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Baptized into the world of business and travel at a young age I’ve subsequently lived in multiple countries, traveled to many more and built myself a small fortune investing in businesses and markets that I spend an extraordinary amount of time doing due diligence on. People sometimes ask me... More
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  • It's Crazy What This Commodity Is Being Sold For! 0 comments
    Jul 1, 2014 4:21 PM

    By: Chris Tell at http://capitalistexploits.at/

    Internally we have a running joke here. We talk of the "Yeti" deal. Like the Yeti, everyone has heard about the deal but few have seen it and the longer this persists the greater the doubt that the "Yeti" actually exists.

    The "Yeti deal" is a deal I began work on with a good friend and adviser to Seraph.vc in the middle of last year. Our syndicate members have heard a lot about the deal but as I said, for a number of reasons it's not come to the stage of being investable… yet. The deal involves coconuts, coconut water to be precise.

    We began due diligence nearly a year ago on a particular company which shall remain anonymous, landed up restructuring their existing corporate structures, shareholders, company domicile, rebuilt their financials, and a host of other things required, in order to both fully understand the deal, as well as ensure it was suitable for both ourselves and our syndicates' capital. Suffice to say, it has been a long, though very interesting journey.

    During the course of this due diligence process, we've learned a heck of a lot about coconuts and our strategy to participate in this exciting space has changed materially as a result.

    Coconuts are truly fascinating for a number of reasons, not least of which is the ability to price taxis in most any Southeast Asian country by asking the taxi driver what price a coconut sells for in the wet markets. There is a pretty consistent ratio between the price of a taxi trip in downtown Bangkok and that of a coconut in a Bangkok wet market. The same is true of the price of a taxi in Colombo, and what a coconut sells for in a Colombo market. Ditto Jakarta and Manila all countries which produce a lot of coconuts.

    Aside from double checking if your taxi driver is screwing you by using the "coconut barometer" let's look at the products and uses for coconuts as a preliminary.

    • Water - Nutrient packed with zero fat and the same electrolyte balance as our blood plasma.
    • Oil - Here is a commodity which has been globally traded for over 50 years. Increasingly used in pharmaceutical industry, coconut oil has been used to treat Alzheimers, is anti-viral, anti-fungal, anti-bacterial, anti-microbial. It's also an incredible anti-aging supplement taken both internally, and when used topically on skin, hair, and cuticles. Studies also show that it improves metabolism significantly when taken daily. It's also been proven to be anti-inflammatory and one of nature's most potent burn creams.
    • Activated carbon - Though I religiously take activated charcoal when traveling, it was only when doing research on the industry that I found that in fact the highest quality activated charcoal comes from coconuts. The activated carbon is used in water purification. You know that black stuff in your water filtration system? Yep, that's it.
    • Lauric acid - used in cosmetics and soap manufacture.
    • Meat - Food. Plain and simple.
    • Biodiesel
    • Milk - Tom yum goong anyone?
    • Fibres - Wow, there are literally a multitude of products we've seen in this space. Everything from making mats to mattresses, to using fibres as an alternative to plastics.
    • Husks - used as fertilizers and biomass.
    • Coconut sugar - Has a low glycemic index score that is roughly half that of white sugar, and tastes amazing, so it's a positive solution for those watching sugar intake.
    • Coconut flour - Gluten free and hypo-allergenic, ideal for baking, with lower in carbs than conventional flours, with the highest amount of dietary fibre (58%) of any flour (twice that of wheat flour).

    We've long been proponents of investing in agriculture and have mentioned it many times in posts on the site and in our crash course, which provides a bit of an overview and insight into our investment thesis.

    In any event, the numbers are hard to ignore, so when I think about coconuts the one thing that stands out is that with a coconut palm you're literally growing water, food, and other resources together. In a world where water is such a scarce and valuable commodity this is particularly intriguing. Investing in water is problematic not least of which because parasites… ughh. I mean, governments can and will so easily commandeer it in times of crisis. I struggle to see them doing that with coconut plantations though nothing would surprise me anymore.

    Coconuts enjoy a hot humid climate and grow in the tropics and sub tropics, which often means that many of the countries where coconuts are grown, water in fact demands a premium - clean drinking water, that is. In most of Southeast Asia, central America, South America and the Caribbean you can't drink the water from the tap without getting violently ill. When you're drinking the water from a coconut you never have to worry about whether its going to make you sick or not as the tree strips all impurities out.

