Issuer
Free Writing Prospectus
Filed Pursuant to Rule
433
File No.
333-248546
File No.
333-248545
File No.
333-241569
File No.
333-230623
File No.
333-254650
December 21,
2021
FWP
NOTICE
The Teucrium Commodity Trust has filed a
registration statement (including a prospectus) with the SEC for
the offering to which this communication relates. Before you
invest, you should read the prospectus in that registration
statement and other documents that the Teucrium Commodity Trust has
filed with the SEC for more complete information about the issuer
and this offering. You may get these documents for free by visiting
EDGAR on the SEC Website at www.sec.gov. Alternatively, a copy of
the prospectus for each Fund may be obtained
at https://teucrium.com/ or
by calling (802) 540-0019.
____________________________________
2022 Grains Outlook
– Time to Rebuild
Jake Hanley, Managing Director/Sr.
Portfolio Specialist
Introduction
In our 2020 Outlook we wrote that the
coming decade could possibly see the resurgence of a commodity bull
market. That thesis was put to test with the onset of the global
COVID-19 Pandemic. However, by the end of 2020 the GSCI Equally
Weighted Commodity Index was pushing through 5-year highs. Since
the breakthrough, there have only been a handful of speed bumps as
commodity prices continue to climb and have now advanced beyond
previous 10-year highs.
Chart #1
Source: Bloomberg Finance L.P. and Teucrium
Created 11/29/2021.
GSCI Equal Weight Commodity
Index
Monthly Price Chart 12/31/2009 –
11/26/2020
Past Performance is not indicative of
future results. This chart is for informational purposes and is not
indicative of an investment in any Teucrium
fund.
The rally has been robust and practically
all encompassing. Looking at the commodity futures markets, all but
eight are on the plus side of unchanged this year and the majority
are showing double digit percentage gains.1 As of this writing, both wheat and corn
are up over 20% and 30% respectively.
Last December we wrote about the potential
for the grains to make a “Big Shift” into a secular
bull market. Indeed, grain prices in 2021 built on the momentum
from 2020 and continued to rise against a backdrop of bullish
fundamentals, namely tightening supplies, and growing demand. The
“Big Shift” has happened.
Next will come a global effort to rebuild
inventories. Note however, that grain prices have the potential to
remain higher for longer for the simple reason that it will take
time to rebuild supplies.
Afterall, in agriculture there is no dial to turn to crank up
production like there is in oil. It takes time to grow crops. Therefore, it will
take time, likely multiple growing seasons, to rebuild
inventories.
Ultimately, whether grains and other
commodity prices continue to move higher is anyone’s guess.
Still, one trend remains clear: there is an increasing investor
appetite for exposure to alternative asset classes. Some investors
are looking for ways to protect against inflation; others, having
lived through periods of high stock and bond price correlations are
looking for “non-correlated” assets (i.e. investments
that tend to zig when others zag). As such, investors are
increasingly turning to Commodities in general and grains in
particular.
What follows is an examination of the grain
markets as we look ahead to 2022.
The section outline is as
follows:
I. Golden
Grain Cycle: Review of the Golden Grain
Cycle
II. Supply
and Demand: Fundamental factors we’re
watching
III. Inflation and the Dollar: Exploring the
rapid growth in the money supply and currency
valuations
IV. Grains
in Your Portfolio: Relating our analysis back to you, the
investor
V. Conclusion: Time to
Rebuild
We hope you find this information
interesting and valuable. Please do not hesitate to contact us with
questions or ideas you would like to discuss.
On behalf of all of us at Teucrium, thank
you for your continued interest in our funds.
We wish you a Merry Christmas, Happy
Holidays, and a HAPPY NEW YEAR!
I. The
Golden Grain Cycle
“Grains tend to trade at or near their
cost of production until there is a supply disruption at which
point prices historically have moved dramatically higher. Over time
as production increases and/or demand decreases, inventories are
rebuilt and prices trend back toward the cost of production once
again.”
