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At The Money: Hungry? Should You Invest in Wheat? · Masters in Business

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  Speaker 1: Bloomberg Audio Studios, podcasts, radio news, to die.
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  Speaker 2: Before the harvest, the crops, the grains, fields of rippling wheat, wheat.
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  Speaker 2: All there is in life is wheat. Sonia, here's your
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  Speaker 2: chance to do something kind.
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  Speaker 1: For a dying boy. But I don't really love wars.
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  Speaker 2: I mean, I love him, but I'm not in love
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  Speaker 2: with him. Oh wheat, lots of wheat, fields of wheat,
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  Speaker 2: A tremendous amount of wheat.
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  Speaker 1: Ever since Russia invaded Ukraine, grain prices have exploded. Gaining
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  Speaker 1: exposure to grain like wheat is usually a challenge. Futures
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  Speaker 1: are an entirely different animal than stocks are bonds. They
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  Speaker 1: have a very different risk profile, not only from stocks,
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  Speaker 1: but just against options. There's a whole lot more downside
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  Speaker 1: with futures. The wheat etf doubleds the war started and
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  Speaker 1: have come back down to pre war levels. Is wheat
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  Speaker 1: a fit for your portfolio? I'm Barry Ridoltson on today's
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  Speaker 1: edition of At the Money. We're going to explore the
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  Speaker 1: question of buying and selling wheat in your investment accounts.
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  Speaker 1: To help us unpack all of this and what it
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  Speaker 1: means for your portfolio. Let's bring in sal Gilberti. He's founder, CEO,
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  Speaker 1: and chief investment officer of Techrium Trading, best known for
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  Speaker 1: creating exchange traded funds that give investors direct exposure to
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  Speaker 1: agricultural futures. He's also an old school commodity trader since
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  Speaker 1: way back in nineteen eighty two. So what was the
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  Speaker 1: problem that the wheat fund symbol WAT was designed to
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  Speaker 1: solve for investors who wanted exposure to wheat but are
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  Speaker 1: a little skittish about holding futures directly.
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  Speaker 2: Well, and thanks for having me berry wheat. So futures
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  Speaker 2: of any kind are tough to trade, right, so you've
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  Speaker 2: got to have a margin account. They're they're volatile. It
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  Speaker 2: requires a different expertise. And when I heard about ETFs,
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  Speaker 2: I didn't even know what an ETF was when I
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  Speaker 2: founded this company. And I found out and said, wow,
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  Speaker 2: that's brilliant because I always trading commodities and futures. And
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  Speaker 2: I said, anybody can can buy these things on their
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  Speaker 2: in their stock account, that's amazing. And so we package
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  Speaker 2: these things inside of ETFs, and the wheat ETF has
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  Speaker 2: been very popular. I don't know if you know Andy Heckt,
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  Speaker 2: but he basically says, you know, wheat is more political
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  Speaker 2: commodity than oil. It's older. I think it's mentioned fifty
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  Speaker 2: or seventy something times in the Bible, like wheat is wheat,
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  Speaker 2: it's it's a big deal. It also of the crops
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  Speaker 2: that I think a higher percentage of wheat is directly
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  Speaker 2: consumed by humans than say corner soybeans, which also goes
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  Speaker 2: to animals and fuel and all that. Now, you can
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  Speaker 2: run wheat through an ethanol plant as an aside if
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  Speaker 2: it's lousy, and it'll turn into ethanol, but that's not
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  Speaker 2: a common thing. So such so integral to human life.
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  Speaker 2: Basically a right bread tortillas. It's a big deal. You
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  Speaker 2: got to have wheat. And so we thought there should
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  Speaker 2: be a week fund, and we started this fund, and
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  Speaker 2: we structured it, we think properly so people can buy
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  Speaker 2: it in their stock account. They don't need a margin
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  Speaker 2: account like any other ETF. They can they can buy it.
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  Speaker 2: We worry about the futures inside of it, and it's
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  Speaker 2: designed to track wheat prices through wheak futures. When they
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  Speaker 2: go up, the fund designed to go up. And when
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  Speaker 2: the week futures go down, the fund's designed to go down,
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  Speaker 2: you know, less some some fees and expenses and a
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  Speaker 2: little bit of static, but it generally worked pretty well.
