At The Money: Hungry? Should You Invest in Wheat?

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2:23To die before the harvest. The crops, the grains, fields of rippling wheat. Wheat. All there is in life is wheat. Sonia, here's your chance to do something kind for a dying boy. But I don't really love Boris. I mean, I love him, but I'm not in love with him. Oh, wheat. Lots of wheat. Fields of wheat. A tremendous amount of wheat. Ever since Russia invaded Ukraine, grain prices have exploded. Gaining exposure to grain like wheat is usually a challenge. Futures are an entirely different animal than stocks or bonds. They have a very different risk profile, not only from stocks, but just against options.

3:09There's a whole lot more downside with futures. The wheat ETF doubled since the war started and have come back down to pre-war levels, is wheat a fit for your portfolio? I'm Barry Ritholtz, and on today's edition of At The Money, we're going to explore the question of buying and selling wheat in your investment accounts. To help us unpack all of this and what it means for your portfolio, let's bring in Sal Gilberte. He's founder, CEO, and chief investment officer of Techrium Trading, best known for creating exchange-traded funds that give investors direct exposure to agricultural futures. He's also an old-school commodity trader since way back in 1982.

3:56So what was the problem that the wheat fund, symbol W-E-A-T, was designed to solve for investors who wanted exposure to wheat, but are a little skittish about holding futures directly. Well, and thanks for having me, Barry. So futures of any kind are tough to trade, right? So you've got to have a margin account. They're volatile. It requires a different expertise. And when I heard about ETFs, I didn't even know what an ETF was when I founded this company. And I found out and said, wow, that's brilliant because I always traded commodities and futures. And I said, anybody can buy these things in their stock account.

4:37That's amazing. And so we package these things inside of ETFs. And the wheat ETF has been very popular. I don't know if you know Andy Hecht, but he basically says, you know, wheat is more political commodity than oil. It's older. I think it's mentioned 50 or 70 something times in the Bible. Like wheat is wheat. It's a big deal. And also of the crops, I think a higher percentage of wheat is directly consumed by humans than, say, corn or soybeans, which also goes to animals and fuel and all that. Now, you can run wheat through an ethanol plant as an aside if it's lousy and it'll turn into ethanol, but that's not a common thing.

5:14So wheat's so integral to human life, basically, all right? Bread, tortillas, it's a big deal. You got to have wheat. And so we thought there should be a wheat fund. And we started this fund. We structured it, we think, properly. So people can buy it in their stock account. They don't need a margin account like any other ETF. They can buy it. We worry about the futures inside of it. And it's designed to track wheat prices through wheat futures. When they go up, the fund's designed to go up. And when the wheat futures go down, the fund's designed to go down, less some fees and expenses and a little bit of static.

5:52But it generally works pretty well. So you mentioned prices. You're not talking about the cash price of physical wheat. You're talking about the sea boat price, the futures price, what's the distinction between the two? How do investors see this reflected in their grocery prices? Well, so there's kind of a disconnect, not a direct disconnect, but wheat prices are going to move up and down on a bulk level, on a wholesale level. Investors can't buy that. I mean, you know, you want to buy a truckload of wheat or a cargo load of wheat somewhere and ship it around. It's impossible. So futures as a proxy, they have delivery points.

6:36OK, each delivery location is going to be a different price. But the advantage of futures and the CME futures are, you know, the global standard, basically, for the soft red winter soft red wheat. That that all you have to do is look at that price. OK, every farm, every location has a different price for physical wheat. it doesn't matter. It all gets to be a futures equivalent price when you factor in delivery. And so futures is the standard to look at to know where wheat's going. That's what you're looking. You mentioned soft winter. When I was doing some research for this conversation, I was kind of shocked at how many distinct wheat markets there are.

7:15Hard red winter, hard red spring, soft red winter, white wheat, durum. What are all these different wheats? So in general, all you need to know is the wheat that everybody looks at is the soft red, and that's used for baking. OK, in general, just baking, home baking, that kind of stuff. The hard wheats are used more for specialty things like pasta. All right. And, you know, but unless you're a chef, who cares? I mean, you're going to buy your wheat in your grocery store, and that's fine. And generally, you're soft unless you're buying a specialty wheat for whatever you want to do. And soft wheat is the benchmark for wheat price, global wheat prices on CME.

7:59USDA does forecasts out for the rest of the year into next year. They're forecasting hard red winter wheat at its lowest price since 1957-58. How on earth is that possible that 75 years later, wheat prices are still the same? It just seems crazy to me. So farming advancements and we've kept up with demand. So that's what's happened. That's why, you know, ags get a bad name because people say, well, inflation adjusted, your return is zero or negative. Well, OK. But if you've got that commodity, it's very cyclical. It trades at flatline, basically. It trades at break even because farmers are subsidized.

