Saturday, October 27, 2012

CORN: Clear Price Patterns In Commodity

Issuer of CORN ETF says investors can take advantage of seasonal price declines at peak harvest time in Northern Hemisphere.

More than 18 months ago, Teucrium Trading issued its first agricultural exchange-traded fund, the Teucrium Corn Fund (NYSEArca: CORN). This past September, Teucrium, which draws its name from a classification of Mediterranean and Western Asian herbs and shrubs, announced three new single-commodity ETFs: the Teucrium Wheat Fund (NYSEArca: WEAT); the Teucrium Soybean Fund (NYSEArca: SOYB); and the Teucrium Sugar Fund (NYSEArca: CANE). Hard Assets Investor Managing Editor Drew Voros caught up with Teucrium Co-Founder and President Sal Gilbertie to discuss those ETFs and a Teucrium report that outlines seasonal prices declines for corn during peak harvest time.

Hard Assets Investor: You recently released a study that corn’s seasonal price decline is often associated with peak harvest time. Can you explain a little more?

Sal Gilbertie: The piece, "Harvest and the Seasonal Effect," explains the effects of the corn and soybean harvest — which occurs within a two- to three-month period every year in the Northern Hemisphere. Since the bulk of the world's corn supplies are grown in the Northern Hemisphere, there is a clear seasonal pattern that traders and asset allocators can often use to their advantage. Remember, with these crops, there is only one growing cycle, so all of the supplies for the entire year are grown and harvested at the same time. This massive influx of supplies on the world markets does two things: First, it often results in an absolute price low being set during harvest for corn that will be used the following year. Second — and this is very important for asset allocators — the abundance of supply often causes a negative divergence below the year's average price for both corn and soybeans.

HAI: How can investors take advantage of this pattern?

Gilbertie: Logic would dictate to acquire these two important agricultural commodities during the fourth quarter of the year. Should the absolute price lows also happen to be set in the fourth quarter — as is often, but not always the case — then all the better. Of course, a trader or opportunistic investor would be primarily focused on the absolute low price patterns, but both of these seasonals can be used to an investor's advantage in the fourth quarter of the year.

HAI: You’ve seen the same pattern with soybeans, right? Why the similarity?

Gilbertie: Soybeans and corn compete for acreage in the Northern Hemisphere, so there is an abundance of supply coming to market for both at the same time. The difference is that while both corn and beans share the seasonal negative divergence pattern, soybeans do not exhibit as strong an absolute price-bottoming pattern. That’s because there are vast amounts of soybeans also grown in the Southern Hemisphere.

HAI: If a December pattern of absolute lows is consistent, wouldn’t investors profit more through shorting corn?

Gilbertie: It is much more difficult to find a topping pattern in corn than a bottoming pattern. But it should be noted that investors could easily short corn by either shorting the shares of the ETP themselves or through the use of options, which are actively traded in the Teucrium CORN Fund as well.

HAI: Why should a diversified investor have agricultural assets in his or her portfolio?

Gilbertie: There are so many reasons, it's hard to list them. But there are three things that all investors should remember: First, agricultural commodities have less of a correlation to the overall markets than many other investments. In fact, this past August, corn was up almost 13 percent versus an overall decline in the S&P 500 of around -5.288 percent.

Second, agricultural commodities are now becoming so widely ingrained in every aspect of the global economy that the inherent supply uncertainties that come with farming make potential shortages of these commodities that much more of a reality in a world driven by an almost insatiable demand for everything, especially food and fuel.

Third — and perhaps most basic and easily understandable of all — is that there are limits to how much arable land and water can be found on the planet to produce enough for an ever-expanding global population. The only thing that will limit the Earth's human population is the availability of food and water, which an investment in the agricultural sector represents.

HAI: Are rising correlations here to stay?