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  Speaker 1: So you mentioned prices, You're not talking about the price
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  Speaker 1: cash price of physical wheat. You're talking about the sea
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  Speaker 1: boat price, the futures price. What's the distinction between the two.
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  Speaker 1: How to investors see this reflected in their in their
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  Speaker 1: grocery prices.
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  Speaker 2: Well, so it's it, you know, there's a there's kind
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  Speaker 2: of a disconnect, not a direct disconnect, but it's wheat
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  Speaker 2: prices are going to move up and down on a
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  Speaker 2: bulk level. On a wholesale level, investors can't buy that.
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  Speaker 2: I mean, you know, you want to buy a truckload
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  Speaker 2: of wheat or a cargo load of wheat somewhere and
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  Speaker 2: shipping around, it's impossible. So futures as a proxy, they
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  Speaker 2: have delivery points. Okay, each delivery location is going to
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  Speaker 2: be a different price. But the advantage of futures and
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  Speaker 2: the CMEE futures are you know, the global standard basically
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  Speaker 2: for the soft red winter softwad wheat. That all you
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  Speaker 2: have to do is look at that price. Okay, every farm,
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  Speaker 2: every location is a different price for physical wheat. It
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  Speaker 2: doesn't matter. It all gets to be a future's equivalent
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  Speaker 2: price when you factor in delivery, and so futures is
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  Speaker 2: the standard to look at to know where wheat's going.
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  Speaker 2: That's what you look at.
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  Speaker 1: You mentioned soft winter. When I was doing some research
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  Speaker 1: for this conversation, I was kind of shocked at how
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  Speaker 1: many distinct wheat markets there are. Hard red winter, hard
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  Speaker 1: red spring, soft red winter, white wheat, Durham. What are
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  Speaker 1: all these different wheats?
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  Speaker 2: So in general, all you need to know is the
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  Speaker 2: wheat that everybody looks at is the soft red and
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  Speaker 2: that's used for baking, okay, in general, just just baking,
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  Speaker 2: home baking, that kind of stuff. The hard wheats are
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  Speaker 2: used more for specialty things like pasta, all right, and
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  Speaker 2: you know, but unless you're chefoo cares. I mean, it's
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  Speaker 2: you're going to buy your your wheat and your grocery store,
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  Speaker 2: and that's fine. That generally you're soft unless you're buying
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  Speaker 2: a specialty wheat for whatever you want to do. And
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  Speaker 2: softwheat is the benchmark for wheat price. Global wheat prices
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  Speaker 2: on CME.
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  Speaker 1: USDA does forecasts out for the rest of the year
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  Speaker 1: and to next year. They're forecasting hard red winter wheat
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  Speaker 1: at its lowest price since nineteen fifty seven, fifty eight.
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  Speaker 1: How on earth is that possible that seventy five years
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  Speaker 1: later wheat prices are still the same. It just seems
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  Speaker 1: crazy to make.
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  Speaker 2: So farming advancements and we've kept up with demand. So
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  Speaker 2: that's that's what's happened. That's why you know, haggs get
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  Speaker 2: a bad name because people say, well, inflation adjusted, your
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  Speaker 2: return is zero or negative. Well, okay, but if you
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  Speaker 2: if you've got that commodity, it's very cyclical. It trades
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  Speaker 2: at flatline. Basically, it trades at break even because farmers
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  Speaker 2: are subsidized. And then when it doesn't rain somewhere or
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  Speaker 2: there's a political upheaval, like like in Ukraine, the press
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  Speaker 2: explodes higher when there's a drought in the Upper Midwest. Granted,
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  Speaker 2: wheat is grown in virtually every country Okay, and wheats.
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  Speaker 1: Probably have staple food crop every It's in everything, and everybody.