8:41And then when it doesn't rain somewhere or there's a political upheaval like in Ukraine, the price explodes higher. When there's a drought in the upper Midwest, granted, wheat is grown in virtually every country. OK. And wheat probably has more. Staple, food crop, it's in everything and everybody eats it. Everything and everybody uses it. What matters to the price of wheat is how much is available for export. OK. And wheat versus corn or soybeans probably has more countries that export it in volume than the other two. The other two big, big ones. And so it's important to know that a disruption in, you know, the the United States wheat belt.

9:19OK, a disruption in China or India. OK, and I believe India is the number one grower of wheat in the world, but they don't export it. Oh, that's really interesting. Yeah. So there's a big difference between how much wheat is grown in a certain spot and how much wheat is exported in a certain spot. What investors care about is how much is exported. And that's why during the Ukraine war, wheat prices exploded higher because of that. The amount exported out of the Black Sea from Russia and Ukraine, they're both in the top five global wheat exports. Russia is number one by far. The EU is right up there as a block.

9:55So that whole area of the world exports most of the exports of the world come out of there. Australia is an enormous exporter. In fact, I believe the record high wheat price is still maintained even after COVID and the Ukraine war. And we have to go look it up. But it was for years intact based on back-to-back droughts in Australia back in, I think, the early 2000s. Wow, that's amazing. So you had mentioned futures trading and how different it is from traditional options trading where there is a similarity are different maturities, different expiration dates. WEAT holds three distinct contracts across three different maturities, about a third each, a little more, a little less.

10:42Why go with that structure? That's really kind of interesting with that sort of spread you've created. Two reasons. One is, you know, these are more, as we've said, strategic allocation products. So they trade flatline for quite a while near break even and then they explode higher. So investors kind of layer in a percent or two in their portfolio when they're low and they just sit on them. And then when they go higher, they get out. So in fact, there's an expression weighted into your portfolio when they're break even, W-E-I-G-H-T, then weight, W-A-I-T, and when there's drought, get out. So it's weight, weight, drought out.

11:16And that can take a couple of years. Weight, weight, drought out. Yeah. Weight, weight, drought out. And so an RIA told us that, that we didn't make that up. But so what happens is when you layer these things into your portfolio, you're kind of sitting on them for a while. So if we just held spot month futures, there'd be a lot more volatility. And what you really want is the general price appreciation when price goes up and you're buying this thing for the price to go up and you're buying it for portfolio stability. You're going to be more stability because if you own out the curve and there's some temporary dislocation in the front month, your portfolio isn't going to move as much.

11:50You're going to have less volatility in that holding. Yet, if there's a true supply disruption and the whole structure of the curve moves up over the course of a half year or a year, you're going to participate in that. And so that's what we designed for investors. The other practical matter is these things have limits. So agricultural commodities have very strict limits in terms of how many you can own per month. And if we just concentrated this fund in one month, we wouldn't be able to handle all the money that comes in. because, you know, before the Ukraine war, we had about 80 million in this fund.

12:22In weeks after the Ukraine war broke out, we had 800 million in the fund. And so, you know, it was easy. It's easy to move in, easy to move out. These are incredibly liquid instruments because of the underlying commodity. So you can put as many, you can write as big a ticket as you want and put it in there. Just, you know, as with any ETF, don't use a market order ever. put in your limit and don't trade in the first 15 minutes of the market. Let the markets open because everything's electronic. And if there's some price glitch in one component, you're not going to get the best price. So just sit on your hands until 945 East Coast time every morning when you're trading an ETF and don't put a market order in.

13:00It's so funny. It's so funny you say that I started on a trading desk and some of the rules us newbies had to learn were No market orders, always limit orders. Although I have a few funny stories about market orders that got executed. MCI WorldCom deal is pretty stupid. Be really careful around the open and no trading IPOs. I mean, those were the three rules, everybody. Those are good rules. Those were pretty good rules. One of the things I've always been fascinated with commodities and futures, the thing that probably confuses laypeople the most, backwardization and contango. Explain what those two things are and how you manage around those.

13:49All right. So I didn't think you were going to bring that up, but that's the reason we have three exposures. It's complicated, but that mitigates backwardization and contango. And that's just in a nutshell, let's keep this to, you know, 30 or 60 seconds. All right. So when I when I was working at Cargill, we called it cost of carry. All right. That's contango. They both begin with a C. That's how I remember. Right. But it's cost of carry. If you're a grocer and you buy a can of peas, put it on a shelf until somebody buys that. You had a cost. You had to buy the can of peas. You got insurance for your store.

14:21You got to pay all these other bills until it goes off the shelf. That's a cost of carry. Simple inventory. You pay for it until you sell it. Absolutely. You laid out the cash. And so over time, it costs you money to keep that thing on the shelf. So actually, if grocers were really, if they didn't care about the consumer sentiment and just cared about market prices, they would raise the price of that can of peas once a month. OK, they'd say, well, heck, that cost me a penny more to hold it and pay for the heating and air conditioning. And, you know, my cost of money, I could earn interest on that money or put it to better use.

