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- [00:00]
IBM Representative
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- [00:29]
Tech Industry Commentator
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- [01:04]
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- [01:57]
Sal Gilberti
welcome.
- [01:57]
Barry Ritholtz
This is a farmhouse.
- [02:00]
Sal Gilberti
We have clusterfly.
- [02:08]
Barry Ritholtz
Investors today can gain exposure to any asset class via ETFs, stocks, bonds, real estate, metals, energy, even crypto. One of the most overlooked sectors are agricultural commodities. Wheat, soybeans, corn, sugar, coffee, all sorts of diversified commodities. And the ETF structure means a very different kind of K1. I'm Barry Ritholtz and on today's edition of at the Money, we're going to explore the question of whether agricultural products deserve a place in your investment accounts. To help us unpack all of this and what it means for your portfolio, let's bring in Sal Gilberti. He's the founder, CEO and Chief Investment Officer of Techreum Trading, best known for creating exchange traded products that give investors direct exposure to ag futures. He's also an old school commodities trader since 1982, trading various agricultural and Energy commodities. So, Sal, let's start really basic. What makes agricultural commodities so fundamentally different from other commodities like energy metals or equities or bonds as an asset class?
- [03:30]
Sal Gilberti
Sure, and thanks for having me, Barry. It's always fun to be with you and talk with you. Let's face it, everyone eats and their animals eat. And that's what AGs are primarily used for. Although, you know, fuel now has come into the mix. But ags are very stable commodities in terms of the downside historically, and, you know, we all know past performances indicative of future results and all that. But the downside on ags is very limited because farmers will just stop planting if they're losing money. And the secret with ags is that demand continues to rise. So the combined global demand of corn, soybeans, and wheat since 1960, okay, rises every single year. It's a record, or it's almost a record. So it's either the second highest ever or it's the highest ever every single year since 1960.
- [04:22]
Barry Ritholtz
So is that, Is that Sal. Is that driven by population, Population growth, or is it driven by. I'm thinking about beef, which seems to not only be benefiting from the whole keto trend, but rising wealth in the rest of the world means people are eating more protein and less of other things. What's the underlying driver of increased demand for commodities?
- [04:45]
Sal Gilberti
You just hit it. Okay. Basically, the underlying driver is a rising population, and more importantly than that, a rising middle class. The people that rise from the bottom to, to the next level. Okay, so if you look up people who are in sustenance, living, which they used to be defined as, I think less than $10 a day, $10 equivalents a day of the moment, they rise from that. And there are hundreds of studies on this. They increase the protein in their diet. They increase eating meat. That's what they do. And that is a huge demand. The number one demand around the world for corn is feeding cattle, is feeding animals in general, feeding animals. The second highest demand is for fuel. So, you know, corn goes into ethanol and corn goes into, sorry, soybeans, go into biofuels. And so what happens is the rising global population, the rising middle class, the growing middle class, which has become huge, by the way. I think as a percentage of the population, we're in our lowest ever percent of people in the bottom. The bottom rung.
- [05:48]
Barry Ritholtz
That's a. That's amazing. Does this mean we're going to see beef, B E F, F, B E F ETF from you sometime soon?
- [05:56]
Sal Gilberti
No. It's really hard to get people to think about eggs is really hard. It's amazing to me. You know, we always say corn is in everything, right? So number one use is feeding animals. Number two uses ethanol production. It's in, so it makes starch. Right. If you use paper, you're using corn. People don't realize that. So it's literally impossible for anyone, anywhere on planet Earth to not be using corn every single day. That directly or indirectly, it's not possible. And people don't understand that it's a vital commodity. And so going back to your original question, I believe, you know, it's a commodity, so it's volatile, but it has this floor because governments around the world subsidize food production. They subsidize their farmers because you don't want your, your, your populace to destabilize because they're hungry and you lose power. So everybody subsidizes their farmers. So farmers get used to operating at break even. And that actually is, I think you've mentioned it, the golden grain cycle. We can get into it, but grains kind of flatline to get used to trading there. And because that demand is basically static, it's not a dynamic demand, it's just always growing. It doesn't really fall significantly when there's a disruption. Which 99 times out of 100 means it doesn't rain somewhere critical. And one time out of 100 means there's a war, there's a political upheaval, and the transport of grains, the access to grains might be limited. They explode, road higher, they go higher really quickly because people are afraid.
