Transcript: Caroline Woods: Joining me now, Sal Gilbertie, CEO and Chief Investment Officer of Teucrium. Sal Thanks so much for joining me at the desk.
Sal Gilbertie: Thanks for having me.
Caroline Woods: So we’re talking soybeans. I think a good place to start would be the fact that China has totally pulled back on US purchases of soybeans. It was, what, the first time that US soybean shipments fell to 0 since 2018? That’s to China specifically. Talk to me about the ripple effects on the global supply picture?
Sal Gilbertie: Sure it’s creating plenty of soybeans for other people because the US isn’t selling any to China. That’s what’s happening. China has bought virtually all soybeans from Brazil. There are three exporters that matter for soybeans. And that’s Brazil, the United States and Argentina. Paraguay is a little slice in the pie, but the big exporters are Brazil, the United States and Argentina. And China is exclusively buying right now from Argentina and Brazil, which leaves the US out in the cold a bit. So it opens soybeans up to other buyers.
Caroline Woods: But was there a shortage. Is that really even necessary. What does this all mean from an investment perspective?
Sal Gilbertie: From an investment perspective, it’s easy. There’s not a shortage. And grains around the world traditionally trade at their cost of production. And in the United States, for soybeans, that’s between 9 and $10 a bushel. We’re right about $10, I think, as we speak now. And that’s break even price. And what agriculture does, because it’s subsidized farmers get used to planting at break even. They will plant and plant and plant. That’s their job. And they’ll choose which crop to plant, that they make more money. But right now, soybean farmers have plenty of soybeans around the world. There are plenty of soybeans. China is the largest importer of soybeans in the world by far. They’re getting all of their supplies from Brazil, whereas traditionally they would get a large percentage of their supplies from the United States. Now they’re stepping in front of people who would normally buy from Brazil. Those people have to buy from the US. The interesting thing is that soybean demand globally has been growing at 3% to 4% a year for at least the last 10 years. It continues to grow. And so luckily, farmers continue to grow as well. And they grow more every year. Right now there are plenty of soybeans, but three times in the last 17 years, we’ve seen both corn and soybeans double from their cost of break, or nearly double from their cost of break even. And then they go back to that cost when farmers plant. And that’s where now we’re back at that break even cost. Which to your question for an investor, is a time to strategically allocate where grains don’t correlate well at all to the S&P 500 or to stocks. So it might be a good time for investors to consider looking at the grain complex as an addition to their portfolio.
Caroline Woods: Explain why though. Because I would assume that China not buying us soybeans would mean prices would go lower. So why would you want to get in right now?
Sal Gilbertie: Well, we’re at a break even cost. We’re at about $10 a bushel. We’ve seen we’ve seen soybeans go down to 9 ish or so, but then they stop because farmers just stop planting or stop selling. And we’re at peak harvest, meaning actually we’re past peak harvest. So most of the soybeans have already been harvested. All soybeans in the northern hemisphere have been harvested. There’s a huge there’s a huge amount of soybeans for sale right now they’re only at $10. Like how much lower can they go. Farmers obviously have found places to put them. China isn’t buying. That should be an extreme worst case scenario for soybean prices. I’m not saying they can’t get down lower, but we’re at the very low end of a historical 17 year trading range. That’s a good time for investors to look at buying something.
Caroline Woods: So talk to us about what could send prices higher?
Sal Gilbertie: A drought 1099 times out of 100. A drought sends sends prices higher. We did see the war in Russia send wheat prices doubling, almost tripling in 2022. That was very short lived because, of course, wheat supply, wheat supplies were not withheld from the market. Nobody’s going to withhold supplies from the market. That’s not happening. So there are plenty of soybeans. Buyers can find soybeans in the United States. They won’t be able to find them in Brazil, because Brazil sold literally all of their crop to the United States. So I mean, to China. Sorry so people have to turn to the United States. So we’ve got the crop is in, we’ve got the biggest buyer not buying. Prices are pretty much as low as you can imagine. They can go lower. But we’re at a point now where there’s probably opportunity.