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  Speaker 2: Eats everything, and everybody uses it. What matters to the
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  Speaker 2: price of wheat is how much is available for export. Okay,
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  Speaker 2: and wheat versus corner soybeans probably has more countries that
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  Speaker 2: exported in volume than the other two. The other two big,
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  Speaker 2: big ones, and so it's important to know that at
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  Speaker 2: this eruption in you know, the the United States wheatbelt okay,
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  Speaker 2: a disruption in China or India okay, and I believe
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  Speaker 2: India is the number one grower of wheat in the world,
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  Speaker 2: but they don't.
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  Speaker 1: Export an Okay, that's really interesting.
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  Speaker 2: Yeah, So there's a big difference between how much wheat
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  Speaker 2: is grown in a certain spot and how much weat
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  Speaker 2: is exported in a certain spot. What investors care about
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  Speaker 2: is how much is exported, and that's why during the
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  Speaker 2: Ukraine War wheat prices exploded higher. Because of that. The
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  Speaker 2: amount exporter out of the Black Sea from Russia and Ukraine,
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  Speaker 2: which are they're both in the top five global wheat exports.
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  Speaker 2: Russia is number one by far, Okay, the EU is
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  Speaker 2: right up there as a block, so that whole area
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  Speaker 2: of the world exports. Most of the exports of the
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  Speaker 2: world come out of there. Australia as an enormous exporter.
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  Speaker 2: In fact, the the I believe the record high wheat
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  Speaker 2: price is still maintained even after COVID in the Ukraine War,
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  Speaker 2: and we have to go look it up, but it
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  Speaker 2: was for years intact based on back to back droughts
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  Speaker 2: in Australia back in I think the early two thousands.
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  Speaker 1: Or Wow, that's amazing. So you had mentioned futures trading
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  Speaker 1: and how different it is from traditional options trading, whether
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  Speaker 1: it is a similarity or different maturities, different expiration dates.
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  Speaker 1: WAT holds three distinct contracts across three different maturities about
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  Speaker 1: a thirty each, a little more a little less. Why
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  Speaker 1: go with that structure? That's really kind of interesting with
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  Speaker 1: that sort of spread you've created two reasons.
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  Speaker 2: One is you know these these are more, as we've said,
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  Speaker 2: strategic allocation products. So they trade flatline for quite a
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  Speaker 2: while in your break even and then they explode higher.
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  Speaker 2: So investors kind of layer in a percent or two
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  Speaker 2: in their portfolio when they're low and they just sit
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  Speaker 2: on them, and then when they go high, they get out.
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  Speaker 2: So we in fact, there's an expression weight it into
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  Speaker 2: your portfolio when they're break even, W E I, G
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  Speaker 2: H T. Then weight wait and when there's a drought,
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  Speaker 2: get out. So it's weight weight drought out.
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  Speaker 1: And you know that take away drought out.
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  Speaker 2: Yeah wait, wait, drought out. And so an Ria told
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  Speaker 2: us that we didn't make that up but so what
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  Speaker 2: happens is when you layer these things into your portfolio,
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  Speaker 2: you're kind of sitting on them for a while. So
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  Speaker 2: if we just held spot month futures, there'd be a
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  Speaker 2: lot more volatility. And what you really want is the
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  Speaker 2: general price appreciation. When price goes up, and you're buying
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  Speaker 2: this thing for the price to go up, and you're
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  Speaker 2: buying it for portfolio stability, you're going to be more
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  Speaker 2: stability because if you own out the curve and there's
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  Speaker 2: some temporary dislocation in the front month, your portfolio isn't
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  Speaker 2: gonna move as much, so you're gonna have less volatility
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  Speaker 2: in that holding. Yet, if there's a true supply disruption
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  Speaker 2: and the whole structure of the curve moves up over
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  Speaker 2: the course of a half a year or a year, you're
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  Speaker 2: going to participate. And so that's that's what we designed
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  Speaker 2: for investors. The other practical matter is these things have limits.
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  Speaker 2: So agricultural commodities have very strict limits in terms of
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  Speaker 2: how many you can own per month, And if we
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  Speaker 2: just concentrated this fund in one month, we wouldn't be
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  Speaker 2: able to handle all the money that comes in because again,
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  Speaker 2: you know before the Ukraine War, we had about eighty
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  Speaker 2: million in this fund. In weeks after the Ukraine War
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  Speaker 2: broke out, we had eight one hundred million in the fund.
