Scythe & Spade Blog

Calculated Leverage

by Monte Nevitt

One of the significant points made in this year’s Urban Land Institute conference held yesterday is that banks have cheap money available for land deals but no one appears to qualify. The bank’s dilemma? They can’t find credit-worthy borrowers. The downturn has left so many of yesterday’s landowners upside down in the greater Phoenix market that the previous players don’t qualify for loans today. It is ironic that the patient and disciplined farmer, who decided to stay on the sideline during the irrational exuberance that was displayed during the last boom is the very individual who is now going to his lender to qualify for the loan to buy back the farmland.

Strong commodity prices, coupled with depressed land values leave today’s farmer with an opportunity to leverage to increase the production and revenue, to address loan payments, to replace aging equipment, or to expand the size of the operation through purchase. In some cases we see dairy farmers buying land, not so much because of a desire to expand – but rather to shore up acreage on which to raise hay to bring their feed cost down.

Ninety five percent of the last thirty five land deals done in Pinal County were closed by farmers or ag related entities.

An article in last Friday’s Phoenix Business Journal highlighted the use of leverage in today’s favorable ag climate to expand and to improve the agribusiness bottom line.

Of particular note in this article is that the Journal highlights a farm purchase in which Scythe & Spade played a key role. The opportunity presented itself for a purchase and expansion onto 1,000 acres in the south Coolidge market. The deal would require a 30 day close. It also required two separate appraisals, a bridge loan of $5.4 million, preparation of material, due diligence, and budgets for a loan underwriting committee, shared well and ditch agreements????, opening and closing escrow, all in a 30 day time period!

Scythe & Spade was able to open its files and due diligence binders, plot in and pull down GIS maps on the property, update budgets, provide materials to appraisers, loan officers at M&I, and to the buyer, coordinate a 1031 exchange, and close escrow by the 22nd of December. In short – the seller , the buyer, the lender, the appraiser, the neighbor/partner, and Scythe & Spade all ended up looking good on the deal.

Take home point: because of Scythe & Spade’s ability to coordinate the deal, this farm family was able to seize a unique opportunity, come to alevel of comfort on a very shortened feasibility, acquire a loan from a cooperative BoM/Harris Bank, and be poised to take advantage of a forgiving commodity market going into 2012 on an expanded acreage.

Sugar Cane Ethanol

by Brett MacNeil, CEO

In previous Blogs and Newsletters, we have warned often about probable changes in subsidy laws and payments, both because of U.S. budget problems, and because farming has become more profitable.

Suddenly (and most corn growers are aware), on December 31, all tariffs and tax credits protecting corn ethanol have been removed. Brazilian sugar cane growers are ecstatic. As stated by Marcos Jank, president of Brazilian Sugar Cane Growers Association, “We have been waiting for this for over 30 years.” Now both countries can compete for the ethanol market directly, and without subsidies of any sort.

Brazilian sugar cane has other advantages over corn-based ethanol; a.) it takes less land to grow comparable ethanol producing sugar cane than corn; b.) it takes less fossil fuel to grow and convert sugar cane to ethanol; c.) cars run well on a higher proportion of cane-based ethanol to gasoline, 18-25% vs. 10% corn-based ethanol. In fact, some vehicle manufacturers, especially motorcycle makers are suggesting no ethanol usage as it is beginning to damage rubber parts in fuel systems (the jury is still out).

The cynics among us have concluded the only reason the subsidies lasted so long was because Congressmen and Senators in corn producing states have been effective in protecting the subsidies, and Iowa is the first state to hold Presidential caucuses, so what candidate in the Iowa caucus would want to suggest ending tariffs and subsidies?

Despite the sudden end of tariffs and subsidies, we still see a huge world-wide demand for corn, and therefore do not foresee a market bust. Nonetheless, we urge our farmers to watch world events and changes, always increasing in number and consequence. Because we carefully watch all governmental activity, let us know of any questions you might have. We insist on “Seeing a trend before it becomes a trend.”

Water Wars

by Monte Nevitt

Water is a key ingredient, if not THE key ingredient in agriculture, and even more so in the arid Intermountain West and Southwest. We pay a great deal of attention to it as the lifeblood of our industry and lives.

There is an interesting book published by Alex Prud’homme in 2011 entitled “The Ripple Effect” which discusses water mis-use, over-use, waste, contamination, and lack of attention paid to the commodity. Because we have historically had water, why worry?

