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to Rule 433
File No.
333-248546
File No.
333-248545
File No.
333-241569
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333-230623
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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
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____________________________________
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 Risks: Commodities and futures generally are volatile and
are not suitable for all investors.
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.
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material must be preceded or accompanied by a
prospectus.
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reserved.
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1 Bloomberg Finance L.P. <CRR
Go> Futures Comparison, YTD as of November 26,
2021
3 For more information on
the S&P GSCI Grains Index please visit:
https://www.spglobal.com/spdji/en/indices/commodities/sp-gsci-grains/#overview
4 USDA
5 Ending Stocks (also called
carry-out): The amount of corn that will be available at the end of
the crop year given the estimated or actual beginning stocks,
production, and usage.
6 Stocks/Use Ratio: Ending stocks
divided by total usage (i.e. consumption).
7 Comparing ’20-‘21
Brazilian Production Estimates: May 2020 WASDE, vs. November 2021
WASDE
8 USDA
https://www.usda.gov/sites/default/files/documents/AgInDrought.pdf
9 USDA
https://www.ers.usda.gov/topics/crops/wheat/wheat-sector-at-a-glance/#:~:text=Winter%20wheat%20production%20represents%20approximately%2070%20percent%20of%20total%20U.S.%20production.&text=In%20the%20Northern%20Great%20Plains,or%20durum%20varieties%20are%20favored.
10The USDA provides the Government
estimated balance sheets for corn, wheat, and soybeans on the
monthly World Agricultural Supply and Demand Estimates Report. A
balance sheet depicts both supply and demand. A tight balance sheet
is when supplies are low relative to demand.
11
https://www.soybeansandcorn.com/articles/8983/
12
https://www.worldstopexports.com/wheat-exports-country/
13 The Baltic Dry Index measures
international shipping costs. For more information visit:
https://www.balticexchange.com/en/data-services/market-information0/dry-services.html
14
https://ourworldindata.org/co2-emissions-from-aviation
15
https://www.c2es.org/content/reducing-carbon-dioxide-emissions-from-aircraft/
16
https://www.agweb.com/news/policy/politics/sustainable-aviation-fuel-and-renewable-diesel-may-be-ticket-eliminating-us
17
https://www.darpro-solutions.com/media/blog/renewable-diesel-the-next-generation-of-fuel
18
https://www.reuters.com/business/energy/chevron-invest-bunge-soybean-crushers-secure-renewable-feedstock-2021-09-02/
19
https://corporate.exxonmobil.com/News/Newsroom/News-releases/2021/0825_ExxonMobil-affiliate-to-produce-renewable-diesel-to-reduce-emissions-in-Canada
20 According to Investopedia…
“M2 is a calculation of the money supply that includes all
elements of M1 as well as ‘near money.’ M1 includes
cash and checking deposits, while near money refers to savings
deposits, money market securities, mutual fund, and other time
deposits.”
–https://www.investopedia.com/terms/m/m2.asp
21 From 1972 through 2019 US money
supply measured by M2 rose at an average annual rate of 6.65%. M2
grew at 25% in 2020, and YTD is up another 11% in 2021. For
comparison, in 2008 during the Financial Crisis/Great Recession M2
grew at a rate of 10%.
22 According to Investopedia the
U.S. dollar index is a measure of the value of the U.S. dollar
relative to the value of a basket of currencies of the majority of
the U.S.’s most significant trading partners.
https://www.investopedia.com/terms/u/usdx.asp
23 You
can read last year’s Outlook “The Big Shift” on
our website ->
https://www.teucrium.com/news-insights/242