Animal Spirits Podcast - Talk Your Book: Agricultural Commodities

Episode Date: July 15, 2019

On this week's Talk Your Book, Michael and Ben sat down with Sal Gilbertie, CEO and founder of Teucrium Trading, an ETF provider of agricultural commodities products. Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits Talk, your book is brought to you by Tukrium. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. Michael Battenick and Ben Carlson work for Ritt Holt's Wealth Management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Ritt Holt's Wealth Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Ritthold's wealth management may maintain positions in the securities discussed in this

podcast. Ben and I sat down with Sal Gilberti to talk about agricultural commodities, a topic that we have not yet discussed on the show. And so we've done a little bit of work on commodities in general. And the general takeaway that we've, I think, both had is that. Bottom of what, you still holding those oil barrels in your backyard? No, it didn't take delivery. So if you look back at like the long range future, and so William Bernstein did a little look at this where he, in his book, skating to where the puck was, the correlation game in a flat world. And there was a study done that showed between like 1972 and 1990, GSCI, which is the Goldman Sachs Commodity Index, had like better returns than the S&P with a little bit of higher

standard deviation, and they're totally uncorrelated. And so the idea was, well, trading commodity's futures has to be like the perfect bet because they have high returns and they have, they're uncorrelated. That's like the holy grail of asset allocation. It's finding something like that. And Bernstein kind of said, well, the problem was before 1990, no U.S. portfolio managers actually could invest in commodities futures. And he said it wasn't until like, what do they have to invest in just production companies? Well, yeah, or you basically had to have a jacket on and trade futures in the pit or know someone who did. So you had to have like a seat in the exchange to actually add commodities exposure. So it's interesting how far we've come. And I guess one of the first

publicly available ones was Pimco released a commodities funding like 1991, he said. And so it's interesting to see how far the ability to trade in these things has come in that time. And unfortunately, for anyone who's invested in commodities, the last 10 years has not been very fun. So we had like that huge run-up commodities prices in the early to mid-2000s, mostly from China and brick countries and these emerging markets that were getting into all this stuff. I don't think I ever told you that I used to be a silvers trader. Silvers? I'm sorry.

I don't know if I said silvers. Silver trader. Meaning what? You were doing technicals on silver? I'm pretty sure I bought silver when it was $50 an ounce. Did you buy it from that commercial on CNBC? Did it ever get to 50 or was like right at 50? Although I will say, no, it never got to 50.

You got to 4982. I will say I cut my loss to short. I will say that. So I think our, except for your foray into silver trading, I think our experience has been like a very high level commodities like looking at the broad indexes. And in this interview, we actually get into some specific commodities themselves and specifically agricultural commodities, which this tukrium trading actually has traded in. And their ETFs have actually been around for like 10 years. And I give them a lot of credit

for keeping these going. And there must be some demand for these because the returns have not been great for commodities for the past decade or so. So I actually think if and when we see a quick little boom in commodities. And I think some of these ETFs that we're talking about today actually have, like they could see a huge inflow of funds because of people chasing performance. Yeah, it wouldn't take much. Let me ask you a question. You think that commodities and maybe, I guess, these products are some of the only liquid instruments that truly have no correlation to a traditional stock bond mix. It makes sense. I mean, I'm sure there's some sort of economic correlation there where in like a severe recession these things would probably go down as well

unless it was inflationary. So the ones we're talking about today, it's corn, wheat, soybeans, and sugar, right? And they have the tickers are corn, wheat, W-A-T, soybean is S-O-I-B and the sugar one is C-A-N-E. All good tickers, by the way. Did we get into my commodities trading on the show, or was that after the mic turned off? I think that was after the mic turned off. Remember, I told Sal that I used to trade corn back in the day. Yes. Which is hilarious. I'm pretty sure that I trade a weed, too.

Yes. I think the other one, they don't do pork belly futures anymore, I was told. But that used to be a thing as well. AQR had a podcast talking about commodities. I went to the show on, so it was also pretty good. And in order to get learned for this show, I listened to a commodity, a lot of commodity podcast. Meb Faber had on somebody, I forget his name, who was in the commodity space. But this is interesting because we actually learned a lot from this because we didn't know much about these individual commodities.

