Scythe & Spade Blog

PROPOSITION #65

By:  Chas Bonner 

Reading about recent developments under Proposition 65 in California again reinforces my family's decision to move out of CA and move into ID 12 years ago.   

Proposition 65 passed by a large margin in 1986, and many referred to it then as the "Attorney full-employment Act."  The essence of it is that consumers must be warned of any unsafe elements in their water or food and even air, assuming it is known. And if unknown, either legislative action or lawsuits generally follow. 

A recent lawsuit was filed by the Environmental Law Foundation against Dole Food Co. and the Gerber Baby Food division of Nestle (both deep-pocketed defendants).  The accusation is that the companies are allowing unsafe levels of lead in baby food, fruit, and fruit juices.  Naturally, the defendants answer that plaintiffs have overstated the amount of lead in food, that much is naturally occurring, and that the Law Foundation has made the assumption that kids eat the food multiple times on a daily basis, thereby increasing the lead in their system. 

In an expected drawn-out trial, the defendants have illustrated that the stakes are huge for all businesses in California, or in the nation that deliver food to California.  Every food will have to be re-labeled, labels will change constantly, business practices will change, interpretations of negligence will change, and as was said by one of the defendant attorneys, "A jar of baby food is going to pay for that." 

Sadly, the state is already paying big since Proposition signs are posted virtually everywhere---gas stations, parking garages, office buildings, restaurants, etc., warning about dangerous chemicals in the air on the premises. 

Surprisingly, the California law actually conflicts with federal law.  Last February the Food & Drug Administration sent a letter to Washington State agriculture department saying Proposition 65 warnings for lead are "unnecessary and would inaccurately portray the foods as a health risk," according to a legal brief filed in the Dole/Nestle trial.  The Environmental Law Foundation attorney responded that the FDA letter to Washington State was not admissible in the CA trial. 

We are lucky to live in Idaho, and legislatures around the remaining 49 states are learning much about the expense of living in California.  Yes, knowledge is power.

WHAT A DIFFERENCE A DAY MAKES

The title of the song made popular by Dinah Washington reminds us of what is happening in the corn market.  A week ago, there was an article in Bloomberg Business Week discussing the crazy market on corn, and how supply continues to decline, but demand continues to increase, primarily because of ethanol production.  Over the last few months, stockpiles had fallen 38% to the lowest levels since 1975.  Yet profits on ethanol were continuing to improve because of the high price of oil, and the U.S. mandate for gasoline to contain ethanol. 

During the month of March, corn futures rose 4.5% to reach a 7 week high of $7.35 per bushel.  Despite the fact that livestock farmers have been cutting back on feed per animal and cutting back on numbers of animals, feed stockpiles still decline. 

However, what a difference a day makes.  On March 31, corn prices fell the limit and have remained about 10% lower than on the 31^st (as of this writing).  This drop was based upon an inconclusive USDA report that corn supplies were higher than expected, yet still short by historical standards. 

It warns us again that what goes up too fast comes down too fast---and too far.  The Corn Belt has been a runaway freight train for a few years, with commodity prices heading higher and land prices following.  We are reading articles on a daily basis warning of another farm crisis like happened in the mid 1980’s. 

Sanity will return, but sadly, some will be hurt by insanity or simply being in the wrong place at the wrong time.  We urge caution, yet believe there is still opportunity in the Northwest and Intermountain West.

DISCOUNT COUPONS

Even though there is not a direct association of discount coupons and agriculture, there is definitely an influence, especially since the American public has always been addicted to coupon use, and because there are few better ways for manufacturers and retailers to introduce new products or drive volume. 

Coupon usage across all product lines peaked in 1999 at 4.6 billion coupons.  Since that time, they slowly declined to almost half until the recession of 2009 when they again shot past 3 billion.  They are again slowing as the economy improves.  As might be expected, the real growth of couponing in the past decade has been digital usage, sometimes on-line coupons that are printed then used, and sometimes smartphone loaded coupons.   

There are some surprising use patterns that have been very stable across time.  Whereas one might presume most coupon usage would be among lower income people, it is just the opposite.  60% are used by people who have over $50,000 annual incomes.  Research indicates that if one is watchful, savings by clipping coupons can exceed $100 per hour.  Historically, each coupon used has had an average value of $1.44 so it does not take much clipping to save a bundle. 

But also, as would be expected, coupon users are heavy shoppers, both in terms of shopping trips and of purchased goods.  Therefore, more waste is encountered.  Research indicates that America produces over 4000 calories of food per person per day, but consumes only about 2000 calories, leading to the conclusion of massive waste.  How much of that waste might be attributed to coupon clipping? 

Manufacturers are trying to cut back on couponing today, realizing how easy it is for shoppers to save big money on their products.  Since manufacturing profits are normally in the single digit arena, a heavy coupon user will be a big loser for the manufacturer. Nonetheless, electronic couponing is growing at triple-digit rates, and many manufacturers like it because they can far better target their couponing to specific market segments.  With the depth of information on consumers now held electronically, targeting is more effective (and perhaps scary). 