–
Sal Gilbertie
The Golden Grain Cycle is, at its core,
cosmic. Consider that growing seasons are dictated by the tilting
of the Earth’s axis in proximity to the sun. As such, in
North America there is only one harvest per
year.
There are years when production exceeds
demand, and prices are low. Alternatively, there are years when
production lags demand, and prices are elevated. The variability of
production in the face of steady, and often growing demand, lays
the foundation for the grain market cycle. This cycle has repeated
throughout history, offering those who recognize the cycle an
opportunity for potential profit. Hence, we refer to the cycle as
the Golden Grain
Cycle.
3 Stages of The Golden
Grain Cycle
#1: Prices trade at or near the cost of
production
#2: Prices advance amid supply/demand
imbalance
#3: Supplies build due to increased
production and prices head back toward the cost of
production.
Typically, grain production exceeds demand.
The excess is held in storage as inventory to be drawn down in
years when demand exceeds production. When production exceeds
demand, market prices will gravitate toward the cost of production
effectively squeezing a farmer’s profit margins (stage 1).2 Lower profit margins can (and often do)
result in fewer acres planted. This can lead to a situation where
production may fail to keep pace with consumption in a given crop
year. Historically, when grain production has lagged consumption,
it has led to a reduction of inventories adding upward pressure on
prices (stage 2).
Historically, we have seen that higher prices are often the cure for high
prices as farmers plant more acres in an attempt to ramp up
production and capture higher prices (stage 3).
This cycle played out in textbook fashion
over the previous decade (2010-2019)
In 2010 – 2012 a La Nina weather
pattern led to poor growing conditions in key areas across the
globe. As such, grain production lagged relative to demand and
prices moved significantly higher, peaking in 2012 (see chart #2).
Higher prices provided farmers the incentive needed to plant more
acres.
The additional plantings led to increased
harvest and global inventories began to grow. As you can see on
chart #3 below, global grain inventories grew without interruption
beginning in the 2013 – 2014 crop year and going through the
2018-2019 crop year. By 2016, grain prices were back near
production costs and traded sideways for the rest of the decade
(Stage 1).
Chart #2
Vertical axis represents S&P GSCI
Grains Index values.3 Source: Bloomberg Finance L.P. and
Teucrium Created 12/01/2021. Past performance does not guarantee
future results. This
chart is for illustrative purposes only and not indicative of any
investment in a Teucrium Fund.
Then in the 2019-2020 crop year, the world
consumed more corn, wheat, and soybeans than was produced. The
globe didn’t run out of food, but rather drew down excess
inventories that had been built over the preceding 6 years
(beginning Stage 2). Again in 2020-2021, for the second year in a
row, the world consumed more corn, wheat, and soybeans than was
produced. This led to an additional draw down of inventories.
Finally, in this current crop year (2021-2022), the world is
expected to produce corn, wheat, and soybeans in excess of global
demand4 (beginning Stage 3). Therefore, we
expect to see global inventories begin to rebuild as we move
through calendar year 2022.
Chart #3
Chart: Annual data from the 2000-2001 crop
year through 2021-2022 crop year as of November 2021. Production,
Consumption, and Ending Stock values found on the left axis
measured in million metric tons. Stocks/Use ratio value found in
the right axis measure in percentages.
Source: USDA and Teucrium.
https://apps.fas.usda.gov/psdonline/app/index.html#/app/home
This is for illustrative purposes only and
not indicative of any investment. Past performance is no guarantee
of future results.
The chart above shows combined global corn,
wheat, and soybean production (orange bars) and consumption (yellow
bars) going back to the 2000 – 2001 crop year. When the
orange bar is taller than the yellow bar, production exceeds
consumption, and vis versa. The green bar represents ending
stocks5 which increase in years when production
exceeds consumption. The dotted blue line reflects the 5-year
moving average of ending stocks. The brown line represents the
stocks/use ratio6 (which is ending stocks dividend by
consumption). The two highlighted yellow bars draw the eye to the
2019-2020, and 2020-2021 crop years when consumption outpaced
production.
