Talk Your Book: High Prices Cure High Prices

0:00Today's episode is brought to you by Tucrium Trading. To learn more visit their site at Tucrium.com. That's Tucrium, T-E-U-C-R-I-U-M.com.

0:36positions in the securities discussed in this podcast.

0:42Welcome to Animal Spirits with Michael and Ben. All credit to Sal, when we said this after we hung up. I think he's the only person on the show, in the history of the show, to come on and say that the product that he is, or the market that he's in, has no real long-term expected return. So agricultural commodities, which is the bulk of the discussion that we had today, they're more like a buy-in weight, a buy-in rent, but they're not necessarily buy-in hold forever. Well, a lot of commodities are tactical. Like there's times where you have these huge booms and these huge busts, but like over the course of the product, they don't really go anywhere.

1:25So yeah, it's like a lot, it's a trading vehicle. And yeah, you're right. Credit to him for actually putting it that way so people understand it better. So Ben, you had an interesting comment today that commodities have a good branding message. Yes. They're the only market where you talk about super cycles. Every time commodities are up like 10%, someone comes on CNBC or Bloomberg and goes, we are setting up for a super cycle. Or Goldman Sachs commodities analyst says, super cycle is coming. No one just says it's a cycle. It's got to be a super cycle. If you said that for stocks, you would get laughed at.

1:56Yes. If you said a super cycle for stocks, people would say, oh, Dow 36 ,000 all over again. But yeah, commodities have a good PR firm, I guess, because the super cycle thing, you have junior gold miners. You know, if I put my Jerry Seinfeld voice on, like, never mind. What's the deal? Yeah, what is the deal with that? So yeah, no, but I love the way Sal put this is because every time the prices start to go up, you get these crazy price targets that are way, way higher. And when you start to go down, you get these crazy price targets that are way, way lower. And his point was, listen, high prices cure high prices, low prices cure low prices.

2:29and the human nature impact of that, like your brain can't possibly think that way. It's like, no, no, they're going to keep going up. They're going to keep going down. There's no middle ground. The way that he explains the cycles of commodities, I find really interesting. And you add the technology element to it and things getting, to your point, like there's no way food on a real basis costs less than it did back in the 20s or 30s or whatever, but it does, which is like a testament to human ingenuity. That Malthus guy was full of shit. He sure was. I'm giving him a pass because he didn't see what was coming.

3:01I'm willing to let it slide, even though people have still thought that that's what was going to happen. There's going to be billions of people. We're not going to be able to feed them all. And Sal's point was we either have just enough food or we have way too much food. We don't have a shortage of food on this planet. I watched a movie over the weekend for the 14th time that's way out into the future when mankind, the planet can no longer handle us. A little movie called Prometheus. It's a good one. Great one. Better than I remember. Is that why they went to space? Because we couldn't? I'm guessing.

3:33Actually, actually, the truth be told, Alien Covenant, the sequel, that's the one where they try to colonize other planets. Okay, great. Another great talk with Sal. He always, he's like a, because there are people in commodity, I think commodities are so extreme and volatile that you tend to get a lot of volatile people in the space. He's right down the middle. He's very even keel. And that's what I like about him. So here's our talk with Sal Gilberte from Tucrium about the agricultural commodities, oil, all these kind of things. We're joined today by Sal Gilberte. Sal is the CEO, the president, the CIO, and founder of Tucrium.

4:08Sal, welcome back to the show. Pleasure to be here, Michael. It's only fitting that we have you back on post-Thanksgiving. How was your Thanksgiving, which Ben thinks is an overrated holiday, which is nonsensical. How was your Thanksgiving, and what do you think about Ben's stance on the greatest holiday ever? that. Thanksgiving is the greatest secular holiday ever. Yes, it is. See? Ben? I said it's three or four down the list for me. That's all. It doesn't mean it's bad. Food, family, fun. It's wonderful. And you get to overeat and no one cares. Sal, I have to watch the Lions lose every year on Thanksgiving.

4:39Okay. Well, when you throw sports in, it changes. I'm just getting it for the food and the fun and the family. Thanksgiving has all the commodities and all the fun. Hey, Sal, I wanted to ask you, which forgive me if we asked you this before, but where does the name Two Cream come from? Tuquerium comes from an herb. My family's a big herb growers, and I thought it was a cool name, Tuquerium Trading. It's really, we tell people it's lore is from the Greek and Greek god, too, sir, and all that. But really, it sounded cool. And it's a useless herb. It's decorative. It grows wild on the hillsides of the Mediterranean.

5:10You don't use it for anything. All right. There we go. All right. So let's start broad, and then we'll drill down a little bit. It's Monday, November 27th, 2023. How would you describe the state of the agricultural commodity world presently? Stable, well-supplied, and headed back towards normalcy, which is cost of production. And that's for the big grains. Now, the couple of outliers, sugar, rice, there are some shortages there because of weather and really high prices. You've got 12-year highs, I think, in sugar and multi-year highs in rice, both because of production problems due to weather.

