HardAssetsInvestor

Written by Drew Voros  |

March 21, 2012

Sal Gilbertie: Surging Chinese Sales, Tight Supply Fuel Rising Corn Prices

Details

Founder of CORN ETF issuer Teucrium says market conditions ripe for higher prices despite record crop expectations.

In July 2010, Santa Fe, N.M.-based Teucrium Trading LLC launched its corn exchange-traded fund (NYSE Arca: CORN) that has since seen its assets under management rise to more than $100 million at certain trading points. Today corn is very much a growing player in the commodity space, as ethanol production, an increasing Chinese appetite for U.S. corn and wild cards such as weather keep corn pricing in the news. HAI Managing Editor Drew Voros recently spoke with Sal Gilbertie, president, chief investment officer and founder of Teucrium, about the corn market in general, his company’s corn ETF in specific and whether agricultural ETFs can replace the futures and options markets.

Hard Assets Investor: The pricing pattern of corn that you’ve spoken about before seems to be forming again. Do you agree with that?

Sal Gilbertie: It does seem like the typical corn seasonal pricing that often plays out in the markets is happening. The greatest number of cyclical lows is set in the corn markets in either October or December. And that’s over the last 22 or 23 years. They coincide with harvest. Most of the world’s corn is grown in the Northern Hemisphere, where corn harvests are in the autumn. It makes perfect sense that when the vast majority of the supply of a commodity for the year hits the market in a 10- to 12-week period, that’s going to have an effect.

So asset allocators who may not be price sensitive, but really want to optimally rotate into say, agricultural commodities, are often provided these seasonal opportunities. Last year, corn obviously provided that by adhering to its traditional seasonal pattern with a low in December. And that’s just due to harvest.

HAI: Conversely, is there a seasonal exit? Is the middle of the summer typically the highest point of the year?

Gilbertie: It’s harder to find a seasonal high than a seasonal low because the harvest is the biggest supply variable. It’s finite and it comes to market all at once. But there are several factors. And if you look back the last 22 years, you really have a difficult time identifying a pattern in the seasonal highs, other than to say that they more often happen between March and July. The reason is quite simple. In March, you begin early planting. People get a sense of optimism that there's going to be corn in the ground. From March to April, it’s just about being dry enough for the farmers to get into the fields and plant. Come July, there's a critical pollination time that determines how many kernels are on the cob. Generally, by July, you get a sense of how many acres have been planted of corn, which removes that particular supply variable.

If there's any sense that there was good weather and you believe there's going to be a decent yield, people then generally get more comfortable with supply. The whole reason the seasonal pricing happens — and it’s easier to identify the bottom than the top, is —because of old crop/new crop corn supply.

If something were to disrupt planting, or the growth stage or the maturing stage of the crop, that could potentially make investors bullish. So, while you have the most recent harvest’s supply on hand, the uncertainty of future supply is what the market focuses on, because we don’t have multiyear inventory of corn. We currently have under a 30-day supply of corn.