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  Speaker 2: And so you know, it was easy. It easy to
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  Speaker 2: move in, easy to move out. These These are incredibly
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  Speaker 2: liquid instruments because of the underlying commodity, So you can
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  Speaker 2: put as many you can write as big a ticket
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  Speaker 2: as you want and put it in there. Just you know,
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  Speaker 2: as with any ETF, don't use a market order ever.
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  Speaker 2: Put in your limp, and don't trade in the first
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  Speaker 2: fifteen minutes of the market. Let the markets open because
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  Speaker 2: everything's electronic and if there's from price glip at glitch
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  Speaker 2: in one component, you're not going to get the best price.
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  Speaker 2: So just sit on your hands until nine to forty
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  Speaker 2: five East Coast time every morning when you're trading an ETF,
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  Speaker 2: and don't put a market order in.
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  Speaker 1: That's so funny. It's so funny you say that. I
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  Speaker 1: started on a trading desk and some of the rules
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  Speaker 1: us neobies how to learn were no, no market orders,
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  Speaker 1: always limit orders. Although I have a few funny stories
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  Speaker 1: about market orders that got executed. MCI WorldCom deal is
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  Speaker 1: pretty stupid. Ull be really careful around around the open,
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  Speaker 1: and no trading IPOs. I mean, those were the three rules, everybody.
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  Speaker 2: Those are good rules.
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  Speaker 1: Those are pretty good rules. One of the things I've
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  Speaker 1: always been fascinated with commodities and futures. The thing that
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  Speaker 1: probably confuses lay people the most backwardization and contango. Explain
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  Speaker 1: what those two things are and how you manage around those,
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  Speaker 1: all right.
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  Speaker 2: So I didn't think you're going to bring that up,
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  Speaker 2: But that's the reason we have three exposures. It's complicated,
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  Speaker 2: but that mitigates backwardization and contango. And that's just in
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  Speaker 2: a nutshell. Let's keep this to you know, thirty or
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  Speaker 2: sixty seconds, all right. So when I when I was
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  Speaker 2: working at Cargilt, we called the cost of carry, all right,
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  Speaker 2: that's canentangle. They both begin with a C. That's how
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  Speaker 2: I remember, right, But it's cost of carry. If you're
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  Speaker 2: a grosser and you buy canopies, put it on a
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  Speaker 2: shelf until somebody buys that. You had a cost. You
• 12:02
  Speaker 2: had to buy the canopies, You got insurance for your store,
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  Speaker 2: you got to pay all these other bills until it
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  Speaker 2: goes off the shelf. That's the cost of carry.
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  Speaker 1: Simple inventory. You pay for it until you sell it
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  Speaker 1: laid out to cash, and.
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  Speaker 2: So over time it costs you money to keep that
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  Speaker 2: thing on the shelf. So actually, if grocers were really,
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  Speaker 2: if they didn't care about the consumer sentiment and just
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  Speaker 2: cared about market prices, they would raise the price of
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  Speaker 2: that canopeas once in a month, okay. They'd say, well, heck,
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  Speaker 2: that cost me a penny more to hold it and
• 12:30
  Speaker 2: pay for heating and air conditioning. And you know it
• 12:32
  Speaker 2: might cost the money. I could earn interest on that
• 12:34
  Speaker 2: money or put it to better use. So the price
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  Speaker 2: as you go out the future's curve should go higher
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  Speaker 2: because you have to store corn for it's the costs
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  Speaker 2: roughly about a nickel a month to store corn, okay.
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  Speaker 2: So if you buy corn at four dollars a bushel
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  Speaker 2: at the end of a year, you better get four
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  Speaker 2: sixty for that corn if you stored it, because it
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  Speaker 2: cost you a nickel a month, all right to go
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  Speaker 2: out there, So it cost you another sixty cents to
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  Speaker 2: hold that corn. If you look at a future's curve,
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  Speaker 2: buy and large, that's priced in, all right, that's priced in.