Luckily for those of us in the food business, most food is perishable and must be pushed through the system quickly.  Coupons, either old-fashioned paper or modern electronic, are one of the best pushers.

WATER CRISIS

We have written many articles and blogs about water situations around the US, and why we like farming in the Northwest, where, despite shortages and legal restrictions in many areas, we are in the “catbird’s seat”  with respect to water availability now and well into the future. While we withdraw a mere 5% or less from the Columbia River draining the Northwest, the Colorado River is almost dry by the time it reaches the Gulf of California, the Mississippi River is now restricting barge traffic, and even many of the eastern U.S. rivers are at historic lows.  In fact, nowhere in the U.S. is water in abundance. 

In Central California, the virtual breadbasket of America, not only have we seen some of the driest years in history in the last decade, no new dams are being built, and water for the Central Valley canal systems has been reduced because of the endangered “Delta Smelt,” a tiny fish with no economic or systemic value.  Once Californians begin starving, the requirements protecting the smelt might fade away. 

In most areas, the first to be effected by shortage are farmers because farms use about 70% of all fresh water available in the country.  Hence, farms are the first to lose out (as we can always expect because cities are more populous and therefore have more political heft). 

Now we are seeing news rarely seen before---cities in Texas may also be cut soon because water in the Rio Grande River is so low.  Even though several prior years have seen severe drought in the Rio Grande Valley, there was still storage in reservoirs.  Today, that too has disappeared. 

While most of the problem is simply Mother Nature and going through the hottest and driest decade in human history, there are other problems such as open canals, leaking water systems, inefficient delivery, all costing an estimated 10-40% of the water shortage, depending upon area of the valley. 

This is one of the reasons our company focuses much of our due diligence on water systems.  Water is becoming scarcer, and scarcity first runs up price, then results finally in disappearance.

FARM-TO-TABLE

By:  Chas Bonner 

What a surprise when returning to my former hometown of Fresno, California to see a newspaper article in the local paper about farming, about restaurant chefs visiting farms, and in-depth discussion of the importance of chefs learning how the products which they cook in their restaurants is actually grown and processed. There are too many stories about people believing milk is made in a carton. 

The photos of culinary students inspecting broccoli plants, watching the harvest, and realizing the complexity of the process was interesting.  Because the “farm-to-table” movement is increasingly important to high-end restaurant chefs, they were deep into every step in the processes.  At the end of the tour, knowing the exact source of all their ingredients and how they were farmed was of importance to all of them. They already recognize that increasing numbers of consumers are interested in the farming process and local procurement, and after their farm visits, the chefs now looked upon farmers more like partners than simply suppliers. 

One might ask how this will affect farming and farmers, and in our opinion, it can only be positive. As chefs cook better and more natural food, and consumers eat that food, knowing how it was produced and where grown, the food itself becomes of paramount importance, and the “fake” foods or highly manufactured foods become of less importance.  And finally, perhaps most importantly, consumers become genuinely interested in farm health and the farming industry.  We need consumers to look at us like partners and not simply links in an impersonal chain.

Water & Agriculture: A Real Asset Investor Summit

By:  Brett MacNeil 

I want to share my involvement at an upcoming conference that you may find relevant and interesting.  I will be moderating the panel on “Investing in Agriculture: Investors seek opportunities as the demand of US agriculture grows” with speakers from Paramount Farms and Limoneira.   I will also be hosting a round-table open discussion session titled “Boots on the Ground: finding good farm investments & doing the Due Diligence that is due.”  Please join me! 

Water & Agriculture: A Real Asset Investor Summit

May 16-17, 2013 | Palos Verdes, California

www.agwaterinvest.com 

This conference intended to provide a forum for discussing innovative ideas for financing and investing in water resource development.  Set up to be exclusive and allowing for plenty of exceptional networking, the format of the conference is moderated question-and-answer hours, with no presentations, plenty of audience participation, and break-out, round-table discussions.  

This conference is dedicated to investments in water and agriculture as real assets.  We will explore different investment strategies, analyze current trends, and discover investment opportunities in both water and agriculture.  Increasing water scarcity and a growing population to feed are leading investors to seek direct exposure to water and agriculture real assets, particularly in light of their potential for growth, crisis resilience, and strong returns.  We will introduce you to the key thought leaders in the water and agriculture sectors.  

Speakers and attendees will include investors, asset managers, government agencies, infrastructure and technology developers, and many other experts in these industries.  We have a full range of compelling sessions with topics that are sure to inform and spark lively conversation.  The goal is to challenge conventional thinking, unleash new perspectives, and provide a forum for high-caliber leaders to network and build relationships.  We hope you will choose to participate!  Registration is available at www.agwaterinvest.com and the early bird special discount ends March 8^th. 

The conference is produced by WestWater Research, the premier advisory firm and market leader in the water rights industry, and American Water Intelligence, the market leader for high-value, business class information on the North American water industry. 

GREAT TO BE A FARMER

By:  Ross Farris 

Last week our President’s message was centered on the “Why” we do things, not what we do or how we do it. In other words, what gets us up in the morning and drives us until nightfall to do what we do? 

Immediately after our President’s message was posted, we saw both of the attached links.  Both vividly illustrate the “WHY” we do what we do, why we are in the occupation of farming and ranching. 