Caroline Woods: OK and for those interested in actually getting involved in the soybean trade or strategic allocation, to your point, you have an ETF, soy B that you say can actually provide liquidity to farmers as a means of an investment. Tell us a little bit more about that. And is this geared toward the. Everyday investor, would you say, or someone who’s a bit more of a sophisticated trader?
Sal Gilbertie: It’s geared toward both. It’s the only ETF right now that’s purely soybeans. And so if someone wants just a pure exposure to soybeans and it holds soybean futures, so it will do what the futures do and it holds out pretty far. And so we’re holding the curve. We’re holding the contracts that farmers hedge in. So when an investor comes in not only are they providing liquidity out there in soybean futures are immensely liquid. They trade deca billions of notional value a day. So no amount of investor money can affect the price of soybeans. There’s plenty of liquidity for any amount of investor money to come in that will allocate. It will provide some support for the curve or some liquidity for a farmer. Prices are going to do what they’re going to do based on supply and demand. I don’t think any investor money can come into an ETF of any size to move the price of soybeans, it will go by itself. Soybeans are an extreme low end of their trading range. It’s something that might be worth a look.
Caroline Woods: Yeah you talk about this Golden Grain cycle in your notes. Fill us in on that.
Sal Gilbertie: So the Golden Grain cycle is what happens. We’ve noticed a pattern the last 17 years since the renewable fuel standard came into place, which really reset the price of all agricultural commodities 17 years ago. What we’ve noticed is grain prices trade at their cost of production. As I mentioned, that’s where they trade normally. Then when there’s a drought, they rocket higher because of demand. So stage one is when they’re at their cost of production. So stage one of the Golden Grain cycle we’re in right now, we’re at or near our cost of production. Stage two is when there’s an event which generally happens every two to six years. If you look back historically, I think the average is every four years you get a drought and the prices rocket higher when they go up. Generally, we’ve seen them double 3 times in corn and nearly double 3 times in soybeans in the last 17 years from these same numbers where we’re at now. And that’s stage two when they’re making those highs. Stage 3 is when they head back down, because every farmer that can will plant soybeans and increase the supply. It’s been a couple of years on the way down for that stage three. We’re back in stage one which is the accumulator by zone for people who are interested.
Caroline Woods: OK and to your point, it’s not correlated to the market. So I saw your stat the soybean fund benchmark index has outperformed the S&P 500 in every 10% or greater market correction since inception. So 7 out of seven. Why do soybeans tend to outperform in times of market correction? And when do you expect this 10% or greater market correction to actually occur?
Sal Gilbertie: Great questions. One everybody uses soybeans. The demand for eggs is steady. Eggs are used for food for humans and animals and for fuel. And those demand factors rarely abate. So we’re always seeing demand increasing. As I said, demand for soybeans has been increasing about 3% to 4% a year. That’s so you’re going to use fuel. You’re going to eat tofu. You’re going to eat meat from a poultry or poultry that eats soybeans, whether the stock market is going up or down. And so when the stock market does have a 10% correction, and I have no idea when that will be. We’ve seen since the soybean fund has been in existence, since that benchmark has been in existence that it tracks, the S&P 500 has had 710% pullbacks, and every time soybeans have outperformed two of those times, soybeans were higher when these stocks were lower. So it does correlate and add some stabilization to a portfolio.
Caroline Woods: And just finally just quickly, because we have to wrap up, I am curious about this. You’re saying the demand has been increasing. You talk about some of the reasons why. My mind immediately went to is this vegetarian’s driving the demand. Is there one particular thing that’s really driving it more than others. Is it tofu?
Sal Gilbertie: I think it’s biofuels. If you want to pick one thing, it’s biofuels. And number two is actually feeding animals. So soybeans are grounded to soy meal that’s eaten by poultry. Demand for chicken has skyrocketed. Demand for Turkey skyrocketed poultry around the world. And Yes, vegetarianism is helping, but it’s a tiny little, little factor.
Caroline Woods: OK, we’ll leave it there. Sal, really appreciate your insights on soybeans. Thanks so much.
Sal Gilbertie: Thank you.
Caroline Woods: That’s Sal Gilbertie, CEO and Chief Investment Officer of Teucrium.