II. Supply
and Demand
Supply
While the 2021-2022 crop year is expected
to result in a build in global inventories of corn, wheat and
soybeans, stocks/use ratios are likely to remain low relative to
history. Given that global demand for grains is expected to remain
robust (more on demand below), production in the coming 2022-2023
crop year will be critical.
There are several factors that may impact
grain production in the coming months. Market participants are
already following a number of these factors very closely, looking
for any indication that production might come in above or below
current expectations. Here are a few production and supply related
items that the trade is currently and/or will likely be focused on
going forward:
> Weather
> Planted Acres
> Availability
Weather
Weather is typically the most significant
and relatively unknown
variable. Long-term forecasts and climate patterns help paint a
picture of what the weather might bring. However, like trying to
pick tops and bottoms in the market, predicting weather is often an
exercise in humility.
That said, based on current forecasts, it
seems likely that weather will complicate grain production in many
places across the globe in the coming months. The main culprit
appears to be the La Nina conditions that have taken hold and are
likely to remain over the winter. La Nina typically results in
warm/dry weather in the US Southern Plains, dryness in Brazil and
North/Eastern Argentina, and wet weather around Indonesia and
Northern Australia.
Chart #4
Dryness in the US Southern plains has the
potential to negatively impact winter wheat production. Dryness in
Southern Brazil and North/Eastern Argentina has the potential to
impact soybean and corn production. Already there are reports of
excessive rains in Australia which is impacting the wheat harvest
there.
Current model shows that this La Nina will
not likely be as strong as the one that just ended in the Spring
2021. Even so, the last La Nina carried some significant
consequences (for example Brazilian corn production came in nearly
19% lower than initially forecast)7, and the fact that we are in the midst
of another La Nina, no matter how strong, is understandably keeping
the trade on edge.
Chart #5
What’s more, a significant portion of
the US farm belt remains considerably dry. As of November
16th, 17%
of the US corn production, 13% of US soybean production and 44% of
winter wheat production are within areas experiencing
drought.8 Note that Winter wheat represents
approximately 70% of total US wheat production.9
NOAA’s seasonal outlook shows above
average precipitation expected for the Pacific Northwest, which
could provide some relief for winter wheat farmers in Oregon,
Washington, and Idaho. However, the seasonal outlook is also
showing below average precipitation in the Southern Plains, which
is consistent with the La Nina pattern.
Chart #6
Planted
Acres
You
Can’t Reap What You Don’t
Sow
The simple equation behind crop production
is as follows: Production = Harvested Acres (x) Yield Per Acre. The
number of acres harvested is a function of how many acres are
planted. While the combined number of acres for corn, wheat, and
soybeans has generally risen over time, there are years where one
crop will be gain acres over the others. For example, in the United
States, there is one growing season for corn and soybeans.
Therefore, each year, farmers must decide how many acres they are
going to plant in each crop. In any given year the economics may be
more favorable for planting corn, versus soybeans and vice
versa.
Currently, both of the corn and soybean
balance sheets are extremely tight.10 Note that the United States is the
world’s largest corn exporter and second largest soybean
exporter. The supply and demand conditions in the US carry global
implications.
The current price difference between the
two crops suggests that in the Spring of 2022 US farmers may
consider planting more corn acres at the expense of soybean acres.
However, high fertilizer prices are increasing corn production
costs, squeezing farmers’ profit margins. As such, US farmers
might actually reduce the amount of corn acres they plant this
coming Spring, opting to plant soybeans instead. Assuming larger
soybean acres and fewer corn acres planted; we would expect upward
pressure on corn prices.
The situation is somewhat different in
Brazil where there are two growing periods compared to the US with
only one. Brazilian farmers will typically plant and harvest a
soybean crop and immediately turn around and plant corn. The
ability to harvest two crops each crop year has helped Brazil
secure a position as one of the most critical food producing
countries in the world. Brazil is the world’s largest soybean
exporter, and is 2nd only to the United
States in corn exports.