Most of us are keenly aware, or should be, of many of the issues outlined in Prud’homme’s book---deserts moving north around the world, dead zones in the sea water at the effluent of all major rivers, decaying infrastructure of supply and sewage disposal in most major cities, aging dams and canal systems delivering water to farms, and finally, only about 1% of the world’s water is fresh and liquid.

A familiar sight for those who have visited the administration building at Salt River Project (SRP) is a painting of a Zanjero, on horseback, armed with a rifle, guarding a weir box at a water distribution point. At one point it was a justifiable homicide in the west to take a life over water. One of Prud’homme’s theses is that in the future there will be wars over water; something we all recognize is probable with growing populations, and shrinking availability of water and quality water. He does feel that the primary problem is associated with water quality, and is a result of total mis-management of the commodity and delivery systems.

Recognizing the truth of water mis-management, Scythe & Spade focuses much of its effort on water, including water rights, availability, and mostly how to reduce usage. Knowing that agriculture uses 70-80% of all water in the US, and even more in the Southwest which is in the middle of a long-term drought, all farms are in the gunsights. It is not a matter of IF we reduce use, it is simply WHEN and HOW we proactively implement water reduction strategies.

Sustainability & Profitability

by Chas Bonner

Conventional wisdom says the two words are oxymorons.

After all, virtually all governments are trying to impose environmental controls, cap and trade programs, water use reduction, sewage clean up, and more. The Kyoto treaty was one of the first world-wide treaties committing many countries to global warming initiatives (and the U.S. was non-signatory to that treaty). Then there was a similar treaty in 2009 in Copenhagen which was a flop. A year later a climate meeting was held in Cancun, and few showed up. The latest one was in Durban, South Africa in November, and nothing substantial resulted. In short, few governments, let alone the U.N., have been effective in forcing climate control on any country.

However, business has seen much more positive results. The accounting firm of Ernst & Young recently quizzed heads of 300 international companies, and surprisingly, 83% of them were in favor of legally binding treaties to mitigate global warming. Even more surprising, most of them were already investing heavily in the arena, AND on a profitable basis. Improved energy consumption has been the most notable, but reduction in waste has also proven profitable. Being “Green” is making green.

As an example, Wal-Mart intensely planned out their transport system, and reportedly are now saving about $200 million per year. Tesco, the big British supermarket firm has taken similar steps, and claims to be saving almost $300 million per year. The Carbon Disclosure Project which charts energy emissions of over 500 large companies now reports that 59% of energy efficiency projects undertaken will be profitable within 3 years---a 33% rate of return. That is profitability.

Closer to home, Scythe & Spade was hired to manage a very large farm in Central Idaho which was a mess, and after wells, pumps, sprinkler systems, ditches, etc. were repaired and revamped, return on the farm more than doubled, much of that due to water savings.

A HAPPY NEW YEAR TO ALL!

Very Merry Christmas

from your friends at Scythe & Spade

A short but meaningful message from all of us to all of you:

VERY MERRY CHRISTMAS TO YOU

Merry Christmas,
Happy New Year too.
May your dreams come true,
And may a Christmas Star
Shine brightly where you are.
We wish a very Merry Christmas to you.

Author: Tamara Moir

Corn Bottles

by Chas Bonner

While we complain about $4 per gallon gasoline, many of us buy bottled water at $8 per gallon ($.99 for a one pint plastic bottle of water). Then we run up the cost by dumping into the garbage, and current estimates are than 25% of all land-fill is plastic bottles. Decomposition of those bottles might take 1000 years, again adding to societal cost.

Naturally, there is a push for more environmentally friendly bottles, and the agriculture community is again the beneficiary. Clear, plastic bottles can be made out of almost any starch, corn, beets, potatoes, etc., by a process of fermentation which eventually produces polylactic acid which is yet another polymer.

For almost 20 years many companies such as Newman’s Own, Whole Foods or Wild Oats have used starch based bottles, but it was not until Wal-Mart decided to improve their sustainability image, and start using starch based bottles that the industry took off.

Some of the pluses of starch based containers are that it takes an estimated 65% less energy to make compared to oil-based polymers, manufacturing processes produce about 68% less greenhouse gases, corn bottles can degrade into fertilizer in short time (if properly composted), and we cannot imagine going to war over corn or potatoes.

