Tuesday, August 28, 2007
Nicely Said....................
"Laws are laws only because government can use coercion against anyone who violates them." -Sharon Harris
Bill Bonner With An Interesting Rant
Governments used to talk of providing ‘safety nets’ for citizens in trouble. That meant offering assistance to people on the margins of society. A man who lost his job would get unemployment compensation. One who was injured would get workman’s comp. Poor people were offered food stamps...and surplus food from government farm support programs.
Now, the feds offer a safety net for people with money – a kind of rich man’s Marxism – in the form of protection against financial losses.
On August 17th, U.S. stocks were selling at just 8.25% below their all-time high. Yet, the rich were already bellowing for a bailout. And along came the Fed with a cut in the discount rate. According to Fortune Magazine, the Fed also bent its rules to help two major banks – Citigroup (NYSE: C ) and Bank of America (NYSE: BAC ).
So great was investors’ confidence in these rescue efforts that it was soon back business as usual on Wall Street. Stocks seemed to be on the road to recovery last week – with another solid increase on Friday. The yield on the 30-year Treasury bond is back at 4.89%. Gold has returned to $677. The dollar is falling again.
We can now announce with confidence that ‘all is well.’
The logic of the safety net – whether used to catch a poor man or a rich one – is that whatever mess you’ve gotten yourself into, someone else pays for it. You forget to save money...you lose your job; bingo...someone else provides emergency assistance. During the ’70s and ’80s, Americans began to realize that providing unlimited assistance to the poor had its drawbacks; many people actually seemed to prefer a life of easy poverty to a life of hard work. Many were ‘hooked’ on public assistance, with several generations of welfare recipients in a single family. We recall, in the early ’80s, asking a young woman in the ghetto of Baltimore what she did for a living.
“I get a check,” was her reply.
Poor thing. She never knew the pleasure and pride of a job well done. She never enjoyed the boost to her confidence and self-esteem that minimum wage employment can give.
Later, the Reagan administration reformed the welfare system. We don’t know if it did any good or not; but people stopped getting so many checks...and stopped talking about it. Now what they are talking about is the safety nets for the rich – and everyone is in favor of them. So far, we’ve seen the central bank act with remarkable speed to help bankers, speculators and hedge fund managers. Stockholders have been given a boost too. And if the housing slump worsens, government will probably rush out some safety nets for homeowners.
Now, capitalists, proles, and the bourgeoisie all get checks. Is that progress...or what?
“The whole secret to the rental business is getting good tenants,” said a man sitting opposite us on Saturday night. The affair was a celebration of a neighbor’s 40th wedding anniversary. He invited about 100 people to dinner to mark the occasion.
“I was a car salesman,” continued our dinner companion. “Actually, I worked my way up so that I was in charge of marketing Renault cars in Toulouse. It was a good job. I loved it. And I was very good at it. So I won about a dozen trips. You know, incentive bonuses. On one of them I got a trip to Florida. What a great time! We went to Cape Canaveral...and toured around the whole state.
“But when I was 55, Renault decided to cut back its sales staff; so they offered me such a nice early retirement, I couldn’t refuse. And then, I began to buy up houses in the Toulouse area. It’s a great city...the center of research and the aeronautical industry in France. And the second biggest student population after Paris.
“I realized that you had to get good tenants. Otherwise, they damage your place...or they miss payments. All it takes is one missed payment per year and your revenue goes from plus to minus. Each month’s rent is 8% of annual revenue. So if you’re running at 8% positive yield and a renter misses a payment, your profit for the year is erased.
“Obviously, you try to build a few missed payments – and vacancies – into your figures. But if you can eliminate them...with no vacancies...and no problems from tenants...then you can operate more efficiently and more profitably...and you can acquire more property.
“So, all I did was to ask more questions. I want to see bank statements. I want guarantees. I want cancelled checks. I want tax returns. I check references. I always meet the people. And if I don’t like them, I don’t rent to them.
“It’s work...but I’m retired. I enjoy it. And it pays off...
“Well...it paid off so well that the French tax authorities came after me. They’re awful. I think they monitor my bank accounts, because they seem to know a lot more than they should. And they tax me so heavily that I wonder why I bother. Now, at my age, all I’m trying to do is to build up some wealth so I can pass it on to my children. But it’s very hard to do. They take so much away...
“I let my daughter live in one of my apartments, for example. They claimed that I would have to pay tax on the amount of money that the apartment should rent for. I told them to ‘drop dead.’ But of course, they always have the last word.
“I think France is headed for ruin. People with ambition...rich people...and young people...are all leaving the country. And I’d leave too if I were younger.”
Now, the feds offer a safety net for people with money – a kind of rich man’s Marxism – in the form of protection against financial losses.
On August 17th, U.S. stocks were selling at just 8.25% below their all-time high. Yet, the rich were already bellowing for a bailout. And along came the Fed with a cut in the discount rate. According to Fortune Magazine, the Fed also bent its rules to help two major banks – Citigroup (NYSE: C ) and Bank of America (NYSE: BAC ).
So great was investors’ confidence in these rescue efforts that it was soon back business as usual on Wall Street. Stocks seemed to be on the road to recovery last week – with another solid increase on Friday. The yield on the 30-year Treasury bond is back at 4.89%. Gold has returned to $677. The dollar is falling again.
We can now announce with confidence that ‘all is well.’