- [07:24]
Barry Ritholtz
Huh. That's, that's really interesting. So you mentioned the golden grain cycle. Walk us through what that means. Where is corn, wheat, soybeans in that cycle today?
- [07:35]
Sal Gilberti
Sure. So golden grain cycle was developed by Jake Hanley, or I think you know him very well. And we, we looked at it and said look it, because we just looked at the spot continuation. So the continuation price of the front month of futures over time. And the bottom line is on corn, as a prime example, between $3.50 and $4 over the last 17 years. Okay. Actually approaching 19 years since the Renewable Fuels Act, 2007, 2008. Corn doesn't go below that. I think it's traded a few weeks under $3.50 in the last 19 years. I can tell you that corn is only traded under $4.4% of the time in the last four years. Five years.
- [08:20]
Tech Industry Commentator
Sorry.
- [08:20]
Sal Gilberti
So in the last five years, corn has only been under $4.4% of THE TRADING days. So clearly the break even is between 350 and 4 and closer to 4 right now. So if you see corn down at, you know, near $4, you. You kind of, based on past history, you're saying, oh, wait a minute, I have limited downside. And in the last 19 years, three. Three times corn is doubled from that price. Okay. And twice because of a drought and once because of the war in Ukraine, which was preceded by a drought in the upper Midwest and problems with. With China grain production and so wheat production. So you had a wheat problem that kind of started the rally. And then Russia invaded Ukraine in 2020, and everything went bonkers. Or 2022, I guess everything went bonkers. The rally started in 2020 and wheat, and then it went to the whole grain complex. So if you. If you've. And you say to somebody, I've got this asset that trades at X, and when there's a supply disruption every four to seven years, it goes to 2x and then it trades back down to X and then repeat, lather, rinse, repeat. So stage one of the golden grain cycle is trading sideways X. Stage 2 is going to 2X and stage 3 is going back to 1X.
- [09:34]
Barry Ritholtz
So it sounds very much like these are trading vehicles that you're looking to take advantage of these disruptions, such as war or droughts. What are the other variables investors should be aware of? Obviously, whether the war in Iran sent fertilizer costs skyrocketing. I've been reading about farmers complaining about that. And then government policy. I've been a big fan of both Harry's Farm and then Clarkson's Farm on Netflix. Both of them complaining about policies in the UK which are now taxing farm estates and taxing fertilizer and taxing everything from tractors to what have you. How significant are our government policies, and what are the other variables investors should be thinking about?
- [10:30]
Sal Gilberti
All right, sure. So. So in order, the main variable is always weather. Okay. And then geopolitical upheaval, like a war.
- [10:37]
Ryan Reynolds
All right.
- [10:38]
Sal Gilberti
And like what happened with wheat when Russia invaded Ukraine. Between Ukraine and Russia, they're. They're, you know, over almost 40% of the world's exportable wheat supply. And everybody was afraid it would get locked in. Well, it didn't get locked in. So you had this. This price spike. And the reason price spikes is because you run out of grain. Right. Remember, you plant grain in the spring, it grows all summer. There's a big pile at harvest in the fall, and then you take from that pile the whole world's taken from that pile, autumn, winter, spring and summer, okay. Because it's still growing, it's not harvested yet. And in general, at the end of that cycle you have about six months supply of wheat. In general, okay. Historically you have about three or four months supply of corn and soybeans. All right? So if there's a disruption and that, that big pile is reduced BY you know, 10%, 20%, 30% now you're approaching zero in corn, soybeans. All right? So that's why the price generally in, takes a spike if they realize it's not going to rain in the U.S. u.S. Corn belt and there's the weather factor, okay. Prices spike and go up and they run up in the, in the next year. What we've seen is a lot of money coming into our ETFs. I mean we had, I don't know, 200, 250 million in our Ag ETFs right before the Iran war broke out. And now we have 800 million to a billion depending on the day.
- [11:58]
Barry Ritholtz
Wow.