specifically for me. Okay. Yeah, I mean, it's interesting in the uses for this stuff and how the number one use for corn is really feed for all these animals that we end up eating. And so there's a, we get into a lot of this actually. And Sal actually walked us through some of the dynamics of the ETF pricing and how these things work. So we'll get into the interview now and talk a little bit afterwards about what we talked about. But I think this is this is kind of interesting because it's something that's a little bit off the beaten path for us. And like you said, I think it truly is an inquilated asset. You better know what you're. you're getting yourself into for these things because they can be extremely volatile and have huge volatility spikes. But this is something different for us. So here we are with Tukriam's Sal Gilberty. We are sitting here with Sal Gilberty, CEO and founder of Tukrium, Sal, thank you very much for joining us. My pleasure. Just by way of background, how exactly did you get to Tukrium? Why did you found it? I started trading leaded gasoline for Cargill in 1982 and just have been in commodities my entire life. I started a desk at Sochgen trading ethanol and ethanol swaps. I pretty much created that product. And I realized there were no grain ETFs. I was introduced to the

concept of commodity ETS while I was there. I thought it was a great idea. Oil ETFs in particular was what came to my attention. And there were no grain ETS. I thought that was crazy. So I stepped out and started an ETF company focusing on agriculture. You have some great names for ETS here. So you have corn, wheat, soybean, cane, and tags. And obviously, I think the name has a lot to do with in a lot of these ways. But how did you decide which ones of these futures to go into? Were these the ones that you had in mind and you wanted to sort of get the whole suite of products? Or how did you decide to do these exact ones?

These are the ones that were lacking. So these were the big four. There was a sugar ETN. There still is another sugar ETN. But there was no single ETF or ETN product dedicated just to corn, which is the world's largest agricultural commodity or wheat or sugar. or soybeans. And those are the big four. They actually were the original DBA. DBA was originally just 25% each of those products. You mentioned ETF and ETIN. For our listeners, can you explain the difference? Sure. An exchange traded fund, and technically we're an exchange traded product.

Exchange traded fund is its own legal entity. It's structured either like a mutual fund or in our case, it's a Delaware series trust. When you purchase one share of those, you actually own a piece of that fund. So there's no credit risk. You own a piece of what's in that fund. You own those assets. An exchange traded note is a note issued by a bank that tracks the value of a particular asset, but you are actually paying the bank to take your money. You're giving them money. They may or may not be investing it. You assume they are and hedging it. And they owe you that money. But in the case of Lehman, when Lehman went under, some of their ETNs that the investors didn't get paid. So there is credit risk with an ETN. There's also non-transparency because you don't

know what the bank is doing to hedge the underlying exposure. Can you spread that risk out or is it just with a single bank. It's with a single bank. It's with the issuer of the ETN. It's an exchange traded note. It's basically a debt offering. So who is the bank that you work with on these products? Well, we don't have ETNs. We actually are an exchange traded product. We're a Delaware Series Trust. So when someone owns, say, a piece of our corn fund, you actually own a piece of that fund. So it's two cream the sponsor can go under. It can disappear. You have no credit risk. You still own a piece of that fund and the assets in it. So sticking with the sort of structure of these products, maybe explain for our listeners and maybe from

Michael and I, how these work and how the futures market works within these ETFs and how you actually do the trading around these and how you own them within the funds. Sure. The ETF, it's an amazing structure and we didn't invent it. We just thought, wow, let's apply this. So what happens is you form this legal structure and then you fund it with some money. It's called seed capital when you start the fund. That's a pretty good pun for you guys, a seed capital. Yeah, seed capital. Actually, I'd never thought of that before. Really? Wow. It's bad. You list them on the New York Stock Exchange. And what happens when money comes in, so I don't actually sell shares to the investing public. All exchange traded fund sponsors, there are baskets, so there are minimum basket sizes.

And in our case, they're between 25,000 and 12,500 shares, depending upon the fund. And an investment bank or a market maker, like a Goldman Sachs or a Morgan Stanley or Susquehanna, they're out there making markets to investors. So they make a bid offer around the fund. And what happens is, in our case, the fund has three futures contracts inside of it. And so when you buy the corn fund, you're going to own a vehicle that owns three corn futures. You know what they are. They're posted on our website every night.

It's a formula. You know what you're buying. Is it three sequential months? Yes. They're actually, we never own a spot month of a future. So we own the second month. And what does what does spot mean? Spot means the front month.

