Looking at the current developments in U.S. agriculture, investors can broaden their diversification through commodities-related exchange traded funds to access the price moves of key agricultural products.
In the recent webcast, Beyond The Trade War(s) Opportunities in Agricultural ETFs, Sal Gilbertie, President, Chief Executive Officer, Chief Investment Officer and Founder, Teucrium, explained that grains are an essential ingredient in simple items we use each day and . For example, corn is the number one global use for animal feed. Grains and sugars are important components for ethanol production, sweetener production, starch production and polymer compounds. The end products from agricultural commodities may be found in the industrial industry, cosmetics, healthcare and wood substitutes, among others.
Looking ahead, Jake Hanley, Portfolio Manager, Teucrium, argued that population growth will further support fundamentals on the demand side, with a projected 25% increase to the world population by 2050.
A growing global middle class has also raised the demand for grains both directly and indirectly, especially in the emerging markets where they shift toward greater meat consumption, which requires high grain-based animal feed. In 2018, half the world reached middle class, and by 2030, the middle class is projected to dominate the global population.
However, Gilbertie warned that supply does not always meet this steadily rising demand, which has helped support price gains that are uncorrelated to traditional assets. During periods like 2007 to 2008, 2010 to 2011 and even more recently in the 2019-2020 period, production has fallen short of demand, contributing to steady gains in corn prices.
“Prices are now trading in levels near the cost of production even through global demand is expected to exceed production,” Gilbertie said.
Corn typically trades at its cost of production and spikes during supply shocks. For example, in the 2019, the USDA lowered production expectations due to unfavorable weather in the U.S. corn belt, which helped corn prices surge over 20%.
“Adding agricultural commodities when they are trading near their cost of production can be lucrative,” Rusty Vanneman, Chief Investment Officer of Orion, said.
Seasonal price trends could also be in the corn market’s favor. Specifically, corn has historically exhibited low prices during fall periods and enjoy a peak during the summer time.
Furthermore, with China recently agreeing to cut tariffs on U.S. imports in agreement with the phase 1 trade deal, Gilbertie pointed out that the trade impact on agriculture markets has not been fully factored in. For instance, China is expected to increase soybean imports as the country rebuilds its stocks in 2020 amid higher demand to support a regrowing swine herd that has suffered through the swine flu.
Beyond the potential for enhanced returns, Hanley argued that U.S. agricultural commodities could help better diversify an investment portfolio. The changing supply and demand dynamic has helped grains and the broader commodities asset class exhibit lower or uncorrelated returns to traditional equity exposure. Specifically, wheat has shown a low historical correlation of 0.09 with the S&P 500 over the past 20 years, corn has a 0.10 correlation to equities, sugar has a 0.08 correlation to equities and soybeans show a 0.19 correlation. A zero reading reflects perfect non-correlation while a one reading reflects perfect correlation.
As a way to gain access movements in agricultural commodities, Teucrium offers a suite of ETFs including the Teucrium Corn Fund (CORN), Teucrium Wheat Fund (NYSEArca: WEAT), Teucrium Soybean Fund (NYSEArca: SOYB), Teucrium Sugar Fund (NYSEArca: CANE) and the broader Teucrium Agricultural Fund (NYSEArca:TAGS).
Financial advisors who are interested in learning more about the agricultural markets can watch the webcast here on demand.