- [11:58]
Sal Gilberti
But the price hasn't really gone up. The price went up maybe 10%. The reason is people are positioning for, for next year. The fertilizer story is a 2027 story. So farmers will fertilize mid season, okay, around now just they call it side dressing and that'll boost the yields that's going to be cut back around the world. But a lot of farmers pre treat their fields, especially corn farmers in the autumn, they get ready so they can get in there in the spring and get everything down. So some of the fertilizer is either priced or goes down, gets laid down in the autumn for next spring. If the fertilizer price remains high in the autumn or the availability remains limited, you will affect next year's yields. And I think that's what investors have done. And back to your point of it's a tradable product. It's more a strategic allocation because these, these doubles that have happened prior to now and again it's just historical, not making any predictions. You can't, we're not allowed. But if you have to be pre positioned and I think investors are saying, well, wait a minute, If I stick 1% of my portfolio in corn or beans or wheat or whatever, it's. My downside is pretty limited based on history. If I'm buying within 10% of the break even price and my upside is like 90% based on history, okay. And it's going to be stable because assuming, you know, setting aside the one or two days every couple of years that Are black days. Those black days where everything goes down. Grains really remain stable in their portfolio stabilizer. And so people, people are kind of layering into trying to say maybe the stock market's frothy, maybe I'm getting a little too risky. Bonds kind of move in tandem with stocks. What am I looking for that has, you know, a lower correlation. Everything's correlated on certain days. Grains have some of the lowest correlation around besides natural gas and sugar.
- [13:40]
Barry Ritholtz
Really, really interesting. One of the thoughts I always consider when I'm looking at agricultural products or commodities is as a hedge to inflation. Prices go up on food, prices go up on key commodities. There are a lot of different ways to hedge inflation. Owning the commodities that go up is a significant aspect of this. How do Investors use commodity ETFs as an inflation hedge?
- [14:13]
Sal Gilberti
They do. I think when people see inflation coming or feel it coming and you know, any commodity, we're grain focused, right? But any commodity, if you see down at its break even level, it's really, you have to be an expert in that commodity. Look at a chart, look at a long term decade or two chart. Wherever it flatlines, it's, it's usually at around the same number. That's your break even. That's your futures equivalent break even cost. Everybody can see those charts. That's when you might want to layer in because your downside based on history is limited and your upside, you know, you can move steadily up with inflation, which we have again, that break even price of corn used to be 350. It's clearly around $4 now, maybe a little high.
- [14:50]
Barry Ritholtz
Really interesting. You know, the first time I ever heard of a USDA crop report was frozen. Frozen orange juice futures from the movie trading places. How significant are these USDA reports to these underlying ag products? Do investors need to track this the way equity or bond investors track non farm payrolls?
- [15:16]
Sal Gilberti
I think so. And the reason is, you know, granted you it's not quite as dramatic because you may not be as good at predicting the numbers of say payroll, right. And those numbers get adjusted as do the ag number sometimes. But I think everybody knows here there's, there's a whole sub industry within agriculture that's watching. They kind of know what the USDA is going to put out. But the USDA is the gold standard. So when that report comes out, all of your hedge funds, all of your pension funds, all the big institutional investors who quite honestly, you know, they're looking for opportunities, they also want to cover their rear. All right, so if, if you've got The USDA as your gold standard. You just follow that. So if the USDA confirms what everybody else already knew. Okay, fine, you're a little late to the game, but you're probably going to be okay anyway, so. Yeah, those reports are really big. The scary thing, Barry, you and I can probably both relate is when we, we give speeches now and I say, how many people have have seen Trading Places? Far more than half the room now has a blank look on their face. Nobody under 35 even knows what the movie really.
- [16:19]
Barry Ritholtz
God. It's just that I'm genuinely, I'm genuinely
- [16:22]
Sal Gilberti
shocked at that we require our interns to watch it. You got to watch.
- [16:26]
Barry Ritholtz
It's Eddie Murphy's. It could be his very best movie. I think so. So you mentioned earlier drought, we talked about war. Given the rise of prediction markets, everybody's trying to figure out what's going on. How much of information about either weather or geopolitics or whatever. Even a poor harvest, how much of that is already embedded in crop prices?
