Asset Trip with Jake Hanley: Agricultural Commodities Are Booming, Here's What You Should Know
An Investing Journey with Jake Hanley
Published Jun 9, 2022•Updated Aug 30, 2022
So for our readers who are unfamiliar with what Teucrium offers, can you talk a little bit about that as well as what you do there?
Teucrium offers a family of agricultural ETFs. So we have four single-commodity funds: corn (CORN), wheat (WEAT), soybeans (SOYB), and sugar (CANE). Any investors looking for single commodity exposure can invest in those funds.
Then we have two diversified funds. The first one is TAGS, and that is a fund of funds. So TAGS owns all the individual commodity ETFs, equal weight, passively managed. And then just last week, we launched TILL, which also invests in corn, wheat, soybeans, and sugar. We're playing into our strengths here in the markets that we know.
But [TILL] has an active overlay. So portfolio managers have discretion in choosing security contracts and which futures contracts we want to own. Having that discretion we believe will help the performance of the fund over time. Long-term allocators might be interested in having that active overlay. Also TILL really importantly does not come with a K-1. All of our other funds are structured as '33 Act products [filed under the Securities Act of 1933], which we can get into the esoterics of registrations and tax laws. But basically, all you need to know is that '33 Act funds issue K-1s. There are brokerage platforms out there that don't really like when their clients get K-1s, some investors don't like getting K-1s, and so TILL is a no K-1 option.
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What sets Teucrium apart from other commodities-based ETF products?
Teucrium was founded by a gentleman named Sal Gilbertie, and I'll give you a little insight into Sal. He was an energy trader. When he was doing that, he saw that commodities-based ETFs were starting to take off. It was, you know, the early aughts, and single-commodity energy ETFs hit the market. Sal was looking at the structure of those products, and he thought he could build a better mouse trap.
What he did was take the idea of giving investors exposure to futures markets through an exchange-traded fund, but instead of doing what some of these funds were doing at that time, which was owning 100% of the portfolio in the front futures contract, Sal decided to diversify the holdings across the curve. So if you think about futures, they have expiration dates, just like options do. If you hold 100% in the front-month contract in a market like energy, that means you have to roll 100% of the portfolio 12 times a year. So in the corn and wheat markets, and soybeans and sugar, Sal said, no, we're not gonna do that. We're gonna diversify.
So none of our funds ever hold the front-month contract. We own the second to expire, (the second-month contract), the third to expire, and then an anchor contract. What that does effectively is it helps mitigate the negative impacts of contango, that idea where the further you go out in time, the more expensive contracts are. So as you're selling a near-term contract and buying a backdated contract, you're selling low and you're buying high, right? And you do that time and time again, it naturally eats away at the fund's asset level. So by spreading across the curve, we now only roll approximately a third of the portfolio five times a year.
The fact of the matter is eventually no matter what you pick to store your wealth in, you have to buy food and energy. So commodities are the world's ultimate reserve currency.
When it comes to your diversified funds, what are the key differences between TILL versus TAGS?
So TILL versus TAGS, it's really interesting because they're very similar products. And as we were starting to brainstorm our next product and where we wanted to go, no K-1 [form] was really important to us, because it was really important to our advisors. We have been made aware that even some brokerage platforms don't allow K-1 products in certain types of accounts, like IRAs. We wanted to make sure that investors who had money with those institutions had a solution that they could invest in. So number one, anyone who doesn't want a K-1 but still wants exposure to agriculture investments, consider TILL.
The other thing that I didn't realize was such a big deal is [active management]. A big broker-dealer called when TILL launched and was very excited because of the active management. Their organization is very concerned about that contango idea, that negative roll yield of having to sell low and buy high for someone who wants a longer term allocation. And so they really like the structure and the idea that we have an active management overlay to help select those contracts.
So those are two differentiating factors. The active overlay will result in a different risk and a different performance for TILL versus TAGS. They will be similar, same markets, but that active overlay just means their returns will be different. TAGS is for anybody who needs or feels more comfortable with a 10-year track record. TAGS has been around for 10 years, it issues the K-1, and it's completely passive. It's gonna do what the markets do. But again, it holds all four of the single commodity funds equal weight. And so it has exposure to 12 different futures contracts through those four markets.
Are there any other ETFs out there like TILL that offer the active management overlay and the no K-1?
