Colvin: Teucrium ETF, ‘CORN,’ Fills Void
July 23, 2012
[This interview previously appeared on HardAssetsInvestor.com and is republished here with permission.]
Greyson Colvin is the founder and president of Colvin & Co. LLP, an agriculture-focused investment manager. The firm, with offices in New York and Anoka, Minn., is the general partner of two farmland funds and also manages separate accounts for individuals and institutions. Colvin and his management team’s family have owned and managed farmland for more than 120 years. HAI Managing Editor Drew Voros spoke with Colvin recently from his New York office about this year’s crumbling corn crop, how farmland has outperformed the S&P 500 the last decade, and how the Teucrium Corn Fund (NYSEArca: CORN) is filling an investment void.
Hard Assets Investor: Could you give us your take on where the harvest is now that we’re at halftime, so to speak?
Greyson Colvin: We were actually very surprised by the large reduction in the corn yield by 20 points in the USDA’s last crop report. Typically the USDA is slow to move and to make reductions. That caught us a little off guard. But they did decrease substantially more than we expected, by more than 1 million bushels.
We’re certainly at an interesting point right now. We’ve seen some substantial degradation in corn-crop quality across the U.S. We’ve seen reports of farmers in Illinois and Indiana abandoning up to 25 percent of their crop. The remaining is going through the crucial pollination stage right now, and they’re worried that the ears are really never going to develop, or get to their full maturity.
In southern Minnesota and Iowa, the drops are looking a little bit better. But there are still going to be decreases in yields from the prior year. But really, we don’t expect to see any improvement from where the USDA data are today. We think that there could be some rains and things may hold constant. There certainly is an opportunity for this to get much, much worse.
Champaign, Ill., one of the best farming areas in the U.S., hasn’t received rain for 24 consecutive days. And if they don’t receive rain in the next week or two, their crop yields could go to zero very easily.
HAI: You mentioned the USDA might have been too aggressive on this crop report. As I recall last summer, the USDA was criticized for being less aggressive and maybe too bullish. Could this year’s July crop report be a little bit of an overreaction to the criticism they received from last year?
Colvin: Yes, I think you’re right. And the thing that we always caution people is that the USDA numbers are always best-case scenario. They’re giving you the data assuming that everything in their thesis and expectations plays out perfectly for the remainder of the year. So there really isn’t a ton of upside. And just in the past few years there’s been a real loss in the quality of the USDA numbers, or at least the confidence in them. So I think the USDA did want to come out and make a big shot across the bow and say, “Hey look, we’re paying attention. We see this just as bad as you do.”
You have to understand, too, that the USDA is a government agency that is incentivized as much as possible to keep commodity prices in check.
HAI: Let’s look at another investment vehicle, the ETF. What is your advice when someone asks if they should buy the CORN ETF, or is it better to stick with the broad-market grain ETFs like (NYSEArca: JJN [the iPath DJ-UBS Grains Total Return Sub-Index ETN]? Or are grains just something novice investors are going to get burned on because it takes vigilance?
Colvin: It boils down to how much time and dedication an investor is willing to spend analyzing the different securities and markets. For somebody who just says they want ag exposure, you know a diversified ETF is the best thing to do. But somebody like yourself, or somebody who closely watches the markets, might think, “Everyone’s too optimistic during the planting season. Everyone thinks we’re having a bumper crop.” And if the data that points to that screams “Buy corn,” let it play out. And as I told you, the USDA and the market seem to factor in the best-case scenario.
HAI: If you were going to invest in a corn crop, how would you do it?
Colvin: The best way—if you have the resources, the time and the knowledge—is actually through the cash market. With the proper marketing and monitoring of prices, investors can really identify some big discrepancies. But 99.9 percent of the people don’t have the time or even really the connection to do this.
The second-best way is the Teucrium Corn ETF (NYSEArca: CORN). Honestly, we have futures accounts, but I’m scared to death of them after MF Global and now you just saw Peregrine Financial Group collapse.
The futures markets are archaic compared to the equities market. It’s just the platforms they have for trading and execution and just monitoring are so hard to understand. The equities markets are so much simpler.
The last time I saw [Teucrium’s] Sal Gilbertie and Keith Taylor, I told them, “I wish I would have started this product [CORN] because it’s something that the markets needed for a long time.” They were smart enough, too, to do the blended futures contracts.