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  Speaker 2: So cost of carrier contango is a normal market, all right,
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  Speaker 2: prices go up slightly as you go out, just to
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  Speaker 2: reflect the cost of buying and holding that commodity. You remember,
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  Speaker 2: commodities are real things. It's just not paper. Right. The
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  Speaker 2: only it doesn't matter in gold, right, because gold's worth
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  Speaker 2: so much and you just put it in a big
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  Speaker 2: pile and there's a guy with no neck and a
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  Speaker 2: gun guarding the pile. Doesn't cost much, right, But in
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  Speaker 2: terms of moving corn around and sticking it in a
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  Speaker 2: grain silo and holding that, that's a big deal. You
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  Speaker 2: got to keep the humidity right and all that. So
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  Speaker 2: backwardation is when that breaks, when that system breaks, and
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  Speaker 2: that system generally breaks when you when you afraid there's
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  Speaker 2: not going to be enough corn that next month, so
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  Speaker 2: you buy all your corn this month. Okay, Well, now
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  Speaker 2: you've broken the supply demand economics because as more buyers
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  Speaker 2: come in, the price goes higher. So if the price
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  Speaker 2: nearby goes higher than the price that's further out, that's backwards.
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  Speaker 1: So that's why it's not it's not lower left to
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  Speaker 1: upper right suddenly it's upper left to lower right or right.
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  Speaker 1: The chart looks like.
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  Speaker 2: Correct and backwardation is not a natural occurrence. It's an
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  Speaker 2: occurrence during a disruption of some sort. B it's applyed
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  Speaker 2: disruption or political disruption.
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  Speaker 1: Huh. Really intriguing. So, of all the commodities we've talked about,
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  Speaker 1: wheat is probably the most global commodity. Not only does
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  Speaker 1: it go into everything from from bread to pasta or whatever,
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  Speaker 1: it's just such a basic food staple. How do you
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  Speaker 1: look at the global changes in wheat production? You mentioned Australia, obviously, Russia, Ukraine,
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  Speaker 1: lots of parts of Europe, Argentina and South America, plus
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  Speaker 1: the United States and Canada. Given the global production, how
• 14:47
  Speaker 1: do you track all the weather and all the factors
• 14:50
  Speaker 1: driving total global wheat production.
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  Speaker 2: If you're in the business, you hire an analyst. If
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  Speaker 2: you're normal person, you look at the USDA report once
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  Speaker 2: a month, and if you're everybody, just look at the
• 15:03
  Speaker 2: futures price. It all gets built in because all the
• 15:05
  Speaker 2: people doing the first two things I just said are
• 15:07
  Speaker 2: building that into the price, and so you know, just
• 15:09
  Speaker 2: look at the futures and you'll see what's out there.
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  Speaker 2: But yeah, really watch the weather. If it's dry in
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  Speaker 2: Western Canada, if it's dry and the Dakotas are in Kansas,
• 15:19
  Speaker 2: if it's dry in Ukraine or Russia. If it's dry
• 15:24
  Speaker 2: in Australia, if it's dry in Argentina, you're going to
• 15:27
  Speaker 2: have a wheat problem.
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  Speaker 1: Huh, really really interesting. So obviously the price volatility is
• 15:33
  Speaker 1: driven by changes in supply, in demands. There's a little
• 15:37
  Speaker 1: bit of geopolitical risk premium. We talked about tariffs and
• 15:41
  Speaker 1: export restrictions and sanctions and obviously war. But how do
• 15:47
  Speaker 1: we generally think about prices of wheat are what are
• 15:53
  Speaker 1: the key drivers that are going to affect this going forward?
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  Speaker 1: Is it simply weather or is that pretty much the
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  Speaker 1: only thing that's driving it?
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  Speaker 2: Honestly, for wheat, it's it's weather and geopolitics. And again
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  Speaker 2: as we saw, you know, if you see if you
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  Speaker 2: see the choke points, which primary is Black Sea is
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  Speaker 2: a choke point, all right, So that's the geopolitic part.