5:51You mentioned that you were getting back to a state of normalcy. How abnormal were things? Because they're probably abnormal in both directions, right? After the war, they probably got abnormal, and then the downswing from there was probably... So where are we in that cycle? Sure. Well, as we've said, there's the golden grain cycle, and normal is stage one. It's three stages. Normal is cost of production. So grains, major grains, corn, soybeans, wheat in particular, they're subsidized by every country in the world. No one wants to run out of food. So farmers are used to operating at the cost of production because demand is robust and growing all the time.

6:24You have steady demand. So when there's a supply disruption, usually because of weather, once because of war in our lifetimes, we get a disruption. And when you have steady demand and interrupted supply, you get prices coming off that cost of production, sometimes quite dramatically like we saw in wheat. So we had the spike in all commodities due to both COVID and then the war in Ukraine. War in Ukraine really affected global wheat and major grain markets. And you're headed back down toward your cost of productions as the markets adjusted. The panic went away. And now supply is coming back on adequately.

6:59Is cost of production, and I know this is an investment advice, but generally speaking, is that when you want to be a buyer? Or what's a broad framework for thinking about these things? Sure. So let's go back to the golden grain cycle. And people can Google it. There's a good piece on that written by Jake Hanley, our analyst. And stage one is normalcy. So you're just trading flatline at cost of production. And how you tell is futures go flat, OK? Every farm's got a different cost, but the futures just go flat because that's delivery. That's the time to layer in your portfolio. I think I've said this to you guys before.

7:32The expression advisors have used for us is they wait it, W-E-I-G-H-T. They wait, W-A-I-T, for supply disruption. And then it's usually a drought. So it's wait, wait, drought out. So you layer into your portfolio, in particular, the grains, in particular, corn. There's great studies on corn when you're flatlined. And then you wait for statistically four to seven years. Every four to seven years, there's a major supply disruption somewhere. And you get prices spiking. And that's when you get out. And so you layer in your portfolio. That's stage one at cost of production. Stage two is when something happens, like a supply disruption.

8:09you go up. And stage three is when you're on your way back down. And that's where we are now. Was there anything about this disruption this time around that surprised you? Did it follow the typical course of action? Because there was a lot of dire predictions after the war started about what could happen. And you kind of came on our show, I remember, right after it happened and said, well, listen, farmers are going to use every inch of their land when prices sky. And you kind of were more level-headed about it. But was there anything about this cycle for the past 18 months or so that has surprised you?

8:37Yeah, the duration of stage two, the duration of the height of the prices. The fact that we remain this far over cost of production, in particular for corn, soybeans, and wheat, to me, for this long, going into year three, basically. Because remember, it started with China, with China having a wheat problem and importing all that wheat three years ago now. So that's what kind of put the underpinning on prices of grains. And then you had the war and the panic. And then, you know, like right now, there's plenty of grain. Russia's just flooding the world of grain and wheat in particular. And so you just had things stabilize.

9:12You don't run out of food. We say this all the time. It gets, there's either enough or there's plenty. When there's only enough, prices go really high and there's plenty, you're at cost of production. I saw a chart that really surprised me. This was from Deutsche Bank and it shows U.S. This is new to me. The US food stuff. I'm not making that up. US food stuff price index in real terms. And it goes back to 1947. And of course, when you go back that long, right? Like things can be a little bit distorted. But what it's essentially showing is in real terms, the price of these things has gone down over time.

9:54And I think if you ask somebody in the 1940s, would food get more or less expensive? I don't know. Maybe I'm making this up, but I guess I maybe would have said it would get more expensive over time as population just continues to grow. But it's done the opposite. And of course, there's been a million buying panics and interruptions over the years. But what are your general thoughts on that? Well, I think we talked about this last time we were together on this venue. And that is you have pretty much no expected return from grains over time. Because they always go back to their cost of production.

10:32That's what they do. And between government subsidies and technology, the use of fertilizer, like synthetic fertilizer made out of natural gas, that's only, what, four decades old, five decades old? So you have these major sea changes in technology and growing techniques, and then the subsidies that allow grains to be produced adequately and very efficiently. And so your expected real rate of return, like a buy and hold of gold or Bitcoin or something like that, it doesn't work with grains. With grains, there really is a cycle. You buy when they're flatlined because you have extremely limited downside historically because farmers will just stop producing.

11:10So it's a pretty easy bet to say, if I'm buying, it costs the production. Something goes below its cost of production, no matter what commodity it is. It's not going to stay there very long because people will stop producing it. So you've got limited downside in those time periods. And again, with demand, for exactly the points, Michael, you brought out, you would expect prices to go up because demand's always rising. But efficiencies in production offset those prices. The fact that demand's always rising again, and the fact that you can't help but have supply disruptions, especially because of weather, means that grains will perform for you, but you just can't buy them and hold them on a 20-year expected return.

