2021 Grains Outlook Part V - Investment Considerations and Conclusion

2021 Grains Outlook

The Big Shift

Part V - Grains in Your Portfolio, Conclusion

Grains in Your Portfolio

Grains historically have low correlations to equities. Low correlations have the potential to improve portfolio outcomes during periods of stock market volatility.

Chart 17

In our 2020 Outlook, we shared the view that investors would likely be looking to commodities as an alternative asset class, specifically looking at grains to further diversify their commodity exposure.

In fact, the GSCI Grains Index has outperformed the S&P 500 in 10 out of the last 11 stock market corrections of 10% or more. We included this data point in our 2020 Outlook last December. At that time, we had no idea that the next equity bear market was just around the corner. The S&P 500 fell nearly 35% peak to trough through March 2009. During that time the GSCI Grains declined by 4.75%, outperforming stocks once again by approximately 29%.

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The historical tendency for grain prices to outperform equity prices during stock market corrections suggests that investors may benefit from an allocation to grains precisely when it matters most, i.e., during significant stock market declines.

While an investment in grains comes with upside potential and downside risks, the potential portfolio diversification benefits should not be overlooked. In 2020, grains investors have experienced both portfolio diversification benefits and upside price moves.

Stressing the importance of diversification may be cliché, yet too many investors tend to overlook the importance of diversifying their commodity exposure. Our experience has shown that many investors’ commodity allocations remain overweight in gold and oil. The chart below shows the percentage performance of corn, wheat, soybeans, gold, and oil versus the Refinitiv Equal Weight Commodity Index this year (through 12/11/2020).

Note that gold, soybeans, corn, and wheat all outperformed the index while oil trailed significantly. Markets in 2020 clearly demonstrated why it’s important to diversify one’s commodity exposure beyond the most commonly held commodities of precious metals and energy by also considering an allocation to grains. We are confident in this view and point to the 67% increase in shares outstanding for Teucrium’s grain-based ETFs over the past 11 months.

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Chart created by Teucrium using Bloomberg Finance LP on 12/19/2020

Front Month: Soybean Futures, Wheat Futures, Corn Futures, Gold Futures, Crude Oil Futures and the Refinitiv Equal Weight Continuous Commodity Futures Price Index

Weekly Price Chart 12/31/2019–12/18/2020

Past performance is not indicative of future results

Chart 20

Calling The Big Shift

Price performance of commodities in general, and grains specifically, is pointing to the potential shift to a secular bull market. Macro drivers, such as a weakening US dollar, increasing annual grain demand, and production uncertainties, seem to be providing tailwinds at the moment. Ultimately, the fundamental drivers of supply and demand will dictate where grain prices go from here. Weather is largely unpredictable and appears to be the biggest threat to production and therefore supply. Global demand appears to be steady and Chinese demand is expected to remain robust through the 2020–21 crop year.

A Big Shift in grain prices may ultimately be realized in a scenario where production struggles to keep pace with growing global demand.

Of course, production increases and/or a decrease in demand could potentially halt or reverse the Big Shift.

Time will tell.

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