Newcomer Teucrium Trading made quite a splash on the commodity ETF scene last year with the Teucrium Corn Fund (NYSE Arca: CORN), the market’s first pure-play corn futures ETF. The fund, which holds a basket of future contracts across the curve, has already attracted more than $42 million in assets just six months after its launch. In fact, CORN has been so successful that the firm has already filed for five additional funds, including ETFs in natural gas, crude, sugar, soybeans and wheat.
When it comes to commodities, Teucrium co-founder and president Sal Gilbertie is no novice. Gilbertie has worked in the space since 1982; most recently, he was Newedge USA’s head of Renewable Fuels/Energy Derivatives OTC execution desk, and an active market maker and derivatives trader. Prior to that, he was principal and co-founder of Cambial Asset Management and Cambial Financing Dynamics, a boutique investment bank.
HAI Editor Lara Crigger sat down with Gilbertie to discuss Teucrium’s success, including the economic pervasiveness of corn, what’s really behind CORN’s high expenses, and why if interest rates rise, futures-based ETFs could essentially be considered free.
Crigger: As analysts and pundits look toward 2011, one common theme seems to spring up again and again: food prices will rise. What do you think?
Gilbertie: While we’re not in the business of making price calls—our business is making products—my take on it is that, yes, globally, we are running pretty tight.
Most people not in the agriculture or food space would be shocked at the pervasiveness of agricultural commodities in our economy—particularly corn. And I’m not just saying that because we have a corn fund. Corn is the second most pervasive commodity in the world, behind energy.
For example: You take your SUV and pull into a service station. You’ll use a bushel of corn in filling up your fuel tank; fuel is the second largest use of corn. When you walk into that station and buy that beef jerky snack? There’s corn’s number one use– in animal feed for protein consumption. The three and four top uses are sugars and starches, which you get when you grab your bottle of soda to drink with your corn chips. Oh, and that bottle the soda’s in is likely made from polymers created from corn– for certain, the safety seal comes from corn-based polymers. Then, when you sign your credit card slip, that piece of paper is held together by cornstarch. Corn is everywhere.
But what people don’t understand is that even though corn is grown every year, its inventories are pretty low. We don’t have the stores on hand to get through a massive crop failure. Every year, the supply side of agriculture is a tenuous situation: If you put one seed in the ground, you have just one season, one shot, to grow it in. If there’s any blip in production, even a minor pullback, you have a problem. The world can come together and solve a metals supply shortage, but there’s nothing anybody can do about a crop failure.
Crigger: Given that corn is so integral to our economy, why do you think it took so long to see a pure-play ETF on the commodity?
Gilbertie: Two reasons. One, the barriers to entry are pretty significant, and even since we launched Teucrium, they’ve become even more significant. One, it’s simply expertise: Bringing commodities knowledge into a securities space is really hard. Two, it takes a lot of resources – money and time and a lot of hard work to bring one of these products to the market. It took a year solid, maybe 18 months, just focusing on corn to bring it to market. That’s significant time and capital.
The first generation of commodity funds out there were all created by financial professionals, so they were financially engineered by bankers, financial professionals, and so on. They had a really good concept, but the next generation, where Teucrium is, is significantly better. We’re making commodity-specific improvements to what’s out there, so some of the pitfalls that happen with prior products won’t happen with ours....MORE