So it's the nearby month. It's the most akin to actual physical price. That's the one subject to delivery. That's the one subject to usually the most volatility. So these products, while you can trade them daily, they're the only products out there. they are very liquid. These are more tactical investing. They're more for people who understand and we can get into that, how to look at commodities and put them within their portfolio. That said, when an investor buys or sells shares, those shares are sold to them by an

investment bank or an arbitrageeur who is looking at where they can buy the futures and they know which futures they are and sell to the investor and make a little money. I'm glad you made that distinction between tactical and more of like a long-term buy and hold because Michael and I have done a lot of work on commodities and not really into the specific the commodities themselves more of like a basket. In looking at the data, you see these huge boom and busts in these commodities. And so we've always said, too, that it is more of a momentum tactical play, probably, than a long-term buy and hold. Yes and no. So in modern portfolio theory, when you put in a basket of commodities, so you've got your stocks and bonds

and let's say traditional 60-40, which hopefully no one does anymore, but let's say 60-40, what you do is you take some of your 60. You leave your bonds alone. This is the risk portion of your portfolio and you put that into commodities. So putting some risk assets into an even riskier assets because commodities are slightly more volatile on stocks, not really that much more when you look at them closely. They offset. The easiest way to explain is if you are a good airline stock picker and you've got a good portfolio of airline stocks, over time those airline stocks are going to do well for you. But in the quarter when there's an oil shock, so oil prices double. That's their biggest cost input. Those stocks decline. Now, they will learn over time because you're a good

stock picker to operate in a higher oil environment. But that one or two quarters when the oil made an impact on their earnings and those stocks go down. If you own the oil, the oil part of your portfolio goes up. Those stocks go down. Your risk-adjusted returns are better because your volatility is lower. You had a gain offsetting a loss. So that's the easiest street way I can explain modern portfolio theory where commodities benefit as a core holding. But that's a multi-commodity basket. The tactical thing comes in where oil, for instance, everybody seems to know that oil between $30 and $40 is pretty much a break-even. And a lot of money pours into oil when it breaks under $40. For some reason, when gold gets between $1,200 and $1,200 an ounce,

decadillions literally pour into the gold markets, when corn gets under $4, which is its break-even area, $350 to $4, no one seems to care. And I guess we've been a bit evangelical out here because we're the only agriculturally focused company. But people really should think about grains in their portfolio because you're using them every day. When I ask people, you know, what commodities do you have in your portfolio? They say, I have some gold. Why?

Well, everybody has different reasons for gold. I have energy. Why do you have energy? Well, I use it every day. I got in my car. I turn my thermostat up or down. So, well, what about grains? And they didn't understand that when you fill up the average SUV in America, you use a

bushel of corn. That's corn's number one use in America is to make ethanol. in the rest of the world, it's the corn's number two use. When your kids jump out of the car by some beef jerky sticks, that's corn's number one use to feed animals globally. That's its number one use. When you grab something to drink, it's probably sweetened with corn syrup. Corn's number three use.

If you're taking notes, that paper is held together with corn starch. It's not possible to avoid using corn anywhere in the global economy. So that's something you should consider in your portfolio. Maybe we're going about this a little backwards. We're starting deep, and we'll take a step back. in a minute. But in terms of the structure of these funds. So it's the second third and fourth month out. Well, second third and then there's an anchor month depending on the crop. So what does that mean? In corn, okay, so in corn, December is the critical month. That's after harvest. That's the one all

the farmers use to hedge. And so you want to be in that one. Always. Always. And often what happens is the way the fund is structured. Sometimes a December is either the second or third month. And then we own the following December. So you actually own two crop years. So are you look, within the fund, are you looking at the term structure and are there active bets going on inside of the fund or is it pretty static? It's static. Okay. You said that you've been in the commodities game since the 80s trading these futures. How have you seen things change? Maybe you could walk through some of the biggest drivers that impact the prices of these. Obviously supply and demand and then there's other things like weather and then recently politics. How of those things change

and how much have the futures markets change in terms of investors stepping in? And what does that done to the way that these things are traded or the way people buy and sell them? Well, futures are no different than any other markets. You've got high speed trading, high frequency trading. A lot of the day-to-day volume is dictated by those entities and individuals and institutions that are trading those. But you hit on all the points. Supplying commodities go back to supply and demand. It's why I'm a commodities guy. I'm not smart enough to be a stock picker. I just can't do it. There are too many variables. I don't know if the products are good. I don't know if the management is good. I don't know what the social trends are. In commodities,

there's either enough or there's not. And has weather had an impact? Absolutely. This year is a perfect example where too much rain has kept the farmers out of the field. You've got corn up over 30% off its lows in only two months. It seems to be creating a cyclical bottom. Let me ask you question about that. You can't necessarily predict the weather. It's impossible. With ags, and we may be getting too deep again in the weeds, but with ags, there's a secret. Farmers around the world are paid to plant. They're paid to plan. So the way to get instability and have your government overthrown is to have empty bellies in your population. They pay farmers to plant. Farmers are subsidized in a variety of ways in every country in the world. So crops actually, their natural