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  Speaker 2: And it look at understand, even during the height of
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  Speaker 2: the Ukraine War and the political fallout in the first
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  Speaker 2: year of that, you could still buy Russian wheat. Anybody
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  Speaker 2: who wanted to could buy Russian week Sanctions don't go
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  Speaker 2: on food that you don't do that, like even during war,
• 16:30
  Speaker 2: nobody puts sanctions on food. You can import food from
• 16:32
  Speaker 2: your enemy. It's perfectly legal, but you might not go
• 16:36
  Speaker 2: to ship to go in there because of the war
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  Speaker 2: premium and all that, but you can buy it. Nobody's
• 16:40
  Speaker 2: going to put restrictions on food. So as soon as
• 16:41
  Speaker 2: people figured out, well, wait a minute, there's going to
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  Speaker 2: be free flow, that price came back down. Where you
• 16:46
  Speaker 2: have an issue is when it doesn't rain, because again,
• 16:49
  Speaker 2: that pile at harvest is small. You've only got on
• 16:53
  Speaker 2: average six months excess supply at any given time. In
• 16:56
  Speaker 2: the world of wheat, if if you have a major problem,
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  Speaker 2: a major crop problem, be a drought or disease in
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  Speaker 2: a major producing area, suddenly you have five months or
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  Speaker 2: four months. What if that happens two years in a
• 17:06
  Speaker 2: row and they have one month to two months. That's
• 17:08
  Speaker 2: why the price is so responsive, and that's why when
• 17:11
  Speaker 2: you see these things flatlined at the low long term
• 17:13
  Speaker 2: price levels, that's when you need to look at maybe
• 17:16
  Speaker 2: an allocation to those things.
• 17:18
  Speaker 1: Huh So, wheat w a t v ETF is an
• 17:22
  Speaker 1: unleveraged product, but obviously wheat futures trade with leverage and
• 17:29
  Speaker 1: a lot of volatility. What sort of time horizon and
• 17:33
  Speaker 1: risk tolerance should an investor that's suitable for this, really
• 17:38
  Speaker 1: really be thinking about sure.
• 17:39
  Speaker 2: Well, again, it's a strategic allocation. So I think that
• 17:42
  Speaker 2: if people, if you do the math, every four to
• 17:44
  Speaker 2: seven years there's a drought. If you look at the charts,
• 17:47
  Speaker 2: things flat line at certain prices. And with wheat, now
• 17:50
  Speaker 2: your break even is it's generally about roughly a dollar
• 17:53
  Speaker 2: a bushel more than corn, and that varies a little bit.
• 17:57
  Speaker 2: But if you know, if you see corn down at
• 17:58
  Speaker 2: four bucks, if you see wheat down approaching five dollars,
• 18:02
  Speaker 2: you're looking at you know, based on history, limited historical
• 18:06
  Speaker 2: downside and you know, pretty significant historical upside. And so
• 18:11
  Speaker 2: you know, it's not these things can't move lower. They
• 18:13
  Speaker 2: just tend not to stay there because of the usage,
• 18:15
  Speaker 2: and the farmers will just ship crops. So I think
• 18:18
  Speaker 2: that it's a strategic allocation. It's something that you move
• 18:21
  Speaker 2: money into when prices are low, and you you know
• 18:25
  Speaker 2: it's in the headlines. When you run out of food,
• 18:27
  Speaker 2: it's not going to be lost in your portfolio and
• 18:29
  Speaker 2: the price w spike. It's you've got a one percent
• 18:31
  Speaker 2: allocation or corn or wheat or whatever it is, and
• 18:33
  Speaker 2: all of a sudden it's two percent. When you look
• 18:35
  Speaker 2: at your rebalance quarterly, you know you take some.
• 18:38
  Speaker 1: Action really interesting. So to wrap up, investors looking to
• 18:43
  Speaker 1: hedge against the cost of food inflation, against geopolitical turmoil,
• 18:48
  Speaker 1: against exposure to other asset classes that are all fairly
• 18:53
  Speaker 1: correlated might want to consider commodity etf such as wheat.
• 18:58
  Speaker 1: I'm barry redults, you've been listening to Bloombergs at the money.
• 19:02
  Speaker 2: Fields of wheat. A tremendous amount of wheat