Many commodities are in high demand these days, capturing the attention of investors and analysts. U.S.corn supplies, for instance, are at their lowest supply level in 15 years, and corn prices have nearly doubled to almost $7 a bushel in the past six months. Prices on gasoline are at 28-month highs. And prices on wheat, coffee and soybean are rising.
To better understand how advisors and their clients can invest in commodities using exchange-traded funds, AdvisorOne spoke with Sal Gilbertie, president of Teucrium Trading, as the second in a series of interviews with ETF-industry leaders. Teucrium introduced its corn exchange-traded fund (CORN) in June 2010 and its natural gas fund (NAGS) on Feb. 1. It plans to roll out a crude-oil fund (CRUD) over the next week or so.
AdvisorOne: How did you and the other Teucrium management come together to start making commodity-focused ETFs?
Sal Gilbertie: I came from the commodities world, where I started out in 1982 as an unleaded-gas trader for Cargill. Our forte has been in energy and agricultural trading, not in precious metals and physically backed metals.
We came together as a company when I ran New Edge’s commodities trading desk and saw that ETFs had contango [see definition below] and other issues
First–generation commodity-focused exchange-traded products were developed by bankers, who wanted to give investors the opportunity to have commodity exposure while getting commodity exposure off their books.
[Note: Contango is a condition in which distant delivery prices for futures exceed spot prices, due to the carrying costs of storing and insuring the underlying commodity; backwardation is the opposite scenario.]
AdvisorOne: What makes commodity investing important and interesting today?
Sal Gilbertie: Commodities are so integral to a well-balanced portfolio with emerging markets growing across the globe, a growing population worldwide and an expanding middle class worldwide.
As people worldwide increase their per-capita use of commodities, even if they approach or fractionally use commodities like those in the U.S., five to 10 years from now we will begin to see shortages of commodities. The expanding mass of humanity is going after a finite group of commodities.
Agriculture is a very different sector with a tenuous supply situation. With corn, we are using our entire supply for various purposes, so if we have a blip in production, like last year’s yield decline or a regional crop failure, we have a big problem. There is only about 20 days of crop inventory available. In other words, if we have a total crop failure that is what is left.
As the global population expands, more people and animals need to eat, and corn goes to that use, the top use. But corn and soybeans also are becoming industrial staples. They are used not just for food but for fuel, starch, animal feed, corn syrup, paper production and products like Advil that have polymers made from corn.
In other words, agricultural products are now engrained in the global economy and a blip in production has a magnified affect on volatility. The father of commodity investing, K. Geert Rouwenhorst of the Yale School of Management, thinks — and sophisticated advisors know — commodities should be in portfolios today.
Over the next five to 10 years, with the global stress on commodity prices being so great and permanent, we will need to include them in portfolios. That is why we came out with next-generation products.
AdvisorOne: How does Teucrium work to make its ETFs different from other exchange-traded products with a commodity focus?
Sal Gilbertie: We have designed our ETFs around the commodity – so with CORN, we design it around its benchmark, like crop yields. This way we address contango and backwardation that have hurt investors with the first-generation products.
We also stay away from spot trades by spreading the exposure across the forward curve to avoid contango in the spot market. This is good for investors who want to hold the ETF for more than 30 days.
AdvisorOne: How have financial advisors reacted to your approach?
Sal Gilbertie: Financial advisors and RIAs have led the charge into CORN, which is now eight months old and has about $77 million to $78 million in assets, trading of 100,000 or more shares and options. It is also used by institutions, an important development for an ETF.
We launched it, because there was nothing like it, and we wanted to come out with a single-commodity agriculture product. Now were are coming out with similar products in the energy space, such as NAGS and CRUD
CORN shows that an effective design works. It is liquid and transparent, which financial advisors and RIAs understand, because they have seen contango and are concerned about liquidity and transparency.
Our formula is all about the fact that you know what we hold now and what we will hold in the future. We are commodities people designing next-generation issues. Plus, we are Dodd-Frank compliant.
We aren’t pushing a new index, so you can add alpha and underweight or overweight a benchmark commodity. We strip out the effects of backwardation and contango as best we can.
Advisors come up to us all the time and ask about our products. I even had someone ask me about our product at a local farmers' market recently.
We come from the right space, and the time was right [last year] for the first single-commodity ETF. I have a 10-year-old boy, and the next 10 years will set the tone for future use of commodities. That’s why we say we are forward thinking.