trading value is at break-even. Farmers are subsidized. So they plant as much as they can until things are at break-even. So the natural trading state is break-even, which is why you've seen, okay, you've seen corn, for example. I'll just stay on it. Corn's been going sideways for four and a half years. It started a bear market six years ago. Why was that? There was a drought seven years ago. We had a high because supplies drop, but demand hardly ever drops in these eggs. And so you had this high spike. Now you've had six years of perfect weather until this year. It took two years to rebuild stocks where there was a bear market. Now you've had a sideways market literally in corn between $350 and $4 a bushel for four and a half years. That's when a tactical investor

can look at that and say, well, wait a minute, I'm looking at this. I know eventually there's going to be some weather impact. Every single year is either the highest use of corn ever in the world. The combined use of corn, soybeans, and wheat either breaks a record or is the second highest every single year. It only goes up. And so when you have a demand that's that steady and rising and the potential for supply disruptions, which you do, it's biblical stuff. You know, floods, fire, famine, pestilence. That's real for farmers and crops. So ags trade sideways at their break-even. They spike higher. When they spike higher, you get out. I mean, we have this slogan, wait, W-E-I-G-H-T into your portfolio when you're trading a break-even. Wait, W-A-I-T for

a drought. When there's a drought, prices have doubled twice in the last 12 years in corn because the droughts get out. So it's wait, wait, wait, drought out. And literally get out. When you see these things double, why rebalance? Just get out and wait. Because when corn goes from $4 a bushel to $8 a bushel, every farmer in the world will plant it. High prices, get rid of high prices. That's an old commodity saying, which is true. I think that you spoke about a 6040 portfolio earlier. People know where their returns come from in stocks and in bonds. In bonds, your lending money, you're expecting you know, to get paid on that. With stocks, you're buying a piece of a business. Hopefully it's growing. With commodities, where do the returns come from? It's absolute returns. Unless you are in

some sort of arcane product or specialty product that you probably have to have access to through an investment bank if you're wealthy enough. Your access to commodities hopefully will either be through prudent trading of futures and that's not for everyone. In fact, it's for almost no one. or through use of ETFs where you tactically allocate them into your portfolio. And when you have these big price moves, you get out. Commodities will trade it break even particularly ags. So you know that your downside is limited based on historical patterns. And when you see a supply disruption and they explode higher, you just trade out.

So who is expected to have the knowledge to trade these? Because I would imagine that soybeans, wheat, corn, and sugar each carry their own idiosyncratic risks. do they all trade together? Are people using all of them? How are people putting this into their portfolio? It's different. I mean, we're the first people to offer these single commodity products. So we just broke 200 million last week in terms of total net. Well, thanks, but that took eight years. It took almost nine years. So as awareness is growing, I mean, you saw KKR put in their portfolio last year for one six-month period, corn as an allocation. So in their allocation model, in one of their allocation models, Henry McVeigh actually made a classification,

But it's led by corn. It says corn, and then in parentheses, grain. It's at zero right now. I don't know what their methodology is. But the fact that there are metals, which basically gold, precious metals, energy. And then the third category is grains is very telling. And I think that that's just the beginning of people realizing, wait a minute, with climate change, with the fact that when grains get in the headlines, it's always a big move.

And the worst thing you can do in commodities is buy the headline. You want to already be in it. I imagine that a lot of the people who trade this also don't have to be necessarily so adept at understanding commodities. And I'm sure there's a lot of technical momentum traders who just see the crazy price swings in these and sort of try to ride those trends as well. Yeah, good point. What percentage would you estimate are fundamental investors traders versus people that are just looking at price and do not care about the underlying at all? I have no idea. And the reason is we don't sell directly to investors. So I actually don't know

who owes my funds unless they call me. And it turns out when we see the tax data with a year lag. About 49% of some of our funds are actually owned in IRAs. They're owned in tax accounts. The rest, we are always contacted by retail advisors. So I think the retail advisors are adopting commodities and in particular grains. You see the big players, like I know Paulson owned 1.1 billion for a long time of GLD, which is the gold ETF. I hear Tudor Jones touting golds in the press the last couple of weeks. But people talk about gold. They talk about oil. They're just now starting to realize, wow, grains are really important, and we're kind of leading edge on that. Do you think that there is a potential for producers to use the ETFs? Would that never happen?

