Assessing the performance of agricultural commodities

Teucrium Funds President and CEO Sal Gilbertie joined Yahoo Finance Live to discuss the performance of agricultural commodities.

Video transcript

ADAM SHAPIRO: So let's talk about what's happening with corn, and soybean, and how you can get in on this. And it's easy to get in on, quite simply. To help us understand this, Sal Gilbertie from Teucrium Funds. He's the President and CEO-- joins us once again.

And I was just looking as we were coming into the segment, Sal-- where CORN, the corn ETF fund, and also the soybean fund, SOYB-- both of those are essentially at their 52-week highs. What's driving that?

SAL GILBERTIE: Supply and demand. And quite simply, there's not enough-- well, there's enough supply, but we have a declining balance sheet, which simply means the world is using more of these grains than it's producing. And we're projected to use more than we're producing. And there have been some surprises.

In corn, your ending stocks, which is a metric that you figure out after you grow all of your corn, and figure out what you had left over from the year prior, and then figure out what you're going to use-- what's left over is called your ending stocks. You do that with any grain. And corn ending stocks have dropped from 1.9 billion in the United States, where these things are priced, to 1.3 billion-- 1.35 billion bushels of excess.

And that was an enormous drop. Given that our usage is going up virtually every year on the major grains, the last time we got to under a billion and a half, that would have been deemed OK. And now, people are starting to get nervous, because under 1 billion bushels on corn, people get very nervous.

The story is soybeans. Soybeans, you'd gone from 48 days supply in the United States at the end of last year to a projected 10 days of supply this crop year. And that's unbelievable. I've seen soybean day supply down as low as 9. But to get supplies drawn that low in the United States is really something.

And remember Brazil, the world's largest exporter of soybeans, actually sold all their soybeans last year. And people turned to the United States, particularly China-- they've drained us of our supply. So we need, even factoring in a really good harvest-- in fact, record yields that the USDA is projecting-- we still aren't really rebuilding those stocks. And that's why prices are higher. You're draining stocks down.

SEANA SMITH: Hey, Sal, I want to ask you just about a larger issue, I guess, that investors are watching, not only in the commodities space, but also clearly in equities as well. And that, of course, is that report that we got yesterday that President Biden is planning to almost double the capital gains tax rate. He has that potential plan of raising taxes on individuals, raising taxes on corporations. How does that affect not only the equities market, but also the commodities market? And does it make you want to change your strategies? Does it affect your strategy at all?

SAL GILBERTIE: Well, it doesn't affect our strategy with the ETFs, because we buy the futures and we just allow investors to participate. If they believe the underlying commodities like corn, soybeans are going up, they buy our funds. If they believe they're going down, they sell our funds. We just we represent-- I mean, if you hold them longer term, like any other stock, you're going to have the same tax consequences.

More importantly, I think, is the effect on farmers and small farms. Farmers generally have income that is personal income-- even the income on their farm. A small farmer may not have a separate company. They may just run all the income through their personal balance sheet, if you will. And they're going to get taxed on that.

So you're going to raise taxes on farms. That's really bad. That raises the cost of doing business. You also-- there are rumors that are going to raise the step-up basis, which didn't get any headlines yesterday. But Biden has been pretty spot-on doing what he promised in the campaign. And he promised to get rid of the step-up basis.

And what that would do is not allow someone to pass their farm on without a tax consequence, which means people will have to sell their farms. And what you'd do is just drive small farms into the hands of big corporate farmers. That's what will happen. So those are the impacts that we're anticipating right now in the tax plan.

ADAM SHAPIRO: For a retail investor who's watching our discussion with you who may not want to get too into the weeds with buying commodity futures that are tied to grains, where in the cycle, when you get a prediction that we're going to have record yields in the harvest this year, and as you said, it's not a supply issue-- it'd seem to me that I might want to hold off buying, because it seems to me we're going to have record, and we got supply-- I can't see the price going up. What am I missing?

SAL GILBERTIE: Well, traditionally, this is actually the time of year where prices level off. So what happens is you generally hit a seasonal low during harvest. And harvest, of course, comes in the autumn. So I think in corn, the first week of October often puts in a seasonal low.

And again, so you harvest, there's a big pile, if you will-- picture a big pile of corn-- that every day the world comes and takes some out. So that pile gets smaller, and smaller, and smaller. And it doesn't replenish until next year's harvest. So you know, you go through winter, the pile's getting smaller, you're rallying off those autumn lows.

When spring comes where we are now, and is it too dry? Is it too wet? Will the seeds get in on time? And that's-- the timing basically determines your yield. And so people get nervous. And you have these rallies happen.

And you often level off. And it will determine if there's a drought, prices will rocket higher. And history has shown us that happens in July-- at the end of June and July. If there's not, you generally drift lower towards that seasonal low. Now, with prices the way they are-- and again, prices have gone this high because China has bought literally all the world's supplies. They had a crop failure. And the overall use in the world is going up.

And we have had some dryness in wheat areas. We're dry right now for planting our corn. We're dry in Southern Brazil and the second crop corn got in late. So you've got to record soybean crop coming out of Brazil being harvested right now. You have really minimal soybean inventories in the US.

Those two are balancing each other out at current prices. You did see another price spike this week. But I think some caution is warranted here. I think you're right, Adam. And the thing is you watch for a drought. And you know that, prior to the 4th of July here in the US, if there's a drought, you will rally again. If there's not, you're going to have a chance to buy these things cheaper in the autumn.