11:47It doesn't work that way. You sent us some talking points ahead of time. And one of them I picked out was you're talking about the Russia-Ukraine war, which we talked to you right after that happened and talked about how people realize like how important wheat is for those regions. And you said that there's plenty of wheat for the world no matter who wins the war. How is that possible? Because we heard all these dire predictions about like there's 30 percent of wheat produced here and there's going to be lions in the street for bread. Like what happened? They kept producing. So, you know, Ukraine's production did go down, has gone down again.

12:21It will probably go down again. But as the war settles out and it's going to be a long war and somebody's going to – I don't think there's going to be a winner or a loser. I think Russia can claim a win here in the end if it's three years out or one year out. I don't know. But because Russia's upsetting the apple cart. But in the end, unless somebody uses a nuke, all that farmland is still there and people are still going to grow wheat. And it's like the issue Russia selling stolen wheat. Well, OK, but it's still wheat, right? And is it stolen if it's a spoil of war? It's theirs now. Like, there's all kinds of, you know, little nuances you could say.

12:57But the wheat is still there. It's going to grow, except where they're actually fighting. Or if they nuke it, OK, where you can't use the land for decades, wheat's going to come off that land. And it's going to be available to the world. You mentioned futures or prices flatlining. What do you mean by that exactly? I just want to make sure that we understand. Sure. So if you look back on a corn continuation chart, a corn spot continuation futures chart, you can see it trading over the last 15 years. It goes back down to about$3.50 and doesn't go below there. I mean, it'll go below there for a month or two.

13:27But it just sits there between$3.50 and$4 a bushel for years. It'll go one, two, seven years was the longest stretch. But three times in those 15 years, it's going above seven. So three times, if somebody said to you, look, I've got a commodity or any investment, that it goes to a certain price and sits there for two to seven years, and then it doubles. And then it goes back to that price and sits there, and then it doubles. And it's done that three times in the last 15 years. You're going to say, heck, next time that happens, why don't you let me know? I'll throw a little something in there. And that's what advisors are doing.

14:01And again, this is not investment advice, but it's worth looking at what the golden grain cycle is. And when grains are at their cost of production, they are a terrific portfolio diversifier because people eat. If the stock market's going up or down, they still eat. The demand is still there. I like how you talk about these markets because you talk about them as in a cycle. And I feel like every time commodity prices start to go up, someone has to say super cycle. I feel like commodities are the only places where you put super in. Commodities have way better branding than anyone because you've got like the junior gold miners.

14:31We don't call small cap stocks junior large cap stocks. And you have the super cycle. So everyone, right when prices go up, it's going to be a super cycle. But you're talking about it more as a cycle. So maybe it's too early to say, but like people were 18 months ago saying this is a super cycle. So what did they get wrong if we haven't gone into a super cycle? Because I don't know, a basket of commodities is probably down, what, 20 % since the highs, depending on how you define that basket? Probably around that, maybe even more. You know, I think super cycle, and I don't know the technical definition of or the generally accepted definition is, but I think it has to do with like a decades long thing.

15:04like if you're in a cycle that lasts 10 years or more. And so if commodities are in a sideways to bull market for more than 10 years, I think people assume that's a super cycle. And I think if they think commodities have bottomed enough where they're going to be sideways to maybe higher for the next 10 years, they say we're entering a super cycle. You know what? Every commodity is different. We do have a whole lot of issues with a lot of different commodities. I mean, lithium is a great example. 18 months ago, there wasn't going to be enough lithium. Like lithium's going to the moon. Well, no market straight lines.

15:34We're all experienced enough, and not really experienced enough, to understand markets don't straight line one direction or another. So when everybody's buying lithium, something might be wrong there. And all of a sudden, lithium prices crash. Now they're panicking that people aren't going to build the mines they need to build because they're not going to make a multi-year investment to have enough lithium. But then it comes out that sodium batteries, sodium ion batteries are better than lithium batteries. and you don't have to worry about the size if you're storing, say, from a wind farm or solar farm.

16:04So all of a sudden, the dialogue goes from there's not enough lithium, everybody needs a lithium battery to now we got these sodium batteries that it's okay if they're big because all the wind farms and solar farms will use those and they're cheaper to make and we don't have to mine lithium and now everybody's happy again. And it's like, what happened to lithium? Well, lithium's not going away, but you just busted the lithium super cycle, if you will. So, you know, commodities, they go up and they go down and nothing gets producers more excited and more efficient than high prices. So as soon as you get high prices in a commodity, your job is not to figure out if they're going down.