It does happen. We hear about it. But futures, you have to put five or 10 percent down to control a notion of value of the commodity, whereas if you're trading an ETF, you're in the regular margin rolls of the Fed, which is probably 50 percent down. Why would you do that as a business owner? How specific are the stories for each one of these four ETFs? Are they fairly correlated with another, Or do they all have their sort of idiosyncratic risk where they will pop or fall based on some specific news to that market? Well, the row crops of corn and beans, they share acres. So they have a pretty decent correlation with one another. And corn is king.

So remember, they're all used as animal feed. And so it's a protein price, essentially. So farmers are going to look in there. So corn will drag everything up or down with its big price moves. But soybeans, during the trade tariffs, when they were first announced on soybeans, soybeans went down, well, everything. more than basically everything else. Wheat is idiosyncratic because there are about 10 different countries that really matter for wheat. If a weather event happens in any number of places in the world for wheat, you can have a price-woven wheat. For corn, the United States really is the one that

matters. For soybeans, the United States and Brazil are the two that matter. So weather events, they have to be specific to corn and soybeans. But in wheat, the all-time high price in wheat was because of back-to-back droughts in Australia. How does sugar fit into this? This seems to be an outlier. It is, but it's one of the bigger commodities that everybody pays attention to. And sugar actually has the lowest correlation to other commodities and generally it changes year to year, but it has the lowest or lower correlation long term to the S&P 500. Sugar is actually a great diversifier. You mentioned the one impact of the tariffs, how the tariffs impacted this commodity space in general? They've impacted it greatly for soybeans because the U.S. soybean farmer, as we've said, is a casualty of war. They really are. They're a civilian casualty of war because China, I guess, is trying to hurt the base of the president, the political base. Chinese need soybeans. It goes both ways. You could say they got some luck. But having African swine fever take out 25% of their swine herd, which is why they're the largest soybean buyer in the world to feed all those hogs. That cut their need for soybeans. So they were able to use soybeans

as a weapon and say, you know what? We're going to stop buying from the United States. That has hurt temporarily the U.S. farmers. All that is is an anomaly. A tariff will create an anomaly, a pricing anomaly in any commodity, but the world doesn't stop using those commodities. In particular, there aren't enough eggs in the world. So, for instance, when you grow corn in a year, you end up in the United States, for instance, with between four and eight weeks excess supply. So it's a giant pile, and that pile has to last you for a year until the next year's harvest. When you use that pile up, you have about four or six weeks left over. If something happens to the next week's harvest, that's why agricultural commodities react so quickly to a potential supply disruption. There

really isn't much excess laying around. It sounds like we keep talking about these crops in the United States. Is that, so this is a total ignorant question, is that what these ETFs are tracking or isn't, like aren't they global markets? And if so, what currencies are driving the returns? Are these price and dollars? Like, can you get into that? That's a great question. Yes. Commodities, so we'll go backwards. Commodities in general are priced in dollars. That means the strength of the U.S. dollar makes it harder for other people to buy commodities. In general, when the U.S. dollar is weak, the macro trend is that commodities will generally be strong. So you've been desperate for some dollar weakness, which we are finally starting to see. We've had serious headwinds since we

launched these funds. Yes, some strong dollar. And in particular, the Brazilian Real, when it rises, the correlation or inverse correlation between sugar and soybean prices, and the Brazilian real is really astounding. So that's something to watch closely as well. So this is global production, but it is dollar denominated? It's dollar denominated. All commodities are generally dollar denominated. It is global production because these are linked markets, okay? So corn, but our ETFs actually are based upon prices on United States exchanges. So we use the world price for sugar because the United States has a domestic limited market. It's a controlled market for sugar.

So we use the world price for sugar. We use the Chicago price for corn, soybeans, and wheat. Commodities are often thought as a hedge against inflation, which is obviously the dollar has been strong. We've had no inflation. How do commodities factor into inflation? Do they push inflation or are they pulled higher by it? And that's sort of a chicken and egg question. It is.

