Talk Your Book: The Long and Short of Commodities

Episode Summary

Executive Summary: Michael Batnick and Ben Carlson interview Tucrium CEO Sal Gilbertie about how weather, geopolitics, and supply chains have reshaped agricultural and energy markets after the Ukraine war. They discuss why Europe avoided an energy crisis, why ags remain driven by supply/demand rather than inflation alone, why commodities lack intrinsic long-term expected returns, and how Tucrium’s new AI-driven long/short ag ETF aims to capture alpha rather than simple exposure.

Main Topics: Europe’s energy crisis never fully materialized (Priority: 5/5): The hosts revisit their earlier fears about Europe running out of gas. Gilbertie argues the biggest surprise was the warm winter, which kept natural gas demand low and prevented the expected shortage and fertilizer shock. Agricultural commodities are driven by supply and demand, not macro narratives (Priority: 5/5): Gilbertie explains that grain demand is structurally steady or rising, while production is variable. Tight inventories and weather disruptions matter more than stock-market moves or recession headlines. Commodity pricing and long-term return expectations (Priority: 5/5): He argues commodities themselves should not have positive long-term expected returns; in normal conditions they should trade near cost of production. Upward drift comes mainly from inflation lifting production costs over time. Ukraine, Russia, Brazil, Australia and global grain supply (Priority: 4/5): The conversation covers how other producers stepped in after Ukraine’s disruptions, how Russia remains a major low-cost exporter, and how record crops in Brazil and Australia helped stabilize supply. Tucrium’s new AI-based long/short agricultural ETF (Priority: 4/5): Gilbertie describes OAIA as a passive fund tracking an actively managed machine-learning index that can go long, short, or flat across ags, with risk overlays and daily trade signals. Inflation, China reopening, and recession risk (Priority: 4/5): The speakers debate whether inflation has peaked and how China’s reopening could reignite demand. Gilbertie is skeptical that a mild recession will materially weaken structural demand for food, energy, and materials. Investor behavior and headlines in commodities (Priority: 3/5): Gilbertie says 2022 taught him that headlines matter enormously, drawing new investor attention to ags and reinforcing commodities’ role as diversifiers during shocks.

Key Arguments: The European energy crisis was avoided largely because winter was unusually warm, not because the underlying supply problem disappeared. Natural gas storage in Europe is well above last year’s levels, but a truly cold winter could still revive the crisis. Agricultural demand is relatively stable and usually makes new highs; supply is the volatile piece. Grain inventories are tight versus history, especially when China is excluded from global stock calculations. Ukraine’s exports were partially restored, but Russia, Brazil, and Australia helped fill the gap. Commodities should generally trade near the cost of production, so they do not inherently deserve a positive long-term return like equities do. Inflation can lift commodities by raising production costs, but the main driver remains supply disruption and weather. The new OAIA fund is meant to generate alpha through machine learning, not simply provide static commodity exposure. A mild recession may slow some demand, but it is unlikely to eliminate structural global needs for food, energy, and basic materials. Headline events and geopolitical shocks play an outsized role in commodity investor interest and performance.

Data Points: Europe natural gas storage: 80% above last year’s levels - Gilbertie says warm weather left Europe unusually well stocked and prevented the feared shortage. Oil price move: from about 110 to 80 - He notes oil was around 110 when they previously spoke and later fell to roughly 80. Corn futures cost of production: about $4.20 or higher - Gilbertie says the cost of production has risen with inflation. Corn price: above $6 - Used as an example of grain prices trading well above production cost. Combined grain demand: Record or second-highest every year since 1960 - He argues demand for corn, soybeans, and wheat is consistently strong. Stocks-to-use ratio: Below five-year averages - He says U.S. and global grain inventories are tight versus history, excluding China. China grain inventory share: More than half of the world’s corn, soybeans, and wheat - He cites China as holding a large share of global inventories, though the figure is hard to verify. European support spending: At least $1 trillion, possibly $2 trillion+ - Gilbertie says Europe has already spent huge sums subsidizing energy costs. USDA bird flu policy: One bird in a million-bird flock triggers culling of the whole flock - Explaining why egg supplies were hit so hard. Egg-laying hen flock: About 5% smaller - He says the laying flock has averaged around 5% below normal over the past year. Egg output: 3.2% lower - Despite fewer hens, output fell less because remaining hens worked harder. OAIA fee: 149 bps - Tucrium’s new ETF fee for tracking the machine-learning index. OAIA index track record: 6 years - The underlying index has a six-year history that Tucrium describes as strong. S&P 500 declines referenced: Last five declines of 10% or more - Gilbertie says Tucrium’s grains index outperformed during those market drawdowns.

Pivotal Quotes: "I asked him, why should or is there an expected long-term positive return from these commodities? And he said, no." — Michael Batnick: A key surprise in the interview about commodities as investments. "It’s the weather, bottom line." — Sal Gilbertie: His explanation for why Europe’s expected gas crisis did not occur. "The commodity by itself isn’t producing any income. It represents value that somebody else." — Sal Gilbertie: His core argument for why commodities should not be expected to deliver equity-like long-term returns.

Implications: Listeners should see ags and energy as supply-shock assets, not passive wealth compounding vehicles. Warm/cold weather, geopolitics, and production costs will likely matter more than recession headlines, while AI-driven commodity strategies may offer a new way to seek alpha.