Scythe & Spade Blog

Food for Nukes

by Chas Bonner

What exciting news this week, and exciting for 2 main reasons. North Korea has expressed willingness to trade out their nuclear research and development for food to feed their famine-racked population. And since most of the food trade will be covered by the United States, our agriculture sector benefits.

North Korea has long been the nemesis of the entire world, even in the Communist world. Kim Il Sung, the first dictator after the Korean War ended in 1953 was an absolute despot. His son, Kim Jong Il learned only too well from his father, and was a nut case to boot. There were many worries about Kim Jong Il’s third son, Kim Jong Un, a mere 28 or 29 years old, and whether he would be better or worse than his father. We have seen the first evidence of a positive turn in the very first full month of his rule.

The whole world is not celebrating quite yet, as we know how capricious North Korea can be. Nonetheless it is a great first step. Perhaps we can count ourselves lucky that Kim Jong Un was schooled in Switzerland, that he loved Michael Jordan, and even plays a credible game of basketball, so he had influences other than cruelty.

Let’s hope Iran learns something from North Korea, even if it can be called extortion.

We all benefit.

Lucky To Be An American

by Chas Bonner

Having been consumed by laziness this week, and having an epiphany last week, I sent the email below to about 100 fraternity brothers because we had a recent reunion. And our friends in agriculture should feel better than most Americans, because we are fortunate to be in one of the best businesses in America.

Brothers Zeta Psi:

I, like most in these United States, complain bitterly about our economy, our government, our ignorant citizens, etc. After reading an article recently in Seeking Alpha, it made me realize how lucky I am to be born in America. All the economic shenanigans of the past 3-4 years have not brought us to destruction:

• Other than AIG, most bank loans have been repaid with interest.
• The frozen banking system is again increasing loans.
• The “too big to fail” banking system is slimming down across America and the world. Over 500,000 layoffs in U.S. banks since the crash.
• The Federal Reserve has made a profit of $79BB on most of the assets seized/traded during the crash.
• The US is one of only 3 developed countries that has seen manufacturing employment INCREASE in the past 2 years.
• Fast-growing wage rates in the Orient as well as shipping costs to and from the Orient are reinvigorating our manufacturing sector.
• Our unemployment rate has shrunk more than most developed countries.
• General Motors has gone from a bankruptcy bailout to the largest auto manufacturer in the world in only 3 years. And they are making money.
• More small businesses are being formed than any time in history. Yes, most won’t last, but many will survive and thrive.
• The stock market is up almost 100% from its low.

My biggest concern today is that OUR generation is a bunch of pigs, leaving our kids and grandchildren nothing but debt, unsustainable Social Security and Medicare, infrastructure decline, deteriorating environment, an educational system in the toilet.

While we definitely have problems, we have opportunity as well. Now to re-invent ourselves so the Product Life Cycle Curve---BIRTH, GROWTH, MATURITY, DECAY---does not put us under. Sorry, but I felt compelled to share this with all of you.

Due Diligence for Food Borne Illness

by Brett MacNeil, CEO

We have written several blog entries and Newsletter articles about food borne illness in the last year, not because we are enamored of the subject, but because we are seeing more and more articles in the food press and the popular press, and more importantly, because there are many ways to trace an illness back to the primary source, the farmer or rancher. We are acutely aware of producers who have gone out of business as a result, and we do NOT want that to happen to any of our clients. Remember the sprout producers in Germany and the cantaloupe producer in Colorado?

As our clients know, one of our core competencies is due diligence. We will not buy, sell or rent a farm without some amount of “DD.” We cover soil quality, water amount and quality, water delivery systems, crop histories, regional strengths and weaknesses, etc. In short, we have a lengthy checklist to follow.

Because food borne illness has become such an issue in our nation where no one wants to face any risk, and where the legal system is alerted to any such event, we are asking all our team members to upgrade their knowledge, and be watchful for any issues that might give rise to illness.

One example will paint a picture. We recently looked at a very nice row crop farm for a long-time client. However, we became aware of a nearby underground hot spring, and between the hot spring and the farm is a livestock feedlot. That will take deep due diligence, an increasing focus for Scythe & Spade.

Food Borne Illness: Part III

by Chas Bonner

By now you are asking yourselves “Have we not heard about this before?” Our answer is YES, and we are now repeating ourselves for the third time. We are reminded that “Repetition = Recall,” and we want all of our clients and friends to remember the import of this topic.

In a new study by the Agriculture Department at the University of Ohio, Robert Scharff has estimated that the cost of food borne illness in the U.S. is $78BB, but this is only the medical, mortality, lost time, and suffering cost. What is not included in that figure are some of the “softer” costs, but which are nonetheless there. Not the least of those is the cost to primary producers---YOU---especially if you are the producer of a tainted food. But even if you are in the same product line, you will also suffer.

In an earlier blog, we discussed the alfalfa sprouts e. coli outbreak in Germany that took months to trace to the primary producer. All other producers in that region, and any European producers of sprouts were also hurt. Likewise, the listeria outbreak on cantaloupe grown in Colorado absolutely killed the cantaloupe business all summer, as sales declined over 30%, not just in Colorado, but throughout all growing regions. Finally, there have been several East Coast supermarket chains that have decided not to have multiple suppliers, despite market pricing concerns. They now feel there is so much legal risk to selling food that they want only one supplier, and if any problems, that supplier is passed the “hot potato.”

While you cannot prevent market losses from commodity problems like the cantaloupe or sprout examples above, you can prevent outbreaks of disease coming off your own farm. We cannot overstate the danger of this, as there are simply too many examples of producers going out of business. With our population refusing to take any risks in their lives, and with the propensity to always blame others, farming is becoming riskier.

Exercise due diligence, and if needed, we can help.

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.