I mean, I look at it. I was always in the oil industry. I started my career in energy. And energy prices going up create inflation. There's no question about that. If they last, they're so pervasive in the economy. I think an argument to some extent can be made for agricultural prices, that if they double and were to stay there, that is going to have a somewhat permanent inflationary

effect. If the price of gold goes up and down, I think that's a reactionary or it's the anticipatory of people think of it. I don't think gold moving isn't moving the rate of inflation, I don't think. One of the stories that we've heard of the last 10 years is the explosion in countries and population growth like in China and India. And these commodity prices have done horribly over the last five years. What do we make of this? Farmers really do a good job. We've got genetic engineering, John Deer tractors that used to go three miles an hour and now go nine miles an hour, can adjust the fertilizer and the planting rates every three feet on the fly. So you think that technology

and farm equipment has also maybe been deflationary? No question. No question about it. I think technology in the farm sector has been astoundingly good for production. Human ingenuity and technology keeps up. What we can't control, and even if we do control it, the weather, you're not going to get it right all the time, or you're not going to control weather if they do control it for agricultural purposes. You may control it for some other purpose. And so weather is always the big variable in acts. There's no question about it. With usage going up, so you mentioned global population rising, the global population rises by 75 to 78 million people a year. That's twice the population of California being added to the world. So just to grow the new soybeans, corn, and wheat

to feed just those people, you need to add an area of the world about an eighth the size of California, just for those three crops every single year, which is astounding. Now, you overcome that with technology and yields, but yields can go down like this year where we plant it late. The government's predicting yields are going to go down and they're still readjusting those numbers and will be for several months. That's why, look, ags trade a break-even. They trade at break-even for a long period of time. They will stabilize your portfolio while they're in there while it's happening because they're very little price moving up or down based on history. And when there's a supply disruption, they literally move very quickly to the upside. It takes a year or so and it gets

price then. So you mentioned that a lot of these ags are used for feed. How worried is the agricultural community in farmers about these new Beyond Meat type of things, the fake meat alternatives? Is it just a blip on the radar right now? Are they really sort of concerned about these things?

How does that fit in? I think right now it's a blip on the radar. I think that when you look specifically at Beyond Meat, that's just, it's just a vegetarian burger. That really doesn't matter. What they're looking at that will matter long term are these companies, and the name's escaping me, the leader in the business where they just take a sell from a steak and put it in a lab and in six weeks you get a steak. That's a big deal

because, number one, I mean, you look at it and go, well, what good is that? I'm not going to eat that steak. If I'm flying on Mars, I'll eat that steak because you don't have to bring a farm with you. You just bring a petri dish or whatever they do. But if you're in Walmart selling gazillion pounds of chop meat every week to barbecuers, most of them aren't going to care where that chop meat came from. That probably over the very long term will have an effect. Do people in this market think about the Federal Reserve at all? Because it seems to me like commodities traders are very macro thinkers. So does that factor into their mindset at all? Yeah. They think about what's the Federal Reserve going to do and what will that impact have

on the dollar. That's what most commodities. Okay. So it is tied directly because the Fed obviously controls a short end of the curve that can maybe drive other prices, but it is directly related to the dollar. So it certainly enters the equation. Yes. The strength of the dollar is as an inversely, generally an inverse relationship with the strength of commodities. Because these commodities have done so poorly for such a long period of time, what can potentially turn that around? Is it going to be the case that investors are going to be rewarded? They're going to get in after the fact? Or are you seeing demand pick up now? Investor demand is picking up because, number one, I think that the tariff war brought the spotlight to agricultural products. Then with all this rain

and farmers not being able to get into the fields, that's a very big deal. So not having enough corn by not having a trendline yield. So the yield goes up by some number every year. It's just math is what it does looking back. The government projections are always based on a trendline yield. They can't use that this year. There will not be a trendline yield. There will be less yield than last year. We've been counting on higher yields every year to feed the world. What's causing that? Too much rain. Farmers couldn't get and plant on time. When's the last time that happened? Supposedly 1993, but it didn't happen to this extent. So this is an anomaly year. It's never happened before to this extent. So is that why these prices are moving home?

Correct. That's why ags are moving higher. So each individual commodity supply demand is the ultimate arbiter of their price. There's no question. In terms of macro, when you see the dollar peaking, you see a lot of money flowing into multi-commodity. So when you say supply demand, I just want to be very clear, you're talking literally about people that are supplying the commodity versus people that are using it. Correct. So this has nothing to do with necessarily like hedgers or buyers and sellers of the investment. It's if buyers or sellers for the underlying product. That's correct because hedgers and buyers and sellers, they all offset. It's the supply and demand that moves the price, truly. How closely do these exchange trade of products track the underlying spot price? That's a great question because what you just said there, it's impossible to track a spot price. And gold you can do it because an ounce of gold is about as big as a half dollar and it's worth whatever. It's worth $1,400 to store a couple of tons of gold. There's some gold in a safe in London with a couple of guys staying around with guns. It's pretty cheap to store