The number of acres of corn and soybeans
harvested in Brazil has more than doubled since the year 2000.
Brazilian production increases have been instrumental in helping
the world keep pace with growing global demand. Like US farmers,
Brazilian farmers are also incentivized by higher prices and will
likely seek to plant as much corn and soybeans as possible, even in
the face of higher fertilizer costs.
The USDA forecasts slight increases to
global planted acres but there is likely to be a reduction in the
amount of fertilizer applied. Crop yields might suffer if plants
don’t get the desired nutrients that fertilizers provide. The
president of the Soybean and Corn Producers Association of Mato
Grosso is reported to have urged farmers to “be cautious with
their input purchases and not to feel pressured to purchase
expensive inputs.” The thinking is that it’s better to
produce less and still have a profit than to purchase high-cost
inputs and lose money at the end of the season.11
If Brazilian farmers determine that they
have a better chance of remaining profitable by producing less,
then we might expect a smaller Brazilian crop relative to current
estimates. Smaller than expected production from Brazil would
likely provide some upward pricing pressure.
Availability
Geo-
Politics
Global food production and trade is a
highly politicized arena. After all when citizens go hungry a
revolution is typically not far off. As such, governments across
the globe are very concerned about food price stability. When food
prices begin to rise, pressures increase domestically to limit food
exports. We see this in Russia, as the world’s largest wheat
exporter. Russia has recently announced that they might revise
their grain-export tax in the event of rising food prices. A higher
export tax would work to encourage Russian wheat suppliers to
market their wheat domestically versus selling it into the global
markets. What’s more, Russia’s agricultural minister
announced that the country is planning to announce a
“grain-export quota” for the first half of 2022, which
effectively would put a cap on Russian grain
exports.
While keeping more wheat within
Russia’s borders may help suppress prices domestically, it is
likely to have the opposite effect on global wheat
prices.
What’s more, there is concern that
Russia may be planning to invade the Ukraine. The Ukraine accounts
for approximately 8% of global wheat exports measured in US
dollars.12 A military conflict has the potential
to disrupt trade and could provide additional upward pressure on
wheat prices. Recall that when Russia annexed Crimea in 2014, US
wheat futures prices rose approximately 18%.
Supply
Chain Concerns
Having learned through experience, the
global economy is not something that can be turned off and on at
the flick of a switch. To say that the COVID-19 pandemic
disrupted global trade
logistics would be an understatement. Labor shortages have directly
contributed to delays in both the production and delivery of goods
across the globe. Those delays, in the face of strong demand, are
adding to producer prices and shipping costs. In fact, the US
Producer Price Index is up 12.5% year-over-year. That is a level
that has not been seen since 1980.
Chart #7
US Producer Price Index Year Over Year
(YoY) Percentage Change measured Quarterly 01/01/1947 –
11/22/2021. The vertical axis measures the YoY change in the
Producer Price Index measured in percentages.
Source: Bloomberg Finance L.P. and
Teucrium. Created on 12/02/2021This is for illustrative purposes
only and not indicative of any investment. Past performance is no
guarantee of future results.
The Baltic Dry Index13 on the other hand is up approximately
127% year-over-year but is down over 50% from the highs reached in
early October. Lower shipping rates may be indicating that some of
the shipping back log is working through and that the delivery
times may be improving. This would be welcome news for global
consumers.
Shipping rates however remain relatively
high and are likely suggesting that we are not out of the woods
yet.
Chart #8
Baltic Dry Index Daily Chart
11/26/2020– 11/26/2021. The vertical axis reflects the Baltic
Dry Index Value.
Source: Bloomberg Finance L.P. and
Teucrium. Created on 12/02/2021. This is for illustrative purposes
only and not indicative of any investment. Past performance is no
guarantee of future results.
Demand
Near-Term
Global combined consumption of corn, wheat,
and soybeans is projected to reach an all-time high over the
2021-2022 crop year. Additionally, combined global exports are also
expected to reach record levels in ’21 – ’22.
Record global demand, combined with record exports have the
potential to provide price support for the grains as we move
through 2022.
