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February 17, 2011 at 05:43 PM
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.