billions of dollars worth of gold. A bushel of corn weighs 56 pounds, you know about what the size of a bushel is, and it goes bad after four years. So nobody's taking physical delivery. Nobody's taking physical delivery. It's really hard. So to track spot on gold or something precious like that is pretty easy. To track spot on any other commodity is impossible. So you're not even trying to? We're not even trying to. What we want to do is track the three commodities, three futures contracts that we hold. In a well-run portfolio of any ETF, it will track its underlying less fees and expenses. Is there a risk that the spot price does really well in these products don't? Or would that be hard to envision? Well, it depends your benchmark. So if your benchmark is spot, which is an

invalid benchmark, spot could do really well. And you're not going to follow. You're going to track whatever it is, some percentage of that, not 99%, not 95%. It's going to be something less than that. But if you're looking at, well, wait a minute. If I were trading this myself, it's impossible. for me to buy spot and hold it because I can't store it and the storage costs, you know, it costs five cents a month to store a bushel of corn. So if you pay $3.50 for a bushel of corn hold it for a year, at the end of that year, it's worth $2.90. That's just the economics of things. So what you want to do is really own the futures curve, out the curve where all that's priced in for you because the pros do that. So that's why ETFs, whether it be one of our

ETFs or someone else's ETF, the benchmark is really the holdings. That's the benchmark. And you just you have to be aware. So in, say, a short-term oil fund, you've got these oil funds that only hold the front month or the second month, and they move very quickly with spot. And people say, well, they're an awful investment because I'm losing 12% of you're holding them. Why are you holding them? That's a trading product. You want to hold those for four to six weeks of the most. Are these different? These are different. Yes. There are oil products out there that hold things 12 months out. That's the one you want to own if you want to hold it for 12 months. We designed, I designed these funds so that your holdings are with the professionals holding.

You're in there. We take care of the futures rolling for you. Instead of concentrating in one month and having 100% turnover, say, 12 times a year, like in an oil or natural gas fund by nature of the product, okay? Cornelty has five futures months in a year. So if I'm split 35%, 30%, 30%, 35%, roughly a third, I'm only rolling a third of my portfolio five times a year versus 100% of my portfolio 12 times a year. Right there that helps with the holding process.

Then there's contango and backwardation, so the slope of the curve. which is the expected prices in the future, you don't need to pay attention any of that. We try to mitigate that. It'll never go away in anybody's product. We try to mitigate that by being out the curve. You said that it costs five cents to store a bushel. Can you talk about the difference between the sticker price of the expense ratio of this fund versus what is actually paid?

Sure. Well, the sticker price is what's on the prospectus. So the prospectus, in our case, our funds are not total return products, which means the interest rate is not factored into your return. The interest accrues to the fund. We'll put 5% down or whatever it is to control the notional value futures. If you put a million dollars into our fund, which is easy to do and people do it, you've got a million dollars worth of exposure.

We take that money by a million dollars worth of corn. That might only cost us $50,000 or $60,000. The rest of that money is earning interest. That interest goes inside the fund, okay? But it offsets the expenses. That's right in the expense table. So to get the true expense ratio for any fund, look in their prospectus. because there are websites out there, and almost none of them have an accurate picture of funds.

They either put your fees and not your expenses. They put your gross fees, which are before offsets or before waiving fees. So I'll take my management fee, and I've been waiving our fees. We've been waiving our fees at our discretion to keep our fees low for investors while we grow our asset base where it's naturally a low fee because we have so many assets to spread the expenses across. The only way you can get an accurate picture of what the fees really are is look in the prospectus. There's a mandated formula by the SEC. and I've got to update that. Everyone has to update to prospect this once a year. We also put out

quarterly filings. That's the only accurate way to see what the fees are. Sally, think there's anything we missed that you wanted to hit on? People just need to be aware of grains and that they can be tactically used. I think that's the key. You know, one thing we didn't get into is ETSs are so liquid and how liquidity works. I mean, do you guys understand how flash crash works? So why don't we get into that real quick. Do you want to do it? So people maybe look at these products and they look at the AUM and they get sort of scared away

it because they say, oh, this product only has $40 million or whatever it is. Can you talk about how that actually affects liquidity and what should people be looking at before they decide whether to buy yourself? Absolutely. Thank you for asking that because that's a great question. An amazing number of people are not aware that the liquidity of an ETF is based upon its underlying liquidity. So what does that ETF hold? You might have an ETF that trades one share a day, but if its underlying basket trades a billion dollars worth a notion a day and you want to put $10 million into that ETF, you can probably do it and not move it by a penny. literally because what happens is there's an arbitrage going on here's a key never use a market

order in anything nowadays because of electronic trading so a quick lesson on flash crashes all right when i go in and see the market maker for our corn fund i go into his desk in new york city downtown and he's watching all these screens and numbers are flashing and i say how many how many markets are making today this is all 330 i said well how are you doing that well he's not doing it his machine is doing it He goes in there at 6 o'clock in the morning, and remember, a human programs a machine. So a human knows how much risk he or she would like to take. So if you've got a stock that's say $10, okay, and you've got a $9.99 bid in the 10-0-1 offer, that's a machine making that bid an offer to you.