Domestically however, it’s a bit of a
mixed picture. The USDA is estimating a year-over-year 10% decline
in combined corn, wheat, and soybean exports versus last crop year.
Still, combined exports are expected to be robust likely coming in
above the 5-year trailing average.
Chart #9
Chart: Annual data from the 2010-2011 crop
year through 2021-2022 crop year as of November 2021. Exports
measured in millions of bushels.
Source: USDA and Teucrium.
https://apps.fas.usda.gov/psdonline/app/index.html#/app/home
This is for illustrative purposes only and
not indicative of any investment. Past performance is no guarantee
of future results.
Meanwhile, combined domestic usage is
expected to be relatively flat year over year with current
estimates pointing roughly a 1% reduction. It’s worth
pointing out that domestic demand for corn appears to be the most
robust, due to increased ethanol demand (more on bio-fuels below).
At this point, it looks like there are bigger question marks around
demand for US wheat and soybeans in the year
ahead.
The USDA is estimating a sizeable increase
in the feed and residual usage category for wheat (42%). By
allocating usage to the “residual” category the USDA
may be implying that they have a high degree of confidence that the
demand will be there, but that they are not exactly sure where it
will show up yet. For example, it is possible to see a decline in
the feed and residual column and an increase in the export column.
The market would likely view this as a bullish development. It is
also possible that the feed and residual estimate is reduced
without an offsetting increase in any other usage category. That
would likely be viewed as a bearish development that could lead to
increased ending stocks.
Chart #10
Chart: Annual data from the 2010-2011 crop
year through 2021-2022 crop year as of November 2021. Usage
measured in millions of bushels.
Source: USDA and Teucrium.
https://apps.fas.usda.gov/psdonline/app/index.html#/app/home
This is for illustrative purposes only and
not indicative of any investment. Past performance is no guarantee
of future results.
Intermediate Term
Sustainable/Renewable Fuels – Closer
than we think?
Here’s an interesting term,
“sustainable aviation fuel (SAF).” It is estimated that
approximately 2.5% of global carbon emissions come from burning
jet-fuel.14 While that does not necessarily sound
like a big number, consider that if global aviation were itself an
independent country, it would rank among the top 20 of the
world’s largest emitters of CO2.15 This has caught the attention of the
Biden Administration which is reportedly setting a goal of
“eliminating the airline industry’s fossil fuel usage
by 2050.”16 Replacing fossil fuels for use in
combustion (non-electric) engines of all types will likely require
more use of agriculturally derived liquid fuels in the near term,
which means ethanol (and its derivatives) along with soybean oil
(currently a component of biodiesel) will see increased demand as
new environmental policies are put into place.
There is another developing opportunity for
soybeans in the “renewable diesel” markets. The
interesting thing about renewable diesel is that it is not an
additive but rather 100% a fuel unto itself. Renewable diesel, when
compared to petroleum-based diesel, on a gallon per gallon basis,
can reduce carbon emissions by up to 85%.17 Renewable diesel has the potential to
replace petroleum-based fuels which are largely used in the
transportation industry. On the flip side, we could easily see the
”food versus fuel” debate reignite during years of
tighter soybean supply.
In September 2021, Tyne Morgan writing for
Agweb.com attributed the following quote to Pete Meyer, head of
Grain and Oilseed analytics at S&P Global
Platts:
“…renewable diesel and aviation
fuels made from soybeans has the potential to be bigger than what
ethanol was for corn in the first couple of decades in the
2000’s.”
That is quite the statement given that the
Energy Independence Act of 2007, which introduced the E10 gasoline
blending mandate, resulted in a permanent shift higher for corn
prices.
