Talk Your Book: The State of Commodities

Episode Summary

Executive Summary: Sal Gilberti of Tucrium argues agricultural commodities have likely passed their highs but remain structurally tight for 1-2 years due to war-driven supply disruptions, elevated logistics and fertilizer costs, and strong farmer planting response. He says markets are fundamentally driven by supply/demand more than rates, and that energy and ags remain the most direct inflation hedges, with winter natural gas a key risk.

Main Topics: State of agricultural commodity markets after Ukraine invasion (Priority: 5/5): Gilberti says ag prices have calmed from panic levels and likely peaked for this move, but remain elevated because global supply remains tight and demand is persistent. Global planting response and production outlook (Priority: 5/5): Higher prices have incentivized farmers worldwide to plant more, leading to expectations for record or near-record wheat, corn, and other crop production if weather cooperates. Russia/Ukraine as a supply shock and 'weaponized wheat' (Priority: 5/5): The war disrupted Black Sea exports, especially from Ukraine, while Russia continues shipping short term and may use grain and oil to create leverage over vulnerable importing nations. Why commodities move: fundamentals vs macro factors (Priority: 4/5): Gilberti argues commodities, especially agricultural markets, are too large for trend followers or hedge funds to dominate; prices are set mainly by physical supply-demand fundamentals, not Fed policy. Energy, natural gas, and inflation risk (Priority: 5/5): Energy remains the main inflation driver; elevated oil and gas prices raise costs across the economy, with winter natural gas storage levels and heating demand posing future upside risk. Tucrium funds and investor access to ags (Priority: 3/5): The conversation explains Tucrium’s ag ETF lineup, including the new blended fund TILL and the older TAGS structure, aimed at giving investors simple exposure to key staple crops.

Key Arguments: Agricultural commodities likely already saw their peak in this cycle, but the market will stay tight for another year or two because supply has not normalized. Farmers respond to high prices by planting fence row to fence row; the major question is weather and input costs, not willingness to produce. Russia and Ukraine together supply about one-third of global exported wheat, so Black Sea disruption has outsized effects on global food security. Commodity markets are driven far more by real-world supply and demand than by rates or speculative flows; even large investors cannot move markets like wheat in a durable way. Trend followers and CTA flows affect fund AUM, but not underlying commodity prices because the physical market is enormous. Russia may use wheat strategically by offering discounted or free grain to countries dependent on Black Sea supply, increasing geopolitical leverage. Energy is the central inflation variable because it affects transport, fertilizers, and nearly every other good; if energy stays high, ags tend to follow. The Fed may slow demand at the margin, but it does not directly control commodity prices; winter heating demand and gas storage are more important. Rising natural gas prices increase fertilizer costs, which raise crop production costs globally and support higher ag prices. Inflation hedges like gold and bitcoin have not behaved like direct hedges, while energy and ags have shown much more immediate sensitivity to inflationary supply shocks.

Data Points: Global wheat export share from Russia and Ukraine: about 30% - Gilberti notes the Black Sea region accounts for roughly one-third of exported wheat. Corn price decline from post-invasion highs: about 18% off its size - The hosts mention corn is down from the invasion peak but not fully back to pre-invasion levels. Farmer response timeframe: end of June / beginning of July - Gilberti says the Northern Hemisphere planting season is essentially complete by this point. Expected wheat production: record production around the world - He says Russia, Australia, and potentially the U.S. are on track for very strong harvests if weather cooperates. U.S. wheat production outlook: near-record production - Gilberti says a trend-line U.S. crop would be near-record. Russia crop outlook: record crop / another great crop - He states Russia is expected to have record or near-record wheat production. Australia crop outlook: another record crop production - Australia is cited as another major region likely to produce a record crop. Russian wheat booking window: two weeks - He says Russian wheat is reportedly being sold on a very short forward window rather than months ahead. Natural gas storage: within the five-year average, but on the lower range - He describes U.S. gas storage as not alarming but relatively low heading into winter. Ag fund allocation: 25% each - Tucrium’s blended funds allocate 25% to corn, wheat, soybeans, and sugar. New fund ticker: TILL - Tucrium’s new 40-act blended agricultural commodity ETF. Existing fund ticker: TAGS - The older fund-of-funds version of Tucrium’s blended ag exposure. Farmer/commodity inflation benchmark: $350 per bushel of corn - Gilberti references a long-running corn price level that may be surpassed depending on cost inflation and weather. Potential higher corn range: $420 or $450 - He speculates higher production costs and weather could support corn above historical norms. Fed rate hike example: 2% to 5% - Gilberti argues a few percentage points of rates won’t stop farmers from planting or consumers from eating.

Pivotal Quotes: "Everybody who can grow wheat is going to try to grow as much as they can." — Sal Gilberti: Explaining the global production response to high ag prices. "Russia's weaponizing wheat because they've got all the wheat." — Sal Gilberti: Discussing Black Sea exports and geopolitical leverage over import-dependent countries. "Energy is the king in my view of inflation." — Sal Gilberti: Summarizing why energy prices drive broader inflation across the economy.

Implications: Listeners should expect ag prices to stay elevated even if the worst panic has passed. The biggest risks are weather, logistics, and winter energy demand, while food-security and geopolitical pressures remain high for import-dependent countries.