A market maker says, all right, I'll risk $100,000 on either side of that. So you put in an order to buy $100,000 worth of that at 10-01, the machine will sell it to you instantly. If you put in an order at the market to buy a million dollars of that, the machine thinks in thousands of a second and millions of a second depending on the company. It's not going to sell you a million dollars in one shot. You think it did because it happened in a thousandth of a second ten times, but the machine will sell you $100,000, the amount of risk that that trader programmed into his machine, and then recalculate and sell you again. That happens in a fraction of a second. But if you put a million dollar order in, you get, in this example, 10 transactions, of $100,000 each.

If you put a market order in, while the machine is thinking, the market order is an attack order. And it literally looks around the whole marketplace. And so whoever else has a random stray order out there, you get filled at whatever those prices are instantaneously. So you're getting all these horrible fills, $11, $12, inside this one second that you can't see inside of because it's impossible to see inside of that. And the machine then rethinks, oh, in a thousandth of a second, I'll sell another $100,000 at $10.01.

So you get a fill of $12 on some of your... shares and yet it when you look at the screen it's 999 1001 and say wow that was a terrible product no it wasn't that was a bad order and that's how flash crashes happen because a machine when it gets overwhelmed with buys or sells because the person programmed a certain amount of dollar risk it shuts off and it calls for help and it flashes so all that market maker's doing every day is going to its flashes takes a couple of seconds hit on the keyboard to sell you as many as you want or buy from you as many as you want but you have shut the machine down by overwhelming it. So when a news headline comes out and, you know, every retiree in the world on

their electronic account hits a market order for 100 shares, that actually overwhelms the system. How does that ever happen on one of your products? It happened once that we could see on soybean. And people, here's another trick. So did people like come after? They didn't because it was a small number and we saw it happen. But we've seen it happen all over the stock market. When flash crashes happen, that is why flash crashes happen because machines make markets and machines are programmed by a certain level of risk by people, and they're programmed to shut off and call for help. And it takes a couple of seconds. And market orders are attack orders.

This is a really valuable lesson. Well, what's the lesson? Don't use market orders. You limit orders. And don't trade at the open, especially. Let stocks open, even the S&P 500 basket. Remember, the machines are searching for all 500 of those stocks and getting a bid ask and a fair value.

That takes a couple of seconds or even a couple of minutes. So if you're putting a market on open or a market on close order in, there's no way you're going to get a good fill. you're most likely going to get hurt with that so wait 10 15 minutes for the new york stock exchange open then put your orders in and use limits that's really important not just for ets for anything because machines make markets now not people good to know sal thank you very much for coming on this is great my pleasure thank you so ben if you look at any of these charts so we said like these have been really really not great over the last few years but they have had

many booms and a lot of busts. So if you have had in a portfolio, I'm not going to sugarcoat too much, pun intended. It's been bad, but you can use the volatility potentially to your benefit. So who is the user for this? I was wondering this today as I was listening to James Montier, talked to Christine Benz and Jeffrey Patak. It's just a product that a company like GMO would use. Because I can't imagine that this is like retail investors, like sitting at home. You don't think that this is just a lot of traders use these things? Could be, but what type of traders. I think anyone who's looking at like trend or relative strength or I feel like there'd be a lot of people that want, that want to use some sort of asset that can have huge swings and price

and hop on the trends when they, when they happen and get off when they're gone. So I'm guessing there's a lot of like Twitter traders out there who would love this sort of thing, don't you think? I was one of them. Yes. That uses it when it's in an up trend and then gets out when it's in a downtrend because both of them can be very large. So I like the fact that we talked a little bit about the difference between tactical and strategic investing with these things. And I think you just have to really go into your eyes wide open if you're going to invest in these things. Yep. Well, thank you, Sal, very much for coming on the show today. Thank you to Tukrium, Animal SpiritsPod at gmail.com. And we'll see you next time.