Agriculture Investing: Wall Street Down on the Farm

You may not be old enough to remember the TV series “Green Acres”, but the reruns are on the TV Land cable channel along with “The Andy Griffith Show”, and of course “I Love Lucy". In this 1960’s classic, a New York attorney (Eddie Albert) moves to the country and fumbles around on the farm. His glamorous wife (Eva Gabor) missed the big city lights.

The New York Times “Food Is Gold, So Billions Invested in Farming” reports that we are experiencing a high powered reenactment of “Green Acres”. Just like the previous boom/bust cycles in Midwest farmland, even high powered amateurs rarely find gold down on the farm. Recall farm banks going under after previous bouts of land speculation.

This bout of speculation is being triggered by the geniuses that bought into CDO squared, private equity and hedge funds. The funds are not limiting themselves to US farmland; their sites stretch to the UK, Brazil, Argentina, and even sub-Saharan Africa. In addition to farmland they also want grain elevators, fertilizer distribution, and fleets of barges and ships. The funds are not too intimidated to start big.

The funds believe that they will be far more productive than the existing farmers. They will bring “new technology” and scale to the operations. Given the food shortage, they can’t lose.

The new mantra is “own the production cycle”, as well as the commodity. To manage the physical product, they think they must control storage and shipping. Profits would be enhanced by storing when prices retreat and selling when prices accelerate. All this without the nasty entanglement of futures contracts. I have to believe that the funds could not resist playing the futures for very long.

ConAgra (CAG) and Cargill are taking the opposite side of the trade. These companies have sold over $2B worth of grain elevators and other distribution assets to the funds. Do the food processors know less about the farm economy than Wall Street’s rocket scientists? You’ve got to be a bit skeptical when even American International Group (AIG) is getting a piece of the action.

The liquidity for these assets can dry up overnight and the more esoteric places carry political risk. I think this will end badly.

No disclosures.

Comments

[Tim Plaehn:]

So what is the cut of the top for those selling these funds? Managing assets in the food cycle is significantly more difficult than mortgages, and we can see how well these hot money funds did there.

2008 Jun 06 10:03 AM