Q: What is the genesis of Teucrium Funds?

I established Teucrium Trading in 2009. Prior to that, I was a principal trader for Société Générale’s Fimat division, which later became Newedge. I was trading about 30 different commodities providing liquidity off the futures exchanges. I started at Cargill in 1982, trading leaded gasoline and created an ethanol swap contract based on futures, which were not widely traded. The financially settled swap that I created took off extremely well.

So, I ended up with a desk trading 30 commodities for institutional market participants. Some of the investors were large ETFs, mostly energy-related, who needed off-exchange liquidity because their positions were too big, especially when they rolled. That’s when I realized that I could create a better ETF, so I left the bank and started Teucrium.

Initially, we had seven funds. They included our current funds, which are the four large agricultural commodities of corn, soybeans, wheat and sugar, as well as a fund of these four funds. We also had two energy ETFs. My original idea was to create a better crude oil ETF and a better natural gas ETF, because I was doing massive over-the counter business for energy ETFs. Over the course of two years, the two energy ETFs were listed and outperformed their category, but no one bought them, so we delisted them.

Q: What is the purpose of the funds?

We launched the Corn Fund in 2009 with the idea to provide direct access to commodities, specifically grains, because most people are not familiar with futures or are incapable of trading them. Most pension funds and endowments are not allowed to trade futures; they gain their commodity exposure in other ways.

Our funds are intentionally designed to be simple, transparent and unleveraged. I used my knowledge of futures and individual commodities to design an ETF that overcomes the initial problems of commodity ETFs.

When the first oil ETF came out, billions of dollars poured into it because it provided immense liquidity and the market was hungry for direct exposure to crude oil. The demand was enormous, but people didn’t understand the short-term trading issues. When investors hold on for longer than four or six weeks, they might have a problem because of the contangoed pricing nature of the market. The investors holding a $99 crude contract would have to replace it with a $100 one, when that contract rolls or sells out. We can’t remove that inefficiency completely, but each of our funds is designed to mitigate it in the best possible way.

Q: How is the firm different from its peers?

We have an area of expertise that no one else in the public domain has. The only people who know as much about grains as we do, work for hedge funds or for big grain trading companies. We literally stand alone with our knowledge in a niche and unique market, which doesn’t have a wide body of expertise. We are the only grain experts to have publicly traded funds and are willing to share our knowledge and to provide a way to get exposure to grains. That makes us unique more than anything else.

Q: How do you create an ETF?

We created the ETFs with the understanding that most investors are not traders. They would be holding the products for some time, maybe a year or longer. The funds are designed for buy-and-hold investors with diversified portfolios who want direct exposure to commodities. I wanted to mitigate the negative effects of contango and backwardation, so each ETF was designed around each specific commodity.

The ETFs facing the most criticism were the ones that concentrated their holdings in the spot month or the first nearby month. I decided not to hold the spot month because it is the most inefficient month for a long-term, buy-and-hold investor, as it deepens the effects of contango and backwardation. Nevertheless, we want to be with that movement and, as a result, we own the second and the third futures month. In that way we are not rolling too much; we are spreading our holdings across multiple contracts and we get most of the benefits of the spot movement.

The next step is choosing an anchor month, which is unique for each commodity. For example, he Corn Fund, which is our largest and most popular fund, owns the second and the third month futures and December following the third month. In the northern hemisphere, where more than two-thirds of the world’s corn is grown, December is the natural hedge, because the crop is harvested between September and December. September is too early, so December is the one that professionals are looking at and farmers are using for hedging. Investors want their money to be where professional money is, not at the front month, where people are trading at headlines.

When corn has the second, the third and the anchor month of December, we are rolling only about a third of the portfolio. The first contract that we hold is 35%, the second contract is 30% and the last contract is 35%. So, we only roll about a third of the portfolio five times a year, while oil rolls 100% 12 times a year. In simple math alone, we mitigate many of the damages that can be done by contango. Also, in several months of each calendar year we own two Decembers, so we own two crop years of corn. That approach gives investors true exposure to the commodity.