    In fact, further to the above point, while its not necessarily a marketable point, we've spoken with agriculture professionals, including a professor of agriculture, who claim that there exists no discernible difference between organic coconut water and non-organic. This is because the tree is so efficient in extracting impurities that the water found in the nut is identical. The soil which the palm trees are grown in shows a difference between organic and non organic but not the coconut water found in the nut.

    Let's take a look at some of the numbers involved in getting you that lovely refreshing bottle of coconut water, fresh of the shelf of your favourite supermarket:

    You'll get approximately 22 trees per rai (there are 2.5 rai to an acre). A good tree will produce 120-150 nuts a year so let's be super conservative and work on 100 nuts a year. Each nut holds roughly 300ml. (bearing in mind the younger the nut the sweeter, and larger nuts hold more but are more sour in comparison). So each rai will produce 30,000ml x 22 or 660 litres a year. Bear in mind it'll take about 3-4 years for a tree to reach full capacity. They grow very quickly.

    Now consider that Harmless Harvest, a US based company who source their coconut water from Thailand, sell their coconut water for between US$6.49 and US$7.99 per 500ml bottle, at Whole Foods in the US, and one nut in the Bangkok wet markets goes for between 8 and 20 baht (depending on time of year). At roughly 30 baht to the USD this means 300ml sells for between US$0.26c and US$0.66c. Now their exists bottling, logistics and HPP involved so it's not all profit but the rough cost is under US$1. Nice, huh?

    With demand continuing to grow as the overall coconut water market expands, while US cities continue to experience drinking water price increases due to droughts that threaten cities like Las Vegas, it's not difficult to imagine moving 50,000 or even 100,000 bottles of coconut each week.

    Let's put the two together now, shall we? Assuming 660 litres per rai and an end consumer price of US$13 per litre ($6,49/ 500ml bottle) we're looking at $8,580 gross from just 22 trees on one rai of land. Now I'm not going to delve into the price/rai of agricultural land in Thailand, simply because it varies greatly depending on location, quality, etc. I will say though that if Thai farmers were receiving anywhere near this for their coconut water, let alone all the other products from a coconut, they would all be driving Maserati's not Toyotas.

    The money comes from commoditizing it and moving product from grove to grocer - the biggest spread isn't growing the underlying nuts, but controlling the nuts from co-op onward (in our opinion). There is SIZABLE profit in coconuts - but the farmers don't make it.

    Attentive readers will understand quickly what we're investing in, and why we've taken so much time to delve into this market and understand it from the inside out.

    Looking beyond the coconut water, let's take a nosy at activated carbon.

    When first looking at activated carbon I was stunned!

    Take a look at the prices of activated carbon being sold on Alibaba. You'll notice it's selling for up to US$2,000 a metric ton. Now I've lived in Southeast Asia for years and one thing that is extremely common is a sight such as this:

    Yeah, they're burnt simply to get rid of them.

    For the most part coconut husks are treated as a liability. In fact, the company we began due diligence on actually pays someone to come and take their husks away for them.

    Now consider that activated carbon sells for up to $2,000 a ton.

    This is nuts (pun intended)! My guess is that the average coconut farmer has no idea about such things as activated charcoal.

    Let's take a commodity such as zinc, for example, which requires a complicated process to bring to market. Unlike coconuts, it doesn't just grow on trees on the side of the road. First, an ore body needs to be identified, geological surveys conducted, a mine built and then the zinc needs to be crushed to powder, treated by froth flotation which is a process involving about 50% zinc and the remainder being sulphur, iron and silicon dioxide. Then with roasting the zinc in this concentrate it becomes zinc oxide. This crude zinc oxide is then turned into a metal using thermal smelting or eloctrolytic refining.

    I haven't even mentioned the costs associated with building the infrastructure so often required to extract zinc, as its not typical for ore bodies to be found conveniently next to railroad tracks, barges, or highways. Then there are the environmental impact assessment reports and the like involved in ultimately getting to our US$2,180 per tonne, price point which is what it is what it currently sells for on the LME.

    The one thing that I absolutely love about my work is that what I inevitably start investigating so often involves opening up doors of opportunity and knowledge I had yet to identify existed. It's enough to make anyone feel alive and like a child again.

    At our upcoming Seraph Aspen Meet Up we'll be covering the company we, together with our members, will be investing in very shortly targeting the coconut water market. The management team, together with many of our portfolio companies, will be meeting with us for a private and intimate meet in a stunning Aspen resort.

    If you've ever wanted to build your own private equity hedge fund this private meet up provides an excellent opportunity to look into what we're all about.

    - Chris

    "Eat coconuts while you have teeth." - Singhalese proverb

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