- [16:54]
Sal Gilberti
Most of it is the one caveat again, as I've referenced earlier, if you get a drought in the US Midwest around July or August, which is what they call kernel fill and pod fill, okay, Currents when the corns get their kernels and when the soybeans get their fill their pods. If you're, if you're too dry and hot in that period, it hits hard in the US Being the world's second largest producer of both those commodities now, now we're exporter, we're second to Brazil. Now that hurts a lot and, but you can see it. Okay, so, so by the end of June, if you're looking at the, if it's been dry and hot and the 14 day forecast says it's going to stay Dr. Hot, you see that price start creeping up and you can look back and drought years in the charts, the price charts. So I, it gets built in but you don't know how bad it is until harvest. So you, you kind of in drought years you get this slow dribble up and then when you get confirmation in autumn and late autumn, then you get that wintertime spike up. Seasonally though, the corn low is, is, is there's double low one. Is it the middle to late August is a good time to look at layering corn in if you're so inclined to do that to your portfolio. So because that's when people have a really good idea that the crop is going to be good or bad. And then October 1st is actually when you do a 20 year smooth or 30 year smooth. Seasonal. October 1st. The first week of October is the cyclical low. The actual absolute price, though, often occurs in August. So August, when you get a good read on the crop, it rained during that critical time, everybody's happy. And then October, because the whole big pile is on the ground, everybody's feeling comfortable. Those are good times to look at, layering these things into your portfolio.
- [18:32]
Barry Ritholtz
Really, really interesting. China has become the dominant buyer of so many agricultural products as well as other commodities. How has their growing economy and even geopolitical importance changed the way grain markets trade?
- [18:51]
Sal Gilberti
It has changed the way commodity markets trade as I've watched China for decades and as they become a net importer of something. So when they became a net importer of crude oil, that changed the crude markets. When they bec. Net importer of corn, that changed the corn markets. When they became a net importer of wheat, that changed the wheat markets. When they, when they, you know, increase their importation of soybeans, they are the soybean market. Okay, so, so China buys most of the world's soybeans that are available for export. Only three countries export soybeans, basically, Brazil, the United States and Argentina. Paraguay is a little blip there, but you can't really see it on a pie chart. It's so small. And so those three countries, if, if they have an export problem, China has a problem because China, China is the largest swine herd. They feed swine, you know, soybean meal. And so they're gigantic importers of soybeans. So, yeah, if China imports or not, the interesting part is soybeans, they've kind of maxed out. But on corn and wheat, every year, if you look at long term trends, they increase how much? Exactly. It's just like oil, the amount of oil they import just keeps going up.
- [19:57]
Barry Ritholtz
Really, really interesting. Given the role of China, the rising role of China and commodity imports. What was the impact of all the mayhem the past year with tariffs? Did that have a significant effect on how much U.S. grain farmers were able to export?
- [20:17]
Sal Gilberti
Kind of, because in Trump's first term when he did the tariffs, that changed everything, so that affected things more. China basically shifted towards Brazil as their first, first source, you know, choice for, for soybean imports toward the U.S. so it kind of shifted.
- [20:31]
Barry Ritholtz
That persists. The, the U.S. has fallen behind BR exports to China.
- [20:36]
Sal Gilberti
Yes, absolutely. And Brazil's beans, by and large, have been cheaper lately anyway. And so China just, you know, tariff or not, they're going to go where the cheaper beans are. When China buys our beans. Now it's the state buying them because our beans are more expensive. And they're sending a political signal of goodwill towards the Trump administration. China, I will note, saved the world by cutting down on their crude imports. Their crude imports largely were to, to, to support their Strategic Petroleum Reserve. In the last couple of years, they've been importing much more than they actually use to boost up their res curves. China is the number one reason that crude demand went down since the, the Iran war has started and China has saved the world. China saved energy prices. Everybody said 150, $200 a barrel. If it weren't for China cutting back on their, their energy imports, we would have seen that.
- [21:24]
Barry Ritholtz
I think a lot of people in the United States underappreciate how aggressively and, and let's just call it clever. China has pushed into alternative energy everything from geothermal to solar to wind. Not a surprise there. There's certain things that you can't replace crude oil with, but everything else they can, they seem to have really made an effort to do so.
