Hey there! Welcome to the 1st edition of the FT Research monthly (or whenever really) newsletter. Today, we’re bringing you a long term play based on a macro trend our team has identified.
Although thus far Jerome Powell and the Federal Reserve have failed to reach targeted levels of inflation in traditional metrics (CPI), we anticipate growing inflation in these areas — specifically in food prices accelerating quickly within the next few years driven by a number of global and domestic factors.
We are targeting corn (and thus CORN) because of its fundamental necessity in the global economy and its unique position within the economy of the United States.
You may remember the swarms of locusts that plagued east Africa, India and China last year. We are now seeing the repercussions of Asian crop damage in 2020 combined with the impact the pandemic has had on planting and harvesting.
In the January 2021 WASDE report, the US Department of Agriculture cut the corn inventory forecast to a seven-year low, meaning world supply is tighter than expected at a time when Chinese demand shows little sign of letting up and South American growers face drier-than normal weather. Brazil’s crop agency also lowered its estimates for corn other commodities.
“Corn markets should stay bid [hot] this winter,” given Chinese demand and risks to Brazil’s harvest, Citigroup said in a note.
The UN Food and Agriculture Organization’s food price index for January rose by a tenth from a year ago to its highest level since July 2014, led by a sharp increase in grain prices. Substantial buying by China and lower-than-expected production in the US helped send the gauge — which tracks a basket of food commodities against their 2014-16 prices — to its eighth consecutive monthly increase, the longest rising streak in a decade.
The rally follows several years of low prices after favorable weather led to bumper crops. Corn prices are up about 45 per cent from a year ago to $5.4275 a bushel.
Currently, speculators’ net long positions in corn — overall bets that prices would rise — have reached their highest level since spring 2011, said Michaela Helbing-Kuhl, an agricultural commodities analyst at Commerzbank. Then, corn cost $7 a bushel.
Anyone who's taken a look at the ingredients on nutrition labels will be familiar with how frequently corn syrup, corn oil, and corn starch are used in American food products. With people on lockdown cooking more at home – and still stockpiling in some parts of the world – prices for commodities are surging, forcing food companies to absorb higher costs.
Kraft Heinz Co. and Conagra Brands Inc. recently said they may choose to raise prices this year on some products that use wheat, sugar and other commodities like corn that are becoming increasingly expensive due to high demand. Other major food companies, including Lipton tea and Hellmann’s mayonnaise maker Unilever, have also signaled higher prices due to global commodity inflation.
Production may also be affected by politics. Farming practices is one of the primary areas the Biden administration is tackling as they address climate change. Among the strategies gaining traction is establishing a federally funded carbon bank that pays farmers to store carbon in their soil. However, establishing this practice would initially cause farmers to incur higher costs of production in order to comply with regulations.
Because these kinds of conservation programs are largely funded through mandatory appropriations, action could be taken without waiting for a new spending bill.
Another X factor to consider is a resurgent post-pandemic economy that will see a release of pent up demand. As more people get vaccinated and the economy reopens, they will be more apt to spend more freely as feelings of security return. We suspect that the effects of a post-pandemic economy are being vastly underestimated by some of those at the Federal Reserve and the United States Treasury.
So, what’s the play?
We recommend shares or LEAPS options on Teucrium Corn ETF (CORN).
Performance over 1-Year: 17.6%
Expense Ratio: 1.11%
Annual Dividend Yield: N/A
3-Month Average Daily Volume: 258,316
Assets Under Management: $137.6 million
Inception Date: June 9, 2010
According to Investopedia, this fund has unique potential as an inflation hedge and for providing a tactical tilt toward an important corner of the agriculture market. The Teucrium Corn Fund (CORN) provides investors an easy way to gain exposure to the price of corn futures (their sole holdings) in a brokerage account.
On the date of publication, the writer of this article is long CORN 2023 LEAPS
Sources and Further Reading
Corn ETF Guide: https://teucrium.com/etfs/corn
January 2021 WASDE report: January
Februrary 2021 WASDE report: February
Kraft Heinz, Conagra may raise some product prices as grains, edible oil costs surge: https://www.reuters.com/article/us-packaged-food-prices-exclusive-idUSKBN2AG2H0
Food inflation concerns deepen as prices reach highest level since 2014: https://www.ft.com/content/571a9d68-c8b5-4c56-a539-26fff81e9296
Biden advisors push a new plan to slow global warming: A soil carbon bank for farmers: https://thecounter.org/biden-transition-regenerative-agriculture-usda-carbon-bank-climate-21/
USDA Says 2021 Farm Exports to China Will Touch Record High: https://www.bloomberg.com/news/articles/2021-02-18/usda-says-2021-farm-exports-to-china-will-touch-record-high
Best Agricultural Commodity ETFs for Q2 2021: https://www.investopedia.com/investing/agriculture-etfs/
"Corn Supply Squeeze Sends Prices Soaring, Risking Food Inflation" By Kim Chipman and Michael Hirtzer (Bloomberg): http://www.fullertreacymoney.com/system/data/files/PDFs/2021/January/corn.pdf