Persistent supply chain struggles have shaken up the global commodity complex, which has ridden a wave of worries to new highs — as Russia's war on Ukraine rages on.
The story is no different for commodity ETFs. Many of these funds have seen huge inflows over the past several months — like the Teucrium Corn Fund (CORN), which is up 34% this year, recently hitting a seven-year high.
Teucrium runs a whole suite of soft commodity ETFs that offer exposure to corn, wheat, soybeans and sugar. Sal Gilbertie, president and CEO of the firm, said the current moment marks a critical juncture for agricultural crops — particularly the global corn harvest.
"It's corn-planting season in the Northern Hemisphere and Ukraine is a major exporter of corn," he said on CNBC's "ETF Edge." "If they don't plant it, they won't have it to export."
Roughly 14%-16% of the world's corn exports come from Ukraine. But exports have been steadily dropping and are projected to plummet further, as crucial sea routes are constrained. Now, experts are keeping a close eye on the corn harvest in Brazil that is seen as potentially offsetting shortages in Ukraine.
The war also is taking a sharp toll on the world's wheat supply. The Teucrium Wheat Fund (WEAT) has risen 50% year to date, fueled by similarly severe shortages.
Approximately 30% of the world's wheat comes from Russia and Ukraine. In addition, Russia is the world's largest exporter of fertilizer and as economic sanctions take hold, a boycott of Russian fertilizer could result in a lower crop yield overall.
Ukraine has some of the world's most arable farmland, but without sufficient fertilizer farmers won't be able to harvest the crops they planted back in autumn come late June and July.
"The Ukrainian government is saying about 50% of their wheat exports may be inhibited or lost completely," Gilbertie said. "That's a bigger problem for the world, because those inventories being trapped are going to cause supply disruptions for global wheat."
Bryon Lake, Global Head of ETF Solutions at J.P. Morgan Asset Management, said commodity ETFs have seen outsized inflows to the tune of roughly $20 billion year to date, which is regarded as clear evidence investors have been bolstering their portfolios as they brace for more inflation ahead.
"Commodities can participate positively in an inflationary environment, so that's what investors are doing," Gilbertie said.
He also explained the mechanism behind Teucrium's commodity ETFs, which are based on futures contracts.
"When money comes into the fund, we buy three different futures contracts in each fund," he said. "We never buy spot. We're always letting people participate what they call along the curve of futures. So, if you think the price of the commodity will go up, you buy the fund, and those futures contracts go up."
Ripe for innovation
The broader ripple effects that the Covid-19 pandemic and Russia's invasion have had on the global commodity market have had a very real impact on reduced globalization, too.
Gilbertie said the supply chain disruptions we are seeing now will morph into more such disruptions, producing a vicious cycle that will only serve to push both prices and demand and prices even higher.
"No one can count on their supplies anymore," he said. "So, people are going to hoard. They're going to have to at least accumulate inventories to build in anticipated supply disruptions, which means the demand for commodities is … higher, not for the actual use, but because people can't count on steady supply."
And that hoarding will likely spark longer-lived commodity inflation.
But one potential positive takeaway from higher prices could be increased innovation that could perhaps stir a new agricultural revolution.
"It just takes time," Gilbertie said, who argues farming has traditionally been among the more adaptable commodity-fueled industries.
"It takes one season for every farmer to plant and get more crops if they're able to plant," he said. "It takes a long time to drill an oil well and an even longer time to build a mine. So, the longer prices stay high, the more motivated people are to produce, the more innovation comes."
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Russia-Ukraine war roiling global wheat and corn markets: A hard look at soft commodity ETFs - CNBC
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