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Saturday, January 10, 2009

Agriculture incomes are rising and investors are bullish as AgChoices conference nears

Alberta farmers and ranchers will gather in Red Deer on February 11th to discuss new opportunities and ideas in agribusiness.

The theme for this year’s AgChoices conference is “What’s the Big Idea?” and speakers will present ideas for improving farm businesses and incomes.

You don't have to own a John Deere to be excited by agriculture these days. Agribusiness holds a certain fascination for libertarian-minded investors, in particular, and not just the back-to-the-land survivalist variety of libertarian.

Legendary global investor and libertarian Jim Rogers, for example, is extremely bullish on agriculture. In a recent presentation to Toronto investment advisers, Rogers said:

“Sell your houses, move to Saskatchewan, buy a tractor and some farmland, and start farming.” 

Investment gurus Doug Casey and Marc Faber, both libertarians, are also promoting farmland as an investment class.

What’s the appeal? When trillions of dollars can be created out of thin air by central banks, and financial instruments, like asset-backed debt, become increasingly complex and, as it turns out, worthless, a certain type of investor looks for opportunities that are tangible and easy to understand – and nothing is more tangible and basic than agriculture and food.

But there are other compelling macro-economic reasons for the appeal of agriculture to libertarian investors.

Libertarians, for instance, understand that inflation is an irresistible tool of government, even when compared against taxes and debt. When taxes get too high, for instance, the economy slows and small businesses seek refuge in the black market, reducing government revenues. Debt also has its limits as responsible lenders, even state actors, normally expect to get their money back and pay attention to balance sheets.  Printing money, however, which creates monetary inflation, can be done quietly, and even with broad support from the financial sector. Inflation is a stealth tax on savings that can be seen only in diminished purchasing power and high prices, a situation which is easily and predictably blamed on speculators, price gouging business owners and other unpopular scapegoats.

In fact, in difficult financial times like these, inflation is not an unintended consequence; it’s the intended consequence of government policy as it monetizes debt, creates financial sector activity and creates the appearance of short-term economic growth at the expense of savers and anyone on a fixed income, and at the expense of medium-term and long-term economic growth.

Since politics operates in four-year election cycles, short term solutions are politically preferable to long term ones, and politicians develop a high time preference as a matter of survival. In this environment, inflation looks attractive, and bringing monetary policy under control looks politically foolish. In the latter scenario, home prices and wages tend to decline temporarily, affecting middle class voters who don’t understand that their prosperity is illusory and are prepared to punish anyone who literally bursts the bubble on which their standard of living teeters.

To prevent inflation, libertarians support sound money policies and most support a gold standard, but savvy investors don’t ignore the reality of the day – rapid monetary inflation. Inflation increases the price of hard assets, like farmland and agriculture commodities, making these assets a safe haven and potentially a profitable place to invest. Inflation doesn’t happen in the aggregate, though, so picking the right not-yet-inflated, productive asset class in anticipation of an inflationary cycle is critical.

Calgary-based Stephen Johnston, investment director with Agcapita Investments, thinks the next undervalued asset class to inflate will be Saskatchewan farmland.

From a story in CommodityOnline:

Agcapita believes Saskatchewan farmland in particular is an undervalued asset. With an average price of $390 per acre, Saskatchewan farmland is some of the least expensive in the world. The prices in Alberta are almost 3 times higher than Saskatchewan at an average of $1,000. During the last commodity bull market in the 1970s, farmland in western Canada went from $100/acre in 1970 to $550 in 1981 – a 550% increase.

Since inflation increases input costs like fertilizer, fuel, feed and everything else, agribusinesses face operational cost challenges that can cut into margins, while farmland itself is a pure inflation hedge. But since food demand is largely inelastic, business costs can be passed along to consumers without distinguishing demand, which is on the rise due to increased meat consumption in Asia.

Agribusiness in Alberta is primarily driven by grain and beef, but small, niche operators are also part of success story. Jim & Margaret Oosterhof, for example, operate J&M Rabbit Farms near Lethbridge. It’s Alberta’s only commercial rabbitry, with the low-fat meat going to grocery stores and upscale restaurants for discriminating, health conscious consumers.

In a good example of vertical integration and diversification, the Oosterhof’s collect, package and market the rabbit manure as an organic nitrogen and phosphorus-rich fertilizer called Bunny Gold Compost.

Farm families like the Oosterhof’s work hard for often modest returns, but fortunes may be changing for this sector. Statistics Canada reported that net farm income was $2.2 billion in 2007, up from $1.2 billion in 2006 as higher grain prices more than offset operating cost increases from 2007's high energy prices.

So despite the economic carnage around them, the AgChoices attendees may have reason for optimism.

Margaret & Jim   

(Picture: Margaret and Jim Oosterhof with J&M Rabbit Farms)

Bunny Gold Compost

(Picture: Bunny Gold Compost, a product of J&M Rabbit Farms)

J&M Bunny Gold pile 

(Picture: J&M Rabbit Farm, Bunny Gold Compost pile)

J&M Sheep Farm 

(Picture: Margaret and Jim Oosterhof also raise sheep)

Jim and son 

(Picture: Jim Oosterhof and son feeding sheep)

Posted by Matthew Johnston

Posted by westernstandard on January 10, 2009 | Permalink


Nice post. I'm convinced, you can start paying me in SK farmland.

Posted by: Kalim Kassam | 2009-01-10 2:48:17 PM

Another Lethbridge success story. Get used to it, Calgary. We're #1 in rabbits and sheep. From dot com to bunny gold. The times are changing back.

Posted by: Lethbridge_Scribe | 2009-01-10 6:56:50 PM

Very funny, LS. The old economy will soon be new again.

I should say that while grain stockpiles have been depleting for about a decade, this is largely due to increases in meat consumption associated with middle class diets. It will be interesting to watch meat consumption during this global recession, especially in Asia where diets have been changing rapidly.

Replacing 500 calories of your diet with meat instead of grain takes 2500 additional calories due to the poor conversion of vegetable protein to meat protein. (These ratios change, of course, depending on the meat. Fish raised in fish farms convert vegetable protein to meat protein better than cattle, for instance.)

And, of course, I’m not advocating vegatarianism as a solution to what I expect to be a global food crisis that should get really ugly by 2012 if agriculture productivity trends hold. But economics may make this lifestyle attractive, which would ease the tight supply-demand situation.

Posted by: Matthew Johnston | 2009-01-10 9:23:13 PM

Tell me when I'm over selling this premise, Kalim.

Today from the Daily Reckoning:

"While we were prepared to launch into the history of British land banks (or banks capitalised land) reality intruded over the weekend. And while arable farmland may be one of the scarcest resources (and best investments) of the next twenty years, it's getting awfully cold in Europe. Which is bad news if you depend on Russian gas."

Posted by: Matthew Johnston | 2009-01-11 10:54:40 PM

When trillions of dollars can be created out of thin air by central banks, and financial instruments, like asset-backed debt, become increasingly complex and, as it turns out, worthless, a certain type of investor looks for opportunities that are tangible and easy to understand – and nothing is more tangible and basic than agriculture and food.

Posted by: susie orman | 2009-01-12 8:44:56 AM

Thanks for your input, Ms. Orman.

Posted by: Matthew Johnston | 2009-01-20 12:41:12 PM

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