Gilbertie: I just saw a study that said we are in the longest-ever period of positive correlation of commodities with stocks. I don't know if it’s here to stay, but I do know that the agricultural sector is one of the last to succumb to the rising correlation issue. Logic would tell us that as ags become increasingly used for industrial purposes, their correlations will rise a bit, but the uncertainty of supply issue that comes with the growing of crops should tend to offset positive correlations to other investments over time. Generally, we’ve seen that over a period of three to seven years, there seem to be major supply issues of one sort or another for any one of the “big four" ags: corn, soybeans, wheat and sugar.

HAI: Why should investors expect anything but the rate of inflation from their ag investments?

Gilbertie: As we've stated, a rising global population, coupled with a finite amount of arable land and water, plus production uncertainties faced by farmers, on an annual basis represents a recipe for supply imbalances of epic scale. Don't forget, there are no stockpiles of the big four ags that can withstand a huge crop failure of a multiyear supply imbalance. These are perishable goods that can't be stockpiled and the demand can't be stopped — people and animals have to eat and use the fuel and other goods that use these crops as a feedstock.

HAI: Should investors be worried about position limits or liquidity?

Gilbertie: No, not at this time. It is generally accepted in the trade due to specific Commodity Futures Trading Commission statements that position limit rules will be delayed into 2012 or 2013.

HAI: What’s the bigger driver of U.S. corn prices, China or the ethanol industry?

Gilbertie: Both are important. It's generally known what ethanol demand for corn will be now and into the future. Those projections are based upon regulatory guidelines that are public and easily analyzed. Chinese demand, on the other hand, is a true wild card. Both short-term Chinese purchases and the implications of large segments of the Chinese population entering the middle class — where they will use all agricultural products more aggressively — loom large on the future of all of the agricultural markets.

HAI: Can you describe the growth of the CORN ETF in terms of assets under management (AUM) over the past few years?

Gilbertie: The CORN fund is less than a year and a half old and it has had spectacular growth. It had $139 million in AUM on its one-year anniversary. Since then, corn prices have dropped and investor interest in all asset classes has waned, but the fund is clearly a success. Over the next year or two, we fully expect our soybean fund to follow CORN's growth, with sugar and then wheat doing the same, just not to the same degree of AUM due simply to the size of the underlying markets.

HAI: Is there a typical buyer of the CORN ETF? Hedge funds, for instance?

Gilbertie: Actually, registered investment advisors seem to be leading the way, but more and more, investors of all types, including mutual funds and hedge funds, are looking to get direct futures exposure without the use of a futures account, which basically points them toward the Teucrium family of funds.

HAI: I presume the success of CORN has led to your new offerings. Can talk about your new ag ETFs?

Gilbertie: These funds are just about a month old now. As I stated earlier, we expect similar success with these funds as we've had in CORN. We believe Teucrium has launched a valuable fund family for investors, since most of the investment world is looking for commodity exposure through intelligently designed exchange-traded products (ETP) that don't require the sophistication of knowledge futures trading. We've intentionally designed transparent, highly liquid products through which investors can gain commodity exposure but not increase the credit risk of their portfolios as they might with an exchange-traded note (ETN).

HAI: Why do you think a soybean ETF had not yet been created, since it is one of the major agricultures? Was the lack of one a motivator for Teucrium to launch one?

The lack of a soybean exchange-traded product was for the same reasons as the lack of a CORN ETP before Teucrium came along. The expertise needed to design and implement a single-commodity agricultural ETP product is very difficult to find, and those holding that expertise are gainfully and happily employed elsewhere. In addition, the large financial institutions that hold such expertise in-house make better use of it internally through proprietary trading activities.

The bottom line is that a single-commodity ETP in the ag space is never going to be a multibillion-dollar product, so the big banks simply won't dedicate resources that have a lower return than developing a big, multicommodity index that can attract billions or tens of billions in AUM. That's a great source of revenue for the banks, but in Teucrium's view, it doesn't necessarily serve the needs of investors and allocators looking to overweight or underweight certain commodities in their portfolios.

The advisors with whom we speak almost always express the opinion that ags and energies generally need to be overweight just because of their pervasiveness in the economy, and the big-four ags, along with crude oil and natural gas, are easy for investors to get information on and act accordingly.

No comments:

Post a Comment