We were very selective in narrowing the market exposure. A lot of the feedback we got is that many of the commodities investing strategies that are actively managed are too broad in their diversification. One of the nice things about having single-commodity ETFs is that high concentration allows for extra volatility, right? So there's an opportunity for a portfolio manager to tactically drive alpha by concentrating in corn or wheat, which has had a really explosive performance recently.
But now you say, I don't necessarily know if I want to pick soybeans over corn. I might be newer to agriculture, but I know the complex is doing well, but should I be in wheat? Well, a diversified structure makes sense. But if you get too diversified, if you're gonna have 1% or 2% in some markets—I'll just mention hogs or live cattle—does that extra diversification really add anything to that strategy? By keeping things relatively concentrated in four markets, we think that has the opportunity to deliver more volatility.
Do you find that the investors who are interested in your single-commodity ETFs tend to be more active, more experienced investors? Or do you also get some beginner commodities investors?
So part of my job has been to educate investors on the merits of incorporating commodities and agriculture into your portfolio. When institutional investors and financial advisors are building strategic allocation portfolios, that traditionally might have been 60/40 stocks/bonds, they're incorporating more alternative assets these days. A lot of those folks, by the way, it's still early stages to get them to consider commodities. It's been a lot easier over the last couple years with what we've seen in commodities. But a lot of folks are coming to realize that many commodities strategies are overweight in energies. So for a strategic allocator that wants to have broad diversification, it's made sense for them to allocate into and incorporate corn, wheat, soybeans, or TAGS/TILL into that strategic portfolio.
We do get some tactical financial advisors and investors, folks who are watching the charts and wanna be in and out in three weeks, or swing traders or position traders, mostly in the single commodity space. I think the single commodity funds definitely hold themselves to be more of a trading product. Or I'll put it this way, folks who are interested in shorter-term trades are more likely to consider our single commodity strategies.
Really important though: Our funds do not hold spot. Spot being the front-month contract. If you turn on CNBC, you turn on Bloomberg TV, whatever you're watching, they're quoting the front-month contract. So if somebody on TV says, 'Hey, corn is up 2% today,' they're talking about the front-month futures contract. Well, if you pull up in your brokerage account and the corn ETFs only have 1.2% today, that's because we don't own the front-month. We're diversified. So it does dampen the volatility a little bit, but it works the same way going the other way. If the front-month contract is down, the corn ETF will likely be down, but not down quite as much. Historically, diversification means we have lower volatility.
Can you speak a little bit more to how your ETFs, and also just more broadly commodities ETFs, perform during times of crisis? So a looming recession, or a high inflation environment...some of the economic factors that investors are worried about right now?
Inflation has been a big driver of interest to our funds and commodity spaces in general. We did a study where we found that in 10 out of the last 11 stock market corrections (a stock market correction being 10% or more) the grains index has outperformed the S&P 500. Right. That goes back to the COVID crisis in 2020. So that's not including the current correction we're in because we're still in that correction. But if you pull up the price of wheat and you look at where the S&P is, very soon, we should be able to say 11 out of 12 times grains have outperformed stocks.
And the reasons are pretty simple. Grains trade based on their fundamentals, and their fundamentals have everything to do with the supply and demand of wheat, corn, soybeans, which relies heavily on weather, and very little to do with the price earnings ratio of large-cap stocks. So I say kind of tongue in cheek, sometimes the weather doesn't care about your PE ratio. If it stops raining and there's a drought in the Southern Plains, guess what? That's bullish for wheat prices, regardless of where stocks are trading.
We saw that during the lockdowns and the early stages of the COVID crisis. Wheat prices held up very, very well, and the simple reason there is that everybody needs to eat. There was some concern that, you know, the cruise lines weren't gonna be buying a ton of flour to make food and pasta for trips, and people aren't gonna be eating out at Italian restaurants anymore. Well, I don't know what it was like in Oregon, but you couldn't find wheat or rice at Costco.
Oh yeah! Here too. Everyone was baking bread.
Everybody was baking at home! So the demand is there for food. Unfortunately, we have the problem that we have right now with food prices really exacerbated by the conflict in Russia and Ukraine. But again, we see a situation where the fundamentals that underlie the food markets are not really concerned about the S&P 500.
So for investors who are looking to gain more exposure to agriculture, they have these agricultural ETFs as an option, they have stocks, they have farmland REITs, they can even invest directly in farmland. How would you compare those various options?