It takes no more than 5-6 minutes to watch both, and when finished if you don’t feel as positive about our profession as we do, you need to watch them again. 

Enjoy!

"So God Made a Farmer" - Dodge Superbowl Commercial 

FFA Creed

ECONOMIC GROWTH RATES & AGRICULTURE

We are bombarded daily with economic news discussing slower growth in America and the world, resulting high unemployment, and flat to diminishing wealth.  Our generation has become accustomed to 3-4% annual growth rates, but since the 2008 recession, rather than a normal robust recovery, we have averaged 2% growth for 3 years, and 2013 is expected to be no better. 

But lest we let that get us down in the dumps, let’s look at some long-term history.  Although there is a wide range of data because of no modern methods of collection, most sources point to average economic growth through the Dark Ages until the Industrial Revolution in the early 1800’s of about 0.2%, or almost the same as population growth.  By contrast, 2.0% today looks good.  In fact, there are many economists today predicting that growth rates by 2050 will be near zero because of so many more people competing for fewer resources. 

Since no one likes going backwards, and since everyone is driven largely by self-interest, what can we as farmers and ranchers do to maximize gain in a slowing economy?  Or more importantly, what can we do to avoid economic backsliding? 

First, we must be thankful to be in one of the best economic sectors in history or in the economic realm.  Food, water, and clothing are the last things mankind can do without, and those are exactly what we produce.  As there are more mouths to feed, bodies to clothe, the demand for our output will surge.  However, the supply cannot surge simply because there is less land to farm, less water to grow food, and productivity per unit of input is slowing.  We predict that the percentage of GDP spent on food in the U.S. will turn around, and begin to increase from today’s 7% for food at home.  Only 25 years ago, we spent about 13% of GDP on food, and many countries like Pakistan and other developing countries spend almost 50% of GDP today.  

Second, to capitalize on changing times, all of us must plan a lot and plan well.  In our company, we spend inordinate time on planning and due diligence as we always want to be in front of change, not reacting to it.  We urge all of our clients and friends to do the same.

INTERGENERATIONAL TAX BURDEN & AGRICULTURE

By:  Chas Bonner 

There was an interesting article in a September issue of “The Economist” that I have read 3 times and saved, as there was such compelling information about future tax burdens and their implications on our economy and upon future generations.  The title of the article was “Sponging Boomers.” 

Using figures from the International Monetary Fund (not from the US government), it indicated that today’s boomer generation was taking $300 Billion more out of the economy than they were putting in, measured by each decade. The worst decade (or best depending upon viewpoint) was the 60-69 year old generation which will use up about $320 Billion more than they contribute.  By contrast, future generations will have to pay in $388 Billion more per decade than they take out. 

Further research into the IMF data and methods of gathering data revealed even scarier numbers.  While our government (and its politicians) tell us through the Congressional Budget Office that the deficit will be slightly over 100% of GDP by 2080, the IMF numbers indicate 1200% of GDP by 2080.  More surprising was that IMF used a discount rate of only 3% in arriving at their conclusions, and most economic analyses use much higher discount rates.  

The primary causes for growing deficits, not only here, but around the world, are aging populations, out of control health care costs, and growing entitlements, according to the IMF.  (My own summation is because politicians are addicted to public office, they give us all the goods and services we want, but not the bill.)  The IMF estimates that if we want to control the runaway deficit, we must produce 15% of GDP in additional revenue annually, and since our GDP is now slightly over $15 Trillion, we must adjust our annual budget balance by 15% of $15 Trillion, or $225 Billion per year, either through reduced spending or increased taxes, or combination thereof. 

Despite harrowing projections, which industry will do better than most?  As we have said before, agriculture is in the “cat bird’s seat.”  Food and water are the last things mankind can do without, there are more and more mouths to feed, there are growing middle classes demanding more calories and more of those calories from meat, there is less land on which to grow food, there is less water, and productivity increases in agriculture continue to diminish. 

In short, the supply-demand picture in our industry is rosy.

RETAIL FOOD PRICE INFLATION

Most world economists were predicting huge price inflation for retail food sales, knowing that commodity pricing and farm level food prices had escalated so much in both 2011 and 2012.  Did we ever fool those economists! 

There are several different measuring bodies, several different measuring tools, and as a result, several different outcomes.  Nonetheless, all food inflation measures were lower than expected, and all were lower than 2011.  Reports from USDA, ERS, CNN, Food Institute News all ranged from a low of 0.1% retail food inflation in 2012 to a high of 2.5%.  When considering the Mid-West drought, feed costs for livestock, the lowest grain storage in memory, and water shortages across the U.S., the fact we have seen such a low increase in consumer prices is astounding. 

But perhaps not.  Perhaps it is because farm level prices are only a small piece of the retail price to the consumer, and it is getting smaller every year.  While as farmers we may not like getting such a small slice of the pie, we can rest assured that if it were a lot higher, when prices spike, we would experience boom and bust like never before.  It takes a small increase in supply to effect a huge decline in prices, and vice versa. 

When you are not noticed, you are not hurt---normally.