Corn prices in China are 'double U.S. farm prices': Teucrium Funds Founder

Teucrium Funds Founder Sal Gilbertie joins the On the Move panel to discuss the impact of the U.S.-China trade war on agriculture.

Video Transcript

ADAM SHAPIRO: Welcome back to Yahoo Finance "On the Move." Over the last two years, we've talked a lot about the impact on the trade war with China, the impact on farmers. And to help us understand what's happening in some of that area, especially with corn, we invite back into the stream Sal Gilbertie. He's Teucrium Funds founder. And he's also the creator of the Corn ETF, which tracks what's going on with corn futures. Good to have you here, sir.

SAL GILBERTIE: Pleasure, always.

ADAM SHAPIRO: We know farmers have been hurting. And we know China has started buying. But it's actually Chinese importers who are profiting. Can you explain this to me?

SAL GILBERTIE: Sure. Right now, there's some kind of food crisis going on in China. Some people attribute it to the weather, which could be. They're getting a lot of rain. It's affecting their rice. Some people attribute it to farmer hoarding.

So whatever it's causing, corn prices in China are really, really elevated. They're at over five-year highs. And when you do the math, even with shipping, they're double US corn prices.

So the Chinese, they have immense stocks of corn. They are holding, as of the latest projection by the USDA, about 61% of all the corn stocks in the world are in China right now. They have sold to date about 48 million metric tons, which is the equivalent of just over 1.9 billion bushels.

Now they've sold every week for the last 12 weeks. There will be another sale in two days. And they're selling out of their state reserves. And they're selling at the equivalent of $8 a bushel, which is just enormous. Here in the US, we're under $3.50 a bushel.

And so even when you pay for the shipping, remember, state-owned firms don't have to pay tariffs. So they can replace every bushel they sell at $8, even with shipping, with two bushels of US corn. And that's why they're in here buying very aggressively US corn. In fact, they made the largest recorded purchase of corn, US corn in history a few weeks ago.

JULIE HYMAN: And so Sal, you point out in a recent column in "Forbes" the irony here is that typically we import here in the US cheap products from China. But right now, trying to is importing cheap corn from the US. So connect the dots for us. What are the implications of this? And it sounds like China is now fulfilling its obligations from the trade deal in terms of corn purchases as a result of this. Is that correct?

SAL GILBERTIE: That's correct. They're fulfilling it in terms of corn, wheat, and soybean purchases, certainly. They are buying all kinds of things, from tree nuts to frozen pork. They really are coming into the United States, buying a lot of food. It's a calendar year deal, which is kind of different than the USDA, which does crop years and sales years. They're different from calendar years.

But when you adjust the two, while China is behind so far in the crop year purchasing, on the calendar year purchasing, they're catching up very, very quickly. They're ahead on corn. They're getting ahead on soybeans. They're ahead on wheat.

They have a food crisis. And the irony, as you point out, Julie, is that we usually import inexpensive products from China. With our US agriculture system, which is the most efficient in the world, the most robust in the world-- Brazil has overtaken us for soybean production, but on everything else, we're really the world's exporter for food. And China needs food. They're looking to us.

They're having some sort of crisis. Information is tough to get out of China. Just go by their markets. Their market prices don't lie. And they're double the US prices, at least in terms of corn.

BRIAN CHEUNG: Hey, Sal, it's Brian Cheung here. We've been talking about the demand side of things. But you mentioned this briefly at the end of that first answer, which is that production here in the US has also been quite high based off the WADSE report that we saw from USDA last week. Tell us a little bit about the conditions that have allowed US production, specifically of corn, to be as high-volume as they've been this year. And what will that do to pricing dynamics in the short term?

SAL GILBERTIE: Sure. Perfect weather is the answer. For eight years in a row, we've had perfect weather. That's unheard of. And that really helps our agricultural production.

The USDA projected record per-acre yields for both soybeans and corn in the last report. Now they have a history of overestimating corn yields in August. And they have been almost spot on with soybean yields.

But remember, the latest projections don't include the derecho storm, which has affected literally millions of acres. Iowa is the number one corn producing state in the United States. Western Iowa has been experiencing a drought, 18 counties there. So they were going to have some problems with corn there.

Unfortunately, this storm hit eastern Iowa really hard. So it hit their best crops. It hit them hard. People are saying we could lose up to 400 million acres-- sorry, bushels of corn. That's a significant hit to the US balance sheet.

Now there's plenty. So to your point, there is more than enough grains. There are more than enough grains. We will probably have record corn production and record soybean production this year.

But the demand is rising to meet it. And now there are questions with storm damage and the fact that we're having a dry August. Some soybeans in a lot of places aren't looking good.

ADAM SHAPIRO: Sal?

SAL GILBERTIE: And August is the year for soybeans, month for soybeans.

ADAM SHAPIRO: You're talking about a natural disaster. But there's the man-made disaster about the tariffs. And here's what one farmer told our Jessica Smith not too long ago.

- Quite honestly, I was hoping for more to get done. I think we've signed some deals. But we haven't really seen sort of the fruits of those labors. And to me, it's been disappointing.

I mean, we sort of have the pomp and circumstance that we have this fancy new deal. But the meat and potatoes that are inside the deal are really what's important. And we really haven't seen those come forward yet.

ADAM SHAPIRO: Teucrium Funds follows several different agricultural commodities. I mean, what are you hearing from farmers?

SAL GILBERTIE: Farmers, they're actually by and large pretty happy. Because don't forget, the other reason besides good weather is we pay farmers. We pay the big farmers. When the tariffs went in place, they all shouted out look, we can't sell our beans. Well, guess what? They got paid for their beans and they can still sell them.

So the farmers are-- in instances where you're having a hardship because you got hit by a storm or you have a localized issue, that's a problem for the farmers. But by and large, between weather and government subsidies-- which are in every country. People want a stable food supply. Farmers are doing fine financially.

Again, when you have an isolated problem, that's your problem. But by and large, the farm economy is doing quite well. And with the price arbitrage right now in China, there are no shortage of Chinese buyers. There's no shortage of the Chinese willing to buy.

Even private companies paying tariffs are making about $2 a bushel on corn. So there is no issue right now with China buying or not buying our products. They are buying our agricultural products, no doubt about it.

RICK NEWMAN: Sal, Rick Newman here. I wonder if you can just go a little more into that. So you talked about the surge in purchases, Chinese purchases of US corn. But there's other evidence that they're nowhere near meeting the targets in the so-called phase one trade deal from January for soybeans and for pork. Are you saying they are actually coming closer to those targets in the last few weeks or months?

SAL GILBERTIE: Absolutely. I'm saying that for the crop year ending, they're nowhere near the targets, You're exactly, exactly right. But remember, that deal was done on a calendar year basis.

The Chinese new crop commitments to buy soybeans are immense. The Chinese new crop commitments to buy corn are immense. That new crop year starts in a couple of weeks, September 1.

So when you hear reports the Chinese are behind, they mean on the crop year that ends August 31. They will conform. They will probably buy more than people anticipate by December 31 on a calendar year basis. That would be my guess.

Prices don't lie. I mean, people are going to arbitrage. Follow the money. The money says China is going to buy a lot of US agricultural products.

ADAM SHAPIRO: And you can follow the money, whether it be soybean, wheat, or corn through the Teucrium Funds, which we also post on the Yahoo Finance web page. Sal Gilbertie is the fund's founder. Good to have you here.