16:44They're going down. It's to figure out when. It sounds like a weird sort of market where there's structural inefficiencies. And I mentioned that the real price of these things has gone down over time, but there are plenty of monster spikes, big, big, big opportunities to make money. I was looking at the total assets of some of your funds and sure enough, straight up, straight down in a lot of cases, is that good behavior or bad behavior? In other words, as just eyeballing, it's impossible for me to tell exactly where the flows are coming from, but ostensibly advisors are steering most of the flows in your products.

17:19Do you see them exhibiting good behavior? In other words, taking advantage of opportunities when they price line? Or do you see more of a chasing mentality or maybe a little bit of both? I think it's a lot of both. I think as time goes by, more and more advisors are doing it the right way and they're accumulating when prices are down and waiting for that price spike, as you said. But bottom line, we're a headline-driven market. If you look at our flows, okay, so mature products like oil ETFs, okay? If you look at when oil breaks below$40 or$50 a barrel, money pours into those ETFs. It's just astounding.

17:54And then it just sits there and waits because people understand that. They're just now understanding that about grains. And remember, the grain ETFs, we're basically the only ones that have these big grain ETFs. And they haven't been around that long, basically 12 years or so. And people are just getting used to, all right, same thing works for corn as works for oil. If it gets down to its cost of production, I can park some money in there and wait. And there's no guarantee as to how long or what the ultimate upside will be, but I get it. So we're seeing more and more advisors and money come in that way.

18:26But if you look at our flows when there are headlines like a war, I mean, our wheat fund, as you know, we went above a billion two. The wheat fund went above 800 million in AUM in weeks after Russia invaded Ukraine because of the panic. And then it dribbles out. And I don't know what it's at now. How about your more tactical strategies? Because you have the long-short strategies as well. Do people try to time the tactical strategies as well? We don't see that. They're new. So we basically see inflows there and they're still small. And we did those for two reasons. One, there's an ag long-short.

18:59And that's because when you're in the stage three of the golden grain cycle and prices are going down, unless you're buying strictly for diversification purposes, you're not going to get the alpha. It's pretty low probability you're going to get alpha. But people still want the grain exposure. So we put up a long short fund that has a very good track history of the index that it follows, the index track history. And so we feel that that's a good alternative for people who want that exposure and want to get some absolute returns when grain markets are more likely to go sideways to down than sideways to up.

19:29And two, the metals markets, we see them as really big markets. It also was the best performing index we could find of our index provider. It just has an amazing six-year track history on that index. So we put that in a long, short fund. And that's, again, lithium was a great example. I don't think lithium's in our base metals fund, but you just don't know what the headline and the prevailing psychology is going to be. So things are not always buy and hold make money. You've got to look for alpha. And the only way to do that is with a long, short fund. I guess it's sort of like the VIX. You don't know where the floor is, but I don't know, whatever, 11, 12, like, you know, eventually there will be a spike.

20:11You don't know what's going to cause it, but you know, it's coming. Exactly. And I'll point out that, you know, nothing's a guarantee. I mean, when we launched, we looked at the ag, our ag long short fund, O-A-I-A is the ticker. And that thing in a six-year track history, it had, I think, 14 down months in its six years. And you can look it up. The monthlies are on the website of the index performance. And we ETF'd it. The darn thing went five months in a row down. Like, no way you could see that. The second we ETF'd it, we're going to have t-shirts made. We ETF'd that, just tanked it. But it's come back.

20:45It's finding its way back. And over time, these things have a proven historical history and past results are not indicative of future performance, all that. But you have to put money to work intelligently. Whether it's going to work or not is always a question, but we think we've hit on some good things with these indexes. You focus mainly on like the base metals and agricultural commodities, but you mentioned oil. And that's the one that most people think of when they think of commodities. I was looking today, so I think the price is, I don't know,$75,$76 a barrel. I think we first hit that in like 2006 maybe.

21:17And so is it the same dynamic there when prices went up to$150 before and then$120 this time around? Does the cycle work there just the same? Because I think most people, if you ask them, they would assume, well, oil prices go up over the long term, when really for a long time, they haven't really gone anywhere. No, they haven't. And they do go up quite often. But when they're down, that's when you layer in, just like you would do with grains. You know, I think oil, last time oil was above$100 and everybody was predicting whatever they were predicting, we were all talking on one of your shows.

21:48And I said, I don't know why, but I think oil is going down. I can't tell you why, but I'm four decades experience trading and oil is going down. Son of a gun, it went down. And then OPEC made those cuts in July, and oil went back up and got over 90, and everybody was talking$100, and it didn't hit that. Now, you can look at all the different reasons why. We can get into that discussion, probably do a whole couple of shows on it. But suffice it to say, oil was supposed to go to 100, and it didn't. Oil's back in the 70s now. Oil's going to touch 50 before it touches. A lot of people said 200. Whoa, whoa, whoa.