14:51So the price as you go out the futures curve should go higher because you have to store corn. For instance, it costs roughly about a nickel a month to store corn. OK, so if you buy corn at four dollars a bushel at the end of a year, you better get four sixty for that corn if you stored it because it costs you a nickel a month. All right. To go out there. So it costs you another 60 cents to hold that corn. If you look at a futures curve, by and large, that's priced in. All right. That's priced in. So cost of carry or contango is a normal market. All right. Prices go up slightly as you go out just to reflect the cost of buying and holding that commodity.

15:27Remember, commodities are real things. It's just not not paper. Right. The only it doesn't matter in gold. Right. Because gold is worth so much and you just put it in a big pile and there's a guy with no neck and a gun guarding the pile doesn't cost much. Right. But in terms of moving corn around and stick it in a grain silo and holding that, that's a big deal. You got to keep the humidity right and all that. So backwardation is when that breaks, when that system breaks. And that system generally breaks when you when you're afraid there's not going to be enough corn that next month. So you buy all your corn this month.

15:56OK, well, now you've broken the supply demand economics because as more buyers come in, the price goes higher. So if the price nearby goes higher than the price that's further out, that's backwards. So that's why it's not it's not lower left to upper right. Suddenly it's upper left to lower right is what the chart looks like. Correct. And backwardation is not a natural occurrence. It's an occurrence during a disruption of some sort, be it supply disruption or political disruption. Really intriguing. So of all the commodities we've talked about, wheat is probably the most global commodity. Not only does it go into everything from bread to pasta to whatever.

16:38It's just such a basic food staple. How do you look at the global changes in wheat production? You mentioned Australia, obviously Russia, Ukraine, lots of parts of Europe, Argentina and South America, plus the United States and Canada. Given the global production, how do you track all the weather and all the factors driving total global wheat production? If you're in the business, you hire an analyst. If you're a normal person, you look at the USDA report once a month. And if you're everybody, just look at the futures price. It all gets built in because all the people doing the first two things I just said are building that into the price.

17:24And so, you know, just look at the futures and you'll see what's out there. But yeah, really watch the weather. If it's dry in Western Canada, if it's dry in the Dakotas or in Kansas, if it's dry in Ukraine or Russia, if it's dry in Australia, if it's dry in Argentina, you're going to have a wheat problem. Really interesting. So obviously the price volatility is driven by changes in supply and demands. There's a little bit of geopolitical risk premium. We talked about tariffs and export restrictions and sanctions and obviously war. But how do we generally think about prices of wheat? What are the key drivers that are going to affect this going forward?

18:12Is it simply weather or is that pretty much the only thing that's driving it? Um, honestly, for wheat, it's it's weather and geopolitics. And and again, as we saw, you know, if you see if you see the choke points, which primarily is Black Sea is a choke point. All right. So that's the geopolitic part. And it look at understand even during the height of the Ukraine war and the political fallout in the first year of that, you could still buy Russian wheat. Anybody who wanted to buy Russian wheat. Sanctions don't go on food. You don't do that. Like even during war, nobody puts sanctions on food. You can import food from your enemy.

18:49It's perfectly legal. But you might not get a ship to go in there because of the war premium and all that. But you can buy it. Nobody's going to put restrictions on food. So as soon as people figured out, well, wait a minute, there's going to be free flow, that price came back down. Where you have an issue is when it doesn't rain. Because, again, that pile at harvest is small. You've only got, on average, six months excess supply at any given time in the world of wheat. If you have a major problem, a major crop problem, be it drought or disease in a major producing area, suddenly you have five months or four months.

19:21What if that happens two years in a row? Now you have one month or two months. That's why the price is so responsive. And that's why when you see these things flatlined at the low long-term price levels, that's when you need to look at maybe an allocation to those things. So wheat, W-E-A-T, the ETF is an unleveraged product, but obviously wheat futures trade with leverage and a lot of volatility. What sort of time horizon and risk tolerance should an investor that's suitable for this really, really be thinking about? Sure. Well, again, it's a strategic allocation. So I think that if people, if you do the math, Every four to seven years, there's a drought.

20:01If you look at the charts, things flatline at certain prices. And with wheat now, your break even is generally about roughly a dollar a bushel more than corn. And that varies a little bit. But if, you know, if you see corn down at four bucks, if you see wheat down approaching five dollars, you're looking at, you know, based on history, limited historical downside and, you know, pretty significant historical upside. And so, you know, it's not these things can't move lower. They just tend not to stay there because of the usage and the farmers will just ship crops. So I think that it's a strategic allocation.

20:36It's something that you move money into when prices are low. And, you know, it's in the headlines when you run out of food. It's not going to not going to be lost in your portfolio and the price will spike. It's you got a one percent allocation or corn or wheat or whatever it is. And all of a sudden it's two percent. When you look at your rebalance quarterly, you know, you take some action. Really interesting. So to wrap up, investors looking to hedge against the cost of food inflation, against geopolitical turmoil, against exposure to other asset classes that are all fairly correlated might want to consider commodity ETFs such as wheat.

21:13I'm Barry Ritholtz. You've been listening to Bloomberg's At The Money. Fields of wheat, a tremendous amount of wheat.

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