[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
Hard Assets Investor:Could you give us your take on where
the harvest is now that we're at halftime, so to speak?
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
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?
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
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?
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?
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
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
Why don't more Midwest farmers have some kind of
irrigation system to prevent what's going on here?
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
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.
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?
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?
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
What's the agricultural story no one is talking
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
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?
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.
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