the supplies that we've lost.

But over time, everything will stabilize, and we will end up with more agricultural production than we've ever had before. Because these high prices are going to bring more land. It's bad for the Brazilian rainforest, let's say. People are going to cut down trees to plant crops, because we need the crops. And you're going to see everybody who can expand land, you're going to see equatorial Africa, South America, anybody that's got land that can be expanded is going to expand it and plant their crops. And two or three years from now, we're going to see surplus food, if the weather cooperates. There's no question about it.

CHRIS VERSACE: Now Sal, that's kind of the flip of what we've seen with coffee, isn't it? Where several years ago the price of coffee plummeted, and people were like burning down coffee trees. And now, coffee prices are soaring.

SAL GILBERTIE: Correct. Coffee's a little different, though. Remember, with grains, it's a once a year crop, sometimes even twice a year, depending if you have a long growing season like in Brazil. But coffee trees, it's a multi-year process. Coffee tree is almost like mining. Where it's not a year or two to bring the production up, it's many, many, many years. So you have deeper, more difficult cycles from which to recover in coffee, than say, grains.

CHRIS VERSACE: Got it. Got it. And just one other question on the fertilizer market. You touched on that with Russia and Ukraine, as well. We have seen shortages and fertilizer prices are moving higher. One of the thoughts that I had is that this could foster an upgrade cycle for ag equipment towards precision ag, to drive productivity and yield, while reducing fertilizer demand. What do you think about that?

SAL GILBERTIE: No doubt about it. I think you're absolutely correct. I think oil prices are getting all the headlines and it's the best thing that's ever happened to the green energy sector. So there's no question. Higher prices make people more efficient. And in the end, higher prices make for lower prices on the other side. Even lower lows sometimes than you saw. Interesting point though.

The grains, what's highly correlated to grains is grain price with its cost of production. And the cost of production is skyrocketing right now. So the floor on grains, which was pretty well defined if you look at a past history chart, is going to be substantially higher, until all these things that are happening, especially in the energy market, shake out. So you could see a floor on grain prices that's substantially higher than we've been accustomed to the last decade or so.

KATHERINE ROSS: I want to ask you, evergreen wise, what does it mean when you suspend creations

and wheat?

SAL GILBERTIE: That's a good question. You have to suspend creations when you run out of shares. And the ETF rules have changed. And we just got approved our new prospectus, and we now have an infinite number of shares. The new ETF rules say that as the new prospectuses take effect this year for everyone, not just Teukrium's ETFs, you don't have a definite number of shares anymore. A limited number of shares that you have to reapply for. We have an infinite number of shares, you just issued them as needed.

I will note, that even though we weren't making creations for those three days, I guess it was, it didn't affect market liquidity. It didn't affect bid ask spreads when we've already looked at studies before and after the suspension that creates. And it had no material effect on the trading or the value. I will note that the price of the wheat fund did trade substantially above its NAV several times. But it did that since Russia invaded, and it did that because the futures prices that we hold were lock limit. And the NAV price is calculated on the last futures price. And the futures prices were artificially suppressed, because the futures exchanges put price limits on them.

But the wheat fund kept trading. And underneath that, the value of the futures were trading as if there were no limits. So while it looked like the wheat fund was out of line with its NAV, what was really out of line was the NAV due to the rules on the futures exchanges. The wheat fund actually, was constantly trading at the fair value of what the market perceived the wheat futures were at the time. So it was really efficient. It's like the poster child for the efficiency of the ETF structure. We're quite proud of it, actually.

CHRIS VERSACE: All right, well Sal, let's move back to thinking about the impact of the consumers. We've got these rising ag prices. How long until we see the flow through to packaged goods, and in other words, reflected in say the data we might collect in the consumer price index?

SAL GILBERTIE: That's going to vary by product. I mean, it depends on if end users were bought, and I don't think they were. So I think a lot of your, just take wheat. Your flour and your flour based products are probably going to see price increases. And because the floor, we believe, on agriculture prices is going to be a little bit higher, you're probably going to see some inflation come in, and then you're not going to see a return to the prices we're used to say, right now, of buying a five pound bag of flour. You know, you're not going to see those prices for quite some time. I suspect, for a few years.

CHRIS VERSACE: OK and you guys have, not only at Teukrium, wheat, but you also have products for soybeans, corn, sugar and others. Is wheat the most widely used commodity across the consumer channel? Or is it one of the other ones, whether it's corn or soybeans?

SAL GILBERTIE: It's corn. Definitely corn. Corn is in everything. The reason, there's a reason they call it King corn, and made that movie titled King corn. Wheat, it should be noted, is the number one for human consumption. So the more of the wheat crop, as a percentage, is consumed directly by humans, than say, the soybean crop. And then say, the corn crop, which is really minuscule.

If you took a pie chart and took direct human consumption of just corn on the cob, corn niblets and corn grits and whatever it is, it doesn't even fit in the slice. The number one use for corn is to feed animals, globally. The number to use is to make ethanol. And the number three use is for starch. You make, starch holds paper together. So if you use a sheet of paper, you're probably using corn. Corn is everywhere. Corn is the number one most distributed product, no doubt about it.

CHRIS VERSACE: OK. And are we seeing any issues? You mentioned earlier that Ukraine is, I think, mid-teens in terms of corn exports. Are we seeing similar spikes in corn prices that we're seeing in wheat, as well?

SAL GILBERTIE: No. I mean, we saw a price go up, we saw the price response go up. And it's interesting to us. And we think part of the reason wheat went up so much, was there was a short squeeze in wheat. Meaning, a lot of people were short wheat futures. And the reason is, people were short, people who are trading spreads, were trading short wheat against long corn and long soybeans.