Q: How correlated are grains to the broader market? Why should investors consider them?

According to a 20-year study, gold is 0.48 correlated to the S&P 500 Index, while grains are roughly 0.20 correlated, so they have less than half the correlation of gold. That’s one of the reasons for grains to become more popular. In 2018, during the semi-annual reallocation of one of its model asset allocation portfolios, KKR & Co. replaced its 1% gold holding with a 1% corn holding. I believe that marks a turning point on Wall Street. It is a big event, because it shows that people realize how important grains are and what a useful tool they can be.

Importantly, grains can be used as a portfolio stabilizer, because they have relatively low downside risk and substantial upside potential during a drought. Grains trade at breakeven; that’s how they work. Farmers keep planting them every year, supported by governments to keep our food supplies safe. As a result, grains trade flatly for years and are relatively stable in a portfolio. It is better for an investor to get them now, while they are trading at that breakeven pattern. In the last 12 years corn has doubled twice from its current price, but it eventually goes back.

Another advantage is the transparency and the liquidity of the investment. We are part of the ETF structure, so we must meet the requirements for all ETF issuers. One of these requirements is to publish the holdings within 24 hours of a trade. Most of the ETFs, including Teucrium, do it on the same day.

We are non-discretionary managers and we stick to the formula of holding three contracts with an anchor month. In that way investors know what they will hold when they buy our fund. We have no leverage; we are perfectly transparent and immensely liquid. All the ETFs are as liquid as their underlying commodity and the corn market is huge.

Overall, I have developed a simple, easy to understand, transparent and liquid product, designed for all investors - from the small investor with an IRA account to large asset allocators. We have consistent growth of the assets under management every year and I believe that the next time there is a drought, our growth will be explosive.

Q: What idiosyncrasies of the grain market would you want to highlight?

The uniqueness of the agricultural products comes from the fact that they are planted, grown and harvested. Then there is a huge pile of them, which keeps getting smaller until the next round of planting and harvesting. The idiosyncrasies in grains are related to the seasonality of harvesting cycles. With the end of harvest, the annual supply of grains is stored, so the market gets comfortable at peak harvest.

That is most apparent in corn, because in a normal year it bottoms with peak harvest in around October and tops out around the 4th of July, when people realize that the crop will be good. In soybeans it’s a little bit different, because soybeans are planted and harvested later than corn. The anchor month for soybeans is November. Wheat has dual seasonality, because there is winter wheat and summer wheat, so there are two times when there’s a harvest.

For sugar the anchor month is March. Sugar is ruled by global supply, because it comes from a lot of places, with Brazil and Indonesia being the major producers. There is a clear picture of global surplus or deficit; it may swing from a surplus for several years in a row to a deficit for several years in a row. So, sugar has large cyclical multiyear price swings based on projected deficits. Overall, each ETF has unique structure and a different anchor month.

Q: What are the main factors affecting the price of corn?

For decades, the breakeven price of corn was about a $1.75 to $2.00 a bushel. When it didn’t rain, it went up by about 50% to between $2.50 and $3.00 a bushel. That was prior to the 2006–2008 period and the ethanol mandate in the U.S. After all the ethanol plants were built, global corn prices doubled. The breakeven price went up to $3.50 and $4.00 a bushel and can spike up to $7 or $8. That’s a big change.

Now China is going to a 10% ethanol mandate in 2020. The government projects that they will be consuming about 44 billion gallons of gasoline in 2020, which means they will need 4.4 billion gallons of ethanol. Right now, they can only produce about 1.1 billion gallons, so they are building more plants. The general expectation is that the government will meet the mandate and will enforce it, because there is also the effect on air quality. The primary goal is not to get rid of excess corn stocks or to stabilize the fuel supply, but to clean the air, because ethanol does burn cleaner. If the 2020 mandate is adhered to, there could be another shift in global corn prices.

