Skip to content
A Critical Look at Commodity ETFs


Ongoing supply chain struggles have rocked the global commodities complex, which has pushed a wave of concerns to new heights – as Russia’s war on Ukraine rages on.

The story is no different for commodity ETFs. Many of these funds have seen huge inflows in recent months, such as the Teucrium Corn Fund (CORN), which is up 34% this year, recently hitting a seven-year high.

Teucrium manages a range of commodity ETFs offering exposure to corn, wheat, soy and sugar. Sal Gilbertie, the company’s president and CEO, said the current moment marks a critical turning point for agricultural crops, especially the global corn harvest.

“It’s corn planting season in the northern hemisphere and Ukraine is a major corn exporter,” he said on CNBC’s “ETF Edge.” “If they don’t plant it, they won’t have any to export.”

About 14-16% of world corn exports come from Ukraine. But exports have fallen steadily and are expected to fall further as crucial shipping routes are limited. Now experts are keeping a close eye on Brazil’s maize harvest, which is seen as likely to make up for shortages in Ukraine.

The war is also weighing heavily on the world’s wheat supply. The Teucrium Wheat Fund (WEAT) is up 50% year-to-date, fueled by equally severe shortages.

Around 30% of the world’s wheat comes from Russia and Ukraine. In addition, Russia is the world’s largest exporter of fertilizers and as economic sanctions take hold, a boycott of Russian fertilizers could lead to lower overall crop yields.

Ukraine has some of the most arable farmland in the world, but without enough fertilizer, farmers won’t be able to harvest the crops they planted in the fall in late June and July.

“The Ukrainian government says about 50% of its wheat exports could be inhibited or completely lost,” Gilbertie said. “It’s a bigger problem for the world, because these trapped stocks are going to cause supply disruptions for global wheat.”

Bryon Lake, global head of ETF solutions at JP Morgan Asset Management, said commodity ETFs have seen outsized inflows of around $20 billion since the start of the year, which is seen as a strong evidence that investors have beefed up their portfolios as they prepare for more inflation. ahead.

“Commodities can positively participate in an inflationary environment, so that’s what investors are doing,” Gilbertie said.

He also explained the mechanics behind Teucrium’s commodity ETFs, which are based on futures contracts.

“When the money comes into the fund, we buy three different futures contracts in each fund,” he said. “We never buy spot. We always let people participate in what they call along the curve futures. So if you think the price of the commodity is going to go up, you buy the fund and those futures are going up.”

Ripe for innovation

The wider ripple effects that the Covid-19 pandemic and the invasion of Russia have had on the global commodity market have also had a very real impact on reducing globalization.

Gilbertie said the supply chain disruptions we are seeing now will morph into more such disruptions, producing a vicious cycle that will only push prices, demand and prices even higher.

“No one can rely on their supplies anymore,” he said. “So people are going to hoard. They’re going to have to at least hoard inventory to account for anticipated supply disruptions, which means the demand for raw materials is… higher, not for actual use, but because people cannot rely on a regular supply.”

And that hoarding will likely trigger longer-term commodity inflation.

But one of the potential positive spin-offs from higher prices could be increased innovation that could perhaps spark a new agricultural revolution.

“It just takes time,” said Gilbertie, who argues that agriculture has traditionally been one of the most adaptable industries fueled by commodities.

“It takes a season for every farmer to plant and get more crops if they are able to plant,” he said. “It takes a long time to drill an oil well and even longer to build a mine. So the longer prices stay high, the more people are motivated to produce, the more innovation happens.”

Warning

cnbc

Not all news on the site expresses the point of view of the site, but we transmit this news automatically and translate it through programmatic technology on the site and not from a human editor.