Chart #11
Source: Bloomberg Finance L.P. and
Teucrium. Chart created on 11/23/2021.Prices are expressed in
1/100th of
$1. i.e. 577 = $5.77This is for illustrative purposes only and not
indicative of any investment in Teucrium Funds. Past performance is
no guarantee of future results. For
this purpose, corn commodity values are representative of the
futures (generic first corn futures contract - <C 1 Comdty>)
spot continuation chart as defined by and sourced on Bloomberg:
Generic contracts, such as C 1, C 2, C 3, ..., are constructed by
pasting together "rolling" contracts, according to the pre-selected
roll types on the commodity default page. The generic contract uses
the value of a particular contract month until it "rolls" to the
next month in the series. You can access a generic contract by
replacing the month/year code with the number 1, i.e. C
1<CMDTY>. Replacing the month/year code with the number 1
will yield the spot contract.” Energy Independence Act and
RFS Standards Timeline:
https://www.ag.ndsu.edu/energy/biofuels/energy-briefs/history-of-ethanol-production-and-policy
Note however, that the Energy Independence
Act mandated ethanol fuel
blends. Currently there is no such mandate for Sustainable Aviation
Fuel (SAF) or renewable diesel. Absent government mandates, it will
likely take multiple years for these new markets to fully
materialize and impact the US soybean balance sheet in a meaningful
way.
Still, the changes are coming, perhaps
faster than many realize. Consider that there are already billions
of dollars being invested in the space. For example, Chevron plans
to invest $600 million dollars into two soybean crushing facilities
to secure future supplies of soybean oil.18 In a separate deal, an ExxonMobil
affiliate is proceeding with plans to produce renewable diesel at a
Canadian refinery.19 To the extent that big oil companies
continue to get involved we could be looking at the beginning of a
meaningful shift in the usage categories for US grains, soybeans in
particular.
We do not anticipate soybean prices to be
impacted by demand for sustainable aviation fuel, or renewable
diesel in the ’21-’22 crop year. However, looking
ahead, we agree with Mr. Myer from S&P Global Platts that this
could be
impactful.
III.
Inflation and the Dollar
Money
Supply Boosting Demand?
Inflation concerns are real, and they are
justified. Alternative asset classes, including commodities, tend
to attract investment flows during periods of elevated inflation
expectations. From the conversations we’ve had with investors
and professional money managers, this year is no
exception.
As we have mentioned several times in our
newsletters this year, we believe grain prices are likely to remain
elevated for a least one more growing season which should continue
to put upward pressure on food inflation measurements.
Fundamentally, grain prices reflect supply and demand dynamics of
the underlying markets. While the supply side of the equation is
largely dependent on favorable weather patterns supporting crop
production, the demand side can be impacted by several different
factors including monetary/fiscal policies.
There is the potential that current
monetary/fiscal policies will result in an excessive amount of
cheap money sloshing around in the system. US Money supply,
measured by M220, increases every year. In 2020 the
supply of money grew an at the unprecedented rate of
25%!21 The issue, as it relates to grain
prices is that abundant, cheap, and in some cases free money, could in effect end up
subsidizing consumer demand.
Chart #12
Chart: Year over Year (YoY) percentage
growth in M2 12/01/1972 – 11/01/2021
Source: Bloomberg Finance L.P. and
Teucrium.
This is for illustrative purposes only and
not indicative of any investment. Past performance is no guarantee
of future results.
Consider that high prices are typically the
cure for high prices. That is to say that as prices continue to
rise, demand eventually abates as increasingly consumers simply can
no longer afford the higher prices. The key question therefore is
how high will prices go before
demand begins to wane.
In the current environment, given the
amount of cheap/free money
in the system, there is the risk that prices can go a lot higher. Simply put, the
monetary/fiscal policies in the wake of the pandemic may have the
effect of artificially supporting demand amid higher consumer
prices that otherwise would be untenable. Grain prices will
continue to trade based on supply and demand fundamentals,
regardless as to whether that demand is real or inflated due to excessively
accommodative monetary/fiscal policy.
The US
Dollar
Consumer prices rose at the fastest pace in
30 years during October 2021. Yet, as of this writing, the US
Dollar Index22 is only 5.75% off the 18-year highs
reached in 2017 and gained roughly 4.5% since September. This may
seem like somewhat of a paradox. After all, don’t higher
consumer prices suggest a weaker dollar versus a stronger one?