For investors, it makes sense to remain diversified and to just consider where the alpha of your investment is coming from. And then use beta. Pay attention because a lot of times something like farmland is gonna be tied closely to the price of the commodities that are grown on the farmland. So even though you may feel diversified because you own some farmland, you own direct exposure to corn, wheat, and soybeans. Maybe you own some fertilizer stocks in your portfolio, just remember to draw that line backwards to say, 'Okay, where are all those things connected?' And where is my exposure truly coming from?
Great advice. Let's switch gears a little bit and talk about your own investing journey. First off, how'd you get started working within agricultural commodities and ETFs?
So I'm a history guy. I literally went to college to become a history teacher. And when I was in school, a close friend of mine whose dad was a big wig at Citibank, we would do what college kids do, right? We stayed up late drinking and trying to solve the world's problems. And he was such an idiot because, I would say, 'dude, there are three branches of government.' He goes, 'no, there's four branches of government.' I'm like, 'dude, I'm poli sci and history. You're just a business major.' <laugh> 'OK, what's the fourth branch of government?' And he says, 'the Federal Reserve.' And I said, 'the what?'
So turns out, as you know, the Federal Reserve is not a branch of government. <Laugh> But that for me, all of my papers in college from then on were on that 'follow the money track.' I ended up writing a thesis on central banking in the US. I became enthralled with markets and banking and just wanted to figure out how the world works. Long story short, I got involved in finance [and] ended up working at Merrill.
[Then working at Teucrium] I fell in love with commodities. I will tell you, I find it very difficult to fundamentally pick stocks. I've obtained the CMT designation because supply and demand makes sense to me. I can look at charts and I can tell you, 'okay, high volume, prices going up.' What are the oscillators telling you, right? That stuff makes sense to me. Fundamentals in stocks, I have a tough time with. My brain doesn't work that way. Fundamentals in commodities are so much easier. It's just supply and demand, just like it is for a common stock. You know, if you're just looking at shares outstanding and the flow and the demand, it's the same thing for commodities. So commodity markets just make more sense to me than stock picking.
Do you remember what your first investment was and how old you were?
Probably a Pokemon card. <laugh> How old would I have been? Eight or nine, I guess. I remember my friend's little brother getting a penny stuck in his nose, having to go to the hospital and playing Pokemon cards. And so I think I might have traded a penny for a Pokemon card.
You mentioned that you invest in crypto. Could you talk a little bit about how you got started and what you enjoy about crypto investing?
I do have to be careful with that because we do have an active filing in this space. So not mentioning any particular currencies, just in general, we'll say that the idea of transacting instantaneously, anywhere in the world with zero friction, on a peer-reviewed ledger, that's completely transparent. It's safe, it's secure. That made so much sense to me. That's the future. It's a no-brainer. I mean, the folks that designed these things are polymaths, you know. Isaac Newton came up with the gold standard and for many of the same reasons, cryptocurrencies certainly have a future. The blind spot there is you need the internet connection, and you also need governments to allow it.
Now I will tell you how to store your wealth. When you want to save your money and retain its value, you want to have something that you can go back to trade for the things you need. What are the things you're gonna need? Food. It's like, eventually you trade your gold for wheat. And the world is finding that out right now as they look at the Russian ruble appreciate tremendously. People are going, 'Wait a second. Don't we have all these sanctions on Russia? What's going on here?' It's like, guys, what don't you get?
Russia has all the wheat now. Not all the wheat, but they're the world's largest exporter of wheat. They are a massive exporter of energy. And what do people need when we talk about wanting to have a safe place to store our wealth? The US dollar loses about 3.8% on average every year, going back to 1972, when we got off the gold standard. So you're losing almost 4% a year. Bitcoin, pick your time period and tell me if you made money or lost money, I don't care. The fact of the matter is eventually no matter what you pick to store your wealth in, you have to buy food and energy. So commodities are the world's ultimate reserve currency. That's why the ruble is appreciating right now.
To wrap up, I'm going to put you on the spot a little. Can you name your biggest investing win and biggest investing loss?
My first date with my now wife. That dinner was very cheap compared to the rest of our life together. So that was my biggest investment win.
My biggest investment loss was the loss of opportunity. I probably sold some crypto way too early.
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