The agricultural professionals. That's how they were positioned just before the war broke out. Because wheat, while for the last two years before the war, we actually consumed in the world globally more wheat than we produce. So the wheat balance sheet is shrinking. There's still plenty of wheat. We had a six month global supply, and now we have, or US supplies, think US. We had a six month global US supply. We're always have that in wheat. And now we're down to around, I think, four months. There's still plenty of wheat. We're not going to run out of wheat.

However, the supplies of corn are shrinking, and the supplies of soybeans are really shrinking. You've had a bad drought in Brazil and in Argentina. And the predictions for the amount of soybeans, excess soybeans as a percentage of what we're used to, are going to be much lower than corn, which is going to be lower than wheat. And so that the stocks to use ratio it's a complicated industry term.

But wheat actually had the most supplies by that ratio. So a lot of people were short. They all got squeezed out. Now, I think as the market settle and as the months go on, I think people are going to focus more on corn, and even more on soybeans. The Ukraine corn crop in the spring is in question, so corn will be in the headlines. But over time, it's soybeans that are going to have the tightest balance sheet.

CHRIS VERSACE: What are some of the end markets for that, Sal, because when you discussed wheat, you discussed corn. But from a consumer perspective, where are we likely to see the pain in soybeans?

SAL GILBERTIE: Soybeans, it goes into animal feed, that's the number one use. And that's going to raise the price of all animal production. Soybeans, and what we've seen, and this is because of the ukraines loss of their sun seed, soybean oil is a cooking oil. And so is palm oil, and so is sunflower oil, and so as cottonseed oil. They are all rising because of the loss of Ukraine sun seed exports.

So Ukraine is 80% of Global sun seed exports. That's enormous. It's had an immediate impact. That's what's going to affect most families around the world, especially the poorest families and the poorest countries, where the biggest percentage of their budget is their food budget. And some countries, I've seen studies where the biggest percentage of their food budget is actually they're cooking oil. It's a big problem for a lot of people.

KATHERINE ROSS: So I want to switch this conversation a little bit, and ask you, Sal, what is the difference, especially from an investing angle. Because with all these headlines around commodities, there's going to be the retail investor that jumps into said commodities. So what is the difference between metal and agriculture commodities from an investing angle?

SAL GILBERTIE: Metals and ags. Well, metals, so the production is different. Agriculture can correct itself when there's a shortage in a year or two, as we've said, because farmers will just plant more as the price goes up. If you need more of a metal, someone has to expand a mine or dig a new mine. That can take decades. And so metals, probably the jump we've seen is going to stay. I think the green metals with the increase, you're going to see green energy.

There's going to be an immense interest in it, because oil prices are so high. So green energy probably doesn't need any more government help. Money is going to pour into it. It's not a social movement anymore, it's an economic movement. Green energy is going to increase the demand for the green metals. And you can look them up, whatever they are. And that, this isn't copper, where if there's a building boom, we're using a lot of copper. This is green metals that go into cell phones and electric cars and electric generators and all alternative energy sources. Solar panels.

Those are what's going to have a big problem. I think that their replacement cost and the time to replace them is far different than agriculture. So the agriculture is going to have a shorter term, one to three years, and you could see what's happening. And they'll go back to their cost of production. And these green metals, I don't know how long it'll take.

CHRIS VERSACE: Now, Sal, just building on that. When we take a look at oil, for example, that's obviously moving higher, we can try and tap other countries for production. We can see rigs come back online. But when we see some of the things that you're talking about for the AG commodities, you can't necessarily plant that much more land. So how do we kind of catch up in terms of production relative to demand?

SAL GILBERTIE: We need good weather. And we've done genetic engineering, as you said, precision agriculture will catch on. But we need good weather. And you have to assume good weather. We're going to assume good weather for the Brazilian sophrina crop, that's their corn crop, they call it that. Their second crop corn, it's their largest corn crop. We're going to assume they're going to have a record crop. We're going to assume we're going to have record soybean, corn crops in the United States. We do have an issue though.

Canada and the wheat belt in the US had a drought last year. Canada really didn't produce any rapeseed, which is canola oil. Canola oil comes from. They got hit on their wheat really hard. The US wheat farmers had trouble last year. And it's still dry in those same areas. So Chris, that's part of the reason for people's concern here, and why prices are showing these upward movements. Because if the weather doesn't cooperate, it is pretty hard to replenish these stocks. At least, in the next year or two.

KATHERINE ROSS: Sal, I want to end with a question that I think is underlying of everything that you've been talking about, especially when it comes to weather impacting commodities. My question for you is, how is global warming impacting commodities directly?

SAL GILBERTIE: It has, well, it is impacting them directly, because as you could see, the volatility in weather is causing a problem. So when you had too much rain in China two years ago, it literally caused such devastation that China imported a record amount of wheat last year. That's why we're tight on wheat stocks. Because China took the top off, as the industry professionals say, of the wheat inventories. Why? Because they had too much rain. Last year, we didn't have enough rain in Western Canada.

They had virtually no wheat crop and no canola crop. And Western United States had a really difficult time with their wheat crop. So the volatility of weather, which you can't predict, the drought now in Southern Brazil and in Argentina, basically took out their soybean crop. Paraguay is the world's fourth largest exporter of soybeans. They're importing soybeans this year. They had such a devastating drought. There's no way to predict what's going to happen. Volatility of weather is causing volatility and ags. That doesn't appear that it will go away.

KATHERINE ROSS: All right, we're going to end there. Sal, thank you so much for joining us today. And Chris, you asked such great questions. Thank you for joining us. Members, please continue to check out us over on

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