It’s important to keep in mind however that when it comes to
currency valuations, it’s all relative.
Chart #13
Chart: Dollar Index (DXY) 12/31/2020
– 11/26/2021. Source: Bloomberg Finance L.P. and
Teucrium.
This is for illustrative purposes only and
not indicative of any investment. Past performance is no guarantee
of future results.
The Dollar Index reflects the US Dollar
valuation versus a basket of international currencies. The dollar,
therefore, has been strengthening against some international
currencies even as consumer prices are rising
domestically.
Generally speaking, a strengthening US
Dollar can generate headwinds for US exports. However, a rising
dollar index does not necessarily negatively impact all commodity
export markets all of the time. Seasonality of harvest/re-supply
can also have significant impact on the relationship between
exports and currency rates.
Take the soybean market for example, the US
mainly competes against Brazil for export sales to China. Chinese
importers are likely keeping a close eye on the value of the
Renminbi versus the US Dollar compared to the Brazilian REAL. The
Renminbi’s relative strength compared to the US Dollar and
Brazilian REAL is likely an important factor for Chinese soybean
importers when determining from which country they will source
their soybeans when adequate supplies are
available.
It is interesting to note that even as the
US Dollar Index has risen sharply over the last couple of months,
the US Dollar has been weakening versus the Chinese Renminbi. While
this is a positive signal for US exports to China, note that the
Renminbi is also strengthening against the Brazilian
REAL.
Chart #14
Chart: Chinese Renminbi percentage
appreciation vs. USD and Renminbi percentage appreciation vs.
Brazilian REAL 12/31/2020 – 11/26/2021. Source: Bloomberg
Finance L.P. and Teucrium. This is for illustrative purposes only
and not indicative of any investment. Past performance is no
guarantee of future results.
Looking out into 2022, we believe market
participants will be well served to remember that currency values
are always relative, and that different markets are more heavily
impacted by different currency pairs. The world will likely be
dealing with the impacts from the monetary and fiscal response to
the COVID-19 pandemic for a long time. Additionally, there is the
ongoing risk of political instability given the real pain/suffering
that has accompanied the pandemic. As such, the economic and
political stability of individual countries will likely continue to
be a significant factor when calculating the relative value of
global currencies.
IV. Grains
in Your Portfolio
Grains historically have low correlations
to equities versus many other commodities (Chart 15). Low
correlations have the potential to improve portfolio outcomes
during periods of stock market volatility.
Chart #15
In fact, the GSCI Grains Index has
outperformed the S&P 500 in 10 out of the last 11 stock market
corrections of 10% or more (Chart 16). The latest example comes
from the initial COVID sell-off in March of 2020. Here we saw the
S&P 500 fall be nearly 35% peak to trough through March, while
at the same time the GSCI Grains Index only declined by 4.75%. That
resulted in a relative outperformance of approximately
29%.
Chart #16
The historical tendency for grain prices to
outperform equity prices during stock market corrections suggests
that investors may benefit from an allocation to grains precisely
when it matters most; i.e. during significant stock market
declines.
Stressing the importance of diversification
may be cliché, yet too many investors tend to overlook the
importance of diversifying their commodity exposure. Our experience
has shown that many investors remain overweight in gold and oil
relative to other commodities. An overweighting to oil has thus far
proven to be beneficial this year, while an overweighting in gold
has likely been a drag on performance.
Oil, corn, and wheat front month futures
are all up over 20%, where soybeans and gold are both down by
approximately 5%, and 6% respectively
year-to-date.
Given the low correlations and historical
relative performance there is a case to be made that by including
agriculture among other commodity investments may help in creating
a more robust portfolio.
Chart #17
V.