There are always minuses to every product, but they are becoming fewer as we gain more knowledge about the product and manufacturing. Today, starch based bottles cannot take hot product; they melt. If thrown in the garbage with oil based polymers, the starch based containers lose their ability to compost, and take just as long to degrade as others.

Despite the downsides, we continue to see improvement in costs and processes, so we can foresee the day when virtually all food containers will be food based, and someday when all containers are made from reproducible sources.

And in the meantime, all of us in the agriculture business will see improvement in demand which never hurts our business.

Agricultural Revolution

by Danielle Stephens

We have done blogs in the past about sustainability, commodity prices, future food sources and shortages, and what it all means to farm owners and employees.

Doing more research on the subject has been most interesting, and one of the best sources of long-term outlooks has been McKinsey & Co., a recognized expert in future planning, and not just for the agriculture industry, but for all business.

McKinsey recently published two interesting articles, one entitled “A New Era for Commodities” and the second entitled “The Next Agro-Industrial Revolution.” Of paramount importance (facts we all know but bear repeating):

• Over 200 years ago, Thomas Malthus wrote that growing populations would eventually die out due to starvation, pestilence, or war. The Industrial Revolution disproved his theories---or as we increasingly hear, maybe just postponed them.
• In the past century, commodity prices continually declined on a constant dollar basis because of better efficiencies and discovery of new sources. In the last decade however, commodity prices have steadily increased, and show no signs of later decreases.
• In food commodities, increasing populations, growing middle classes, reduced land availability, reduced water, and slowing productivity increases will exacerbate shortages and keep prices high on a relative basis.

We encourage our readers to go to both McKinsey sites. They are quick reading.

While knowledge of the facts and theories is critical, of more importance is “What do we do with the information and how do we increase opportunity and decrease risk?”

At Scythe & Spade, one of our company goals is that all team members keep abreast of industry developments and know how to improve productivity while reducing costs. I am personally reminded of a book written by Andy Grove, former CEO of Intel Corporation, entitled “Only the Paranoid Survive.” Fear is a great motivator and forces continual improvement.

Non-Blog Blog

by Chas Bonner

Knowing that consistency is important in the area of information dissemination, we are sending this short blog. However, it is used solely to make sure our readers have seen the article just sent by Brett MacNeil, and covering a very important topic to farmers today.

Note the link to his article entitled “IRRATIONAL EXUBERANCE.”

We have already seen positive feedback from readers.

Thanksgiving

by Chas Bonner

In our blog last week, we discussed what is right in America and the world.

Our short blog in this Thanksgiving week is based upon yet more good news seen in the December issue of Popular Science magazine. One of the 2011 Grand Award Winners for new scientific advances was Forage Boost, a microbial soil enhancer reportedly containing over 1 Trillion living microbes per milliliter. According to Popular Science, Forage Boost can substantially reduce or even eliminate the 180 million tons of worldwide nitrogen fertilizer use, blamed for causing algae blooms that kill aquatic life. It also increases productivity of land by 20%, decreases water run-off by half, and therefore reduces water use. It has been in development for over 10 years.

Because the product is so new to the market, there was little news in Popular Science. Therefore we urge you to check out the website of the developer: www.sumagrow.com.

Good news is always good at Thanksgiving time.

We wish all of our clients, customers and friends a wonderful Thanksgiving, and recognition of the bounty for which we can be thankful.

What is Right?

by Chas Bonner

With the continuous drumbeat of what is wrong in the world, the U.S., Congress, the Administration, etc., it is necessary at times to get out of the mud, and think about what is right, in our world and in our business.

On a relative basis, we are blessed to live in America. Think about the pluses:

• The U.S. vs. the European Union or any nation on earth.
• Entrepreneurialism in this country.
• Relatively homogeneous population, as well as diversity.
• Great infrastructure, if we don’t let it deteriorate too much.
• Cheap and plentiful power.
• Excellent universities that students from around the world come to study.
• Strong companies with worldwide penetration.
• Large and relatively open capital markets.

Then consider agriculture:

• More arable land than almost any country on earth.
• Multiple and quality sources of seed, fertilizer, pesticides, fungicides, etc.
• Better irrigation systems than any other country.
• High levels of productivity, and continuing increases.
• A long and deep culture of agriculture.
• Only 3% of population on the land or associated, yet huge support.
• Growing demand for more and better food.

Could things be better? Of course, but we must remember than everything is relative, and where would we rather farm? We are truly blessed.