- [21:50]
Sal Gilberti
Correct. And I, you know, don't quote me on this. I don't know for sure. We have to go look it up. But I think their, their fossil fuel usage is still going up. Like you can't, you can't do without. And the fact that, thank you goodness, they were filling their Strategic Petroleum Reserve versus actually needing the oil so when the Iran Iraq war, they're not going to pay high prices to fill some, some reserves, so they just stopped importing all that crude. And that, that has helped us tremendously.
- [22:16]
Barry Ritholtz
Yet China is not doing this because they're advocates against carbon and climate change. They're doing it for strategic reasons. But let's talk about climate change for a moment. I know in New York our growing season is longer. I know there are, I'm a gardener and there are certain plants that I can plant now that 15 years ago I was told, oh, there's no way that'll survive in New York. What does the changing temperature bands, the changing climate, what's the impact on crop yields? Is this a persistent upward trend? Is this going to help prices or is this just going to create more volatility?
- [23:00]
Sal Gilberti
I think more volatility because rain makes grain and a warmer Earth, honestly, God,
- [23:06]
Barry Ritholtz
rain makes grain, I love that.
- [23:07]
Sal Gilberti
A warmer Earth, okay. The atmosphere when it's warm, holds more moisture and so you actually get more rain. So global warming has been really good for crops around the world. It's a really good thing for crop production that might Sound counterintuitive to people. Our phones ring off the hook when you get the occasional storm and a million or 2 million acres flood out in the US and you get the news flying helicopters over. As far as you can see, all these farms are underwater. And we get the call. What's that going to do to food prices? Well, they popped up a little bit, but you might want to sell the rally because we plant 400 to 500 million acres in the United States, you lose 2 million acres, no one cares in terms of the absolute price. The only people that care are those poor farmers who are underwater. That's it. And hopefully they have crop insurance.
- [23:54]
Barry Ritholtz
So. So everybody who's flooded out, the 1, less than 1%, suffers. But the rest of the rain brings more crop, you're saying?
- [24:01]
Sal Gilberti
Absolutely.
- [24:03]
Barry Ritholtz
Really interesting. You know, we've talked about everything but technology. And I mentioned I'm a fan of Clarkson's farm and Harry's farm and some of the technology. Just looking at these tractors run themselves like autonomous vehicles have been on the farms for years, long before any of the robo taxis that are out there. What is improving technology due to agricultural productivity? Are we seeing precision irrigation, better seeds, higher quality machinery? What is this doing to production? What is this doing to quality? And what does this mean for price?
- [24:43]
Sal Gilberti
It's by and large raising everything except the price. So thankfully, everything you just mentioned has worked perfectly because that, again, back to 1960, that rising global demand for combined corn, soybeans, and wheat. If you look at this, the. The supply line, it follows that very closely. Other than in a drought year, okay? So except in a drought year, we generally grow as much or more than we need, and that's only because of genetic engineering of seeds. Okay. Of amazing technology where, you know, tractors, now, not only can they be autonomous, they used to run three to five miles an hour. All right? And you had a kind of guess at your fertilizer. Now they run nine miles an hour across these fields, adjusting the fertilizer every three feet. Okay. Based on the analysis in the soil, they've got these. These amazing laser weeders. So you can. You can actually go over your. You know, the.
- [25:40]
Barry Ritholtz
Just zap them without chemicals zapping these wheels.
- [25:42]
Sal Gilberti
You could do stuff without chemicals. And, you know, there's more and more organic land being set aside for less chemicals. I mean, it's all so wonderful. All the technology is. It's a beautiful world. When you look at agricultural technology, it's amazing.
- [25:54]
Barry Ritholtz
So to wrap up anyone interested in having exposure to agricultural commodity products, whether you think the price trend is going to go higher or just as a hedge against inflation, Check out some of the ETFs you can get that can give you exposure to wheat, soybean, sugar, or any combination of things. I'm Barry Ritholtz. You're listening to Bloomberg's at the Money.
- [26:22]
Sal Gilberti
Welcome. This is a farmhouse.
- [26:27]
Tech Industry Commentator
Okay, tech leaders, word on the street is security incidents are dropping way down with Windows 11 PC built in. Security for the win upgrade to Windows 11 Pro at windows means business.com Ryan
- [26:42]
Ryan Reynolds
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- [27:13]
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