Conclusion
Time To
Rebuild
Last December we called the Big
Shift23 into a secular bull market for the
grain markets. We believe that the shift has happened as grain
prices rose to 8-year highs in 2021 and remain elevated to date. It
appears to us that we are now entering the 3rd stage of the
“Golden Grain Cycle,” where farmers around the globe
are taking efforts to increase production in hopes of selling their
crops at these relatively high prices. In fact, current estimates
show that for the first year in the last three, the globe is
expected to produce more corn, wheat, and soybeans combined than it
consumes. This is expected to lead to a modest increase in global
inventories. We believe however that it will likely take at least
one more crop cycle to replenish global supplies to the point where
prices revert to the cost of production.
Note however, that higher than expected
production and/or a decrease in demand could result in the larger
inventories being realized sooner rather than later. This would
likely be bearish for grain prices. Of course, the opposite is
true. lower than expected production and/or increased demand could
create additional stress for global balance sheets and provide
additional support for prices.
Time will tell.
For ongoing grain market commentary and
analysis please follow us on Twitter @TeucriumETFs, connect with us
on LinkedIn, and visit our website at www.teucrium.com
Risks and
Disclosures
Read the
prospectus carefully before investing.
A copy of the prospectus may be
obtained at: www.teucrium.com
The expressed
views were those of Teucrium Trading, LLC as
of 11/26/2021 and
may not reflect the views of Teucrium on the date the material is
first published or any time thereafter. These views are
intended to assist in understanding certain factors that may
contribute to the price of agricultural commodities or commodity
futures such as corn, wheat, soybean and sugar cane. In no way do
the views expressed constitute investment advice, and this document
should not be considered as an offer to sell or a solicitation of
an offer to buy securities outside of the United States of America.
Any decision to purchase or sell as a result of any information or
opinions expressed in this communication will be the full
responsibility of the person authorizing such transaction. An
investor should consider investment objectives, risks, charges and
expenses carefully before investing. The prospectus contains this
and other information.
The Teucrium Corn, Sugar,
Soybean, Wheat and Agricultural Funds (the “Funds”) are
not mutual funds or any other type of Investment Company within the
meaning of the Investment Company Act of 1940, as amended, and are
not subject to regulation thereunder. The funds are commodity pools. Investors may
choose to use the Funds as a vehicle to hedge against the risk of
loss, and there are risks involved in such hedging activities.
Unlike mutual funds, the Funds generally will not distribute
dividends to its shareholders. Investors may choose to use the
Funds as a means of investing indirectly in corn, soybean, wheat or
sugar cane. There are risks involved in such investments. Shares of
the Funds are not FDIC insured may lose value and have no bank
guarantee.
The funds invest in corresponding
commodity futures contracts, cash and cash equivalents and are not
intended to directly track the spot price of a particular commodity
(such as corn, wheat, soybeans or sugar
cane).
Futures investing is highly
speculative and involves a high degree of risk. An investor may
lose all or substantially all of an investment. Investing in
commodity interests subject each Fund to the risks of its related
industry. These risks could result in large fluctuations in the
price of a particular Fund's respective shares. Funds that focus on
a single sector generally experience greater volatility. For
further discussion of these and additional risks associated with an
investment in the Funds please read the respective Fund Prospectus
before investing.
Futures may be
affected by Backwardation: a
market condition in which a futures price is lower in the distant
delivery months than in the near delivery months. As a result, the
fund may benefit because it would be selling more expensive
contracts and buying less expensive ones on an ongoing basis;
and Contango: A
condition in which distant delivery prices for futures exceeds spot
prices, often due to costs of storage and insuring the underlying
commodity. Opposite of backwardation. As a result, the Fund’s
total return may be lower than might otherwise be the case because
it would be selling less expensive contracts and buying more
expensive one.
Past performance is not
necessarily indicative of future results. Diversification does not ensure
a profit or protect against loss.
Foreside Fund Services, LLC is the
distributor for the Teucrium Funds.
This material must be preceded or
accompanied by a prospectus.
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2021, Teucrium Trading LLC, All rights
reserved.
Our mailing address
is:
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Main Street, Suite 215
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You can read last year’s Outlook “The Big Shift”
on our website ->
https://www.teucrium.com/news-insights/242