HAI: Why don’t more Midwest farmers have some kind of irrigation system to prevent what’s going on here?
Colvin: The primary reason is that, in most years, the land in Iowa, Illinois, Minnesota, and the Dakotas receives too much water. The big thing over the last decade has been installing drainage tile, which helps remove excess water and readjusted to drainage districts and outflows as well.
They certainly could install irrigation for years like this. But a proper drainage system can cost well above $1,000 an acre with a payback on that anywhere from seven to 10 years on that irrigation equipment. Financially, it just wouldn’t make sense because even though the droughts are a big concern, most of the time they’re more worried about excess water than no water.
HAI: Any other thoughts on this year’s corn harvest?
Colvin: This is just a completely random data point, but I like to share this. At the beginning of the year, everyone was so excited about the early planting. We spent a lot of time analyzing early planting and yields. We found no correlation at all between early plantings and above-average yields. We weren’t expecting the worst drought in 25 years, but we aren’t surprised that things didn’t play out like people were thinking in March and April.
HAI: And speaking to that thought, why are people surprised it’s hot when we had such a mild winter throughout the country? Is that too simple an approach?
Colvin: The problem is that the analysts, investors and media come in with these high expectations for a bumper crop every year.
HAI: Because it sounds good in a headline?
Colvin: Exactly. It’s just their lack of experience and expertise in the market. I remember my grandfather, a farmer in South Dakota, telling me growing up that if you got a bumper crop one out of every five years, that’s a great thing. Now I would say the market, or at least just the perception now, is that bumper crops come four out of every five years, which really isn’t the case; historical data would not support that.
As an investor, you should come in every year expecting a bad crop.
HAI: What’s the agricultural story no one is talking about?
Colvin: Investors are forgetting the demand story. The USDA thinks that corn demand is much more elastic than it is in real life. As I said earlier, the USDA reported the demand destruction of more than 1 million bushels of corn this month. It’s not that easy to switch from corn to wheat. The cattle don’t like it, farmers don’t like to buy it and typically, if they’re going to switch to wheat to feed their livestock, they need to commit for a six- to nine-month period to allow livestock to adjust.
The last few years when prices got high, a lot of farmers we were talking to said, “Yes, it makes economic sense to switch to wheat, but I’m just worried about my livestock and the effect the switch will have.” They will pay the higher prices for corn. So are you going to see demand destruction? Yes. But at this extreme amount, I don’t think so.
Then there’s the other side of the story: China is still aggressively looking to buy corn as much as possible. Now at $7 a bushel, they’re still not as excited. But they still need corn and the U.S. is still the world’s largest exporter of corn. We have a 60 percent market share. While China will be looking towards South America and Eastern Europe to buy at cheaper prices, eventually they’re going to have to come back to the U.S. farmer to make that shortfall for their grains.
HAI: Let’s move over into your new book, “Investors’ Guide to Farmland.” Give a quick summary of how the common investor can get exposure to farmland short of moving to Iowa and buying tractors.
Colvin: That’s the primary reason we started Colvin & Co., to provide investors with the opportunity to have a path of investment in farmland without actually becoming a farmer themselves or moving to the Midwest. The best way to play agriculture is really farmland. And it’s a real asset, driven by commodity prices, inflation and production. But it also doesn’t have that same volatility that commodity prices or equities are going to have.
For the long-term investor, we think farmland is the best way to play it. But you know, unfortunately farmland doesn’t sell in small lots, and you have to put a significant amount of capital to work to make it cost-effective and efficient. Not every retail investor can do that.
So the next-best way to gain ag exposure is through a diversified basket of ag-related equities that will perform and be driven by the global demand for grain; for example, companies such as John Deere, ADM, DuPont, Magenta, etc. And there are a lot of great ETFs out there like the Market Vectors Agribusiness ETF (NYSE Arca: MOO) that do all the work for you.
We also recommend investments in the underlying commodities themselves. But we always caution that a long-term, buy-and-hold move in commodities might not necessarily be the best investment. It requires some market timing, and you need to be aware of the pricing patterns, the global-demand story, the weather, etc. So for the investor that’s looking to buy and hold for 10 years, we think ag-related equities would be a better place to invest.
HAI: I recall seeing that farmland prices have outperformed the S&P 500. Is that true?
Colvin: Well, if you chase the last-decade farmland values, according to the USDA, across the U.S., they are up 104 percent. The S&P 500 is down roughly 7.5 percent.