Another important factor is the surplus. In a normal year, there are reserves of six months of extra wheat and only two to three months of extra corn or soybeans. That means that even a moderate decline in yield can seriously decrease the surplus, so the markets get nervous about it. It does not necessarily have to be a drought; just poor weather in a major producing country or a loss of two-week production can bring the corn surplus down.

Overall, the explosive upside potential in grains is a drought story, but the stabilizing factor is the consistent demand and consumption. While the downside is limited by the consistent demand, the upside is tremendous. At the same time, grains can provide stability and long-term gains as prices rise due to underlying inflation or increasing consumption.

However, because grain ETFs are a newer product, nobody notices when the price of corn goes below $4 per bushel. When the price of oil drops below $40 a barrel, billions flow into oil ETFs. The entire ETF industry is about 20 years old; energy and gold ETFs are less than 20 years old, while the grain ETFs are barely 10 years old.

As a company, we are approaching our ten-year anniversary, but I feel that we are just getting started, because the industry and the investors have just begun to seriously consider grains. Investors are allocating more to commodities and realize the benefits of diversification and direct exposure. Just like they diversify equity and bond portfolios with different types of stocks and bonds, they should be thinking of diversifying their portfolio with commodities.

Q: Does demographics play a role in wheat consumption and production?

Yes, it is a long-term process, but there are other factors as well. Just the trade war between US and China will shift supplies over the coming decade, especially with soybeans. China has a large capital structure and there are companies looking to create farmland to grow soybeans, so we will have more land opening.

Wheat is different than other grains, because its production is less concentrated. In corn, the two largest producers are China and the U.S. and a drought in any of them will have a big impact. At the same time, there are probably 10 key wheat producing regions. A disruption in any of them would affect wheat. For example, last year wheat prices rallied by about 30% because it didn’t rain in two states of the United States, the Dakotas. Prices didn’t double, as it happened in the past to corn, but they increased significantly and went back down when it started to rain.

The world’s largest wheat producers are China and India, but they consume the wheat domestically. Globally, the most important producers are the U.S., Russia, the former Soviet Union countries around the Black Sea, Western Canada and Australia, because these countries export wheat. A drought in any of these places affects the market. In fact, the all-time high in the price of wheat was set at different time than the all-time for other large grains. It happened in 2008 because of drought in Australia. That makes wheat unique among the grains.

When four years ago there was war in Ukraine, wheat prices made the headlines and rose significantly. Only in a couple of months, our fund went up from $3 million to $35 million and investors acknowledged the safety and the transparency of an ETF structure.

Q: What is the size of the total assets across all the products?

The assets have been growing. Right now, we manage $152 million; AUM ranged from $140 million to $200 million in the previous 2 years. It depends on prices and headlines. Money comes into our Soybean Fund when soybean gets in the headlines and leaves the fund when people read that China is not buying soybeans from the U.S.

Sugar is a unique commodity and the only place where we have a competitor with an Exchange Traded Note.  Our sugar ETF attracts investors for two reasons. First, sugar had a long-term cyclical bottom and, second, the issuer of the competing fund changed their note and people woke up to the difference between trading the sugar ETN and investing in a sugar ETP. I believe that some assets came from that note conversion.

Our fund of funds, Teucrium Agricultural Fund, which holds 25% of our each of our commodity funds, currently has only $1.5 million in assets under management.

Q: Do you have plans to introduce a coffee ETF?

We could do it, but there is a popular ETN out there and I don’t feel the need to compete with it. The ETN is based on a whole agricultural sector, and I think it only has around $50 million. People constantly ask us to launch coffee, cotton or lumber ETFs, but cotton and coffee ETNs are already available to investors. I do not know if there is a direct lumber ETF, but there are lumber-based ETFs that invest in lumber companies.