The logic of the safety net – whether used to catch a poor man or a rich one – is that whatever mess you’ve gotten yourself into, someone else pays for it. You forget to save money...you lose your job; bingo...someone else provides emergency assistance. During the ’70s and ’80s, Americans began to realize that providing unlimited assistance to the poor had its drawbacks; many people actually seemed to prefer a life of easy poverty to a life of hard work. Many were ‘hooked’ on public assistance, with several generations of welfare recipients in a single family. We recall, in the early ’80s, asking a young woman in the ghetto of Baltimore what she did for a living.
“I get a check,” was her reply.
Poor thing. She never knew the pleasure and pride of a job well done. She never enjoyed the boost to her confidence and self-esteem that minimum wage employment can give.
Later, the Reagan administration reformed the welfare system. We don’t know if it did any good or not; but people stopped getting so many checks...and stopped talking about it. Now what they are talking about is the safety nets for the rich – and everyone is in favor of them. So far, we’ve seen the central bank act with remarkable speed to help bankers, speculators and hedge fund managers. Stockholders have been given a boost too. And if the housing slump worsens, government will probably rush out some safety nets for homeowners.
Now, capitalists, proles, and the bourgeoisie all get checks. Is that progress...or what?
“The whole secret to the rental business is getting good tenants,” said a man sitting opposite us on Saturday night. The affair was a celebration of a neighbor’s 40th wedding anniversary. He invited about 100 people to dinner to mark the occasion.
“I was a car salesman,” continued our dinner companion. “Actually, I worked my way up so that I was in charge of marketing Renault cars in Toulouse. It was a good job. I loved it. And I was very good at it. So I won about a dozen trips. You know, incentive bonuses. On one of them I got a trip to Florida. What a great time! We went to Cape Canaveral...and toured around the whole state.
“But when I was 55, Renault decided to cut back its sales staff; so they offered me such a nice early retirement, I couldn’t refuse. And then, I began to buy up houses in the Toulouse area. It’s a great city...the center of research and the aeronautical industry in France. And the second biggest student population after Paris.
“I realized that you had to get good tenants. Otherwise, they damage your place...or they miss payments. All it takes is one missed payment per year and your revenue goes from plus to minus. Each month’s rent is 8% of annual revenue. So if you’re running at 8% positive yield and a renter misses a payment, your profit for the year is erased.
“Obviously, you try to build a few missed payments – and vacancies – into your figures. But if you can eliminate them...with no vacancies...and no problems from tenants...then you can operate more efficiently and more profitably...and you can acquire more property.
“So, all I did was to ask more questions. I want to see bank statements. I want guarantees. I want cancelled checks. I want tax returns. I check references. I always meet the people. And if I don’t like them, I don’t rent to them.
“It’s work...but I’m retired. I enjoy it. And it pays off...
“Well...it paid off so well that the French tax authorities came after me. They’re awful. I think they monitor my bank accounts, because they seem to know a lot more than they should. And they tax me so heavily that I wonder why I bother. Now, at my age, all I’m trying to do is to build up some wealth so I can pass it on to my children. But it’s very hard to do. They take so much away...
“I let my daughter live in one of my apartments, for example. They claimed that I would have to pay tax on the amount of money that the apartment should rent for. I told them to ‘drop dead.’ But of course, they always have the last word.
“I think France is headed for ruin. People with ambition...rich people...and young people...are all leaving the country. And I’d leave too if I were younger.”
The IRS Has A Lot To Say
Your Citizenship and the IRS
Tuesday, August 28, 2007
According to the IRS, a taxpayer can be "out of compliance" for any number of reasons: checking the wrong box, taking a disputed deduction, misinterpreting a regulation, etc. Tax experts cannot agree among themselves what actions are "in" or "out of" compliance. Indeed, the IRS code is the most compli-cated and convoluted tax legislation in the world. Do you have reason to believe that you are "out of com-pliance with the law" from either a civil or criminal standpoint? Most of us are not tax experts and, there-fore, few of us would presumably be able to determine whether or not we are "in compliance" anyway.
Nevertheless, let's take notice of four recent cases where non-filers were found to be innocent of charges brought against them by the IRS: (1) on June 27, 2005, former IRS special agent Joseph Banister, CPA was acquitted by a jury in U.S. District Court in Sacramento (Case No. S-04-435, E.D. Calif.) of charges surrounding conspiracy to defraud and assisting with the improper filing of income tax returns-note: Joe Banister does not file an income tax return, (2) on August 8, 2003, Federal Express pilot Vernice Kuglin was acquitted by a jury in U.S. District Court in Memphis for willful failure to file a tax return (Case No. 03-20111, W.D. Tenn.), (3) on July 9, 2007, Tom Cryer of Shreveport was found not guilty for "willful failure to file an income tax return" by a 12-0 jury decision in U.S. District Court (Case No. 06-C-2176, W.D. La.), and (4) on May 12, 2006, the U.S. Attorney filed an emergency motion in U.S. Dis-trict Court in Peoria to drop the charges of failure to file and tax evasion against Robert Lawrence-just three days before his trial was to start (Case No. 06-CR-10019, C.D. Ill.). Isn't it curious that important verdicts like these are not widely reported in the standard reporters like the Federal Reporter (F.2d)? Nevertheless, the news media has picked them up, as a simple Google search will show. Take a look!
One term of interest for non-filers is the meaning of "United States Citizen". Here are a couple of key questions that we might all ask ourselves: (a) "Do you know of a statute that requires that all United States citizens who earn an income must file an Income Tax Return with the IRS?" and (b) "How do you contemplate the term "United States Citizen" as used in the Internal Revenue Code?"
That term was a source of significant controversy, resulting in the U.S. Supreme Court ruling In Re the Slaughterhouse Cases (1872), 83 U.S. 36 (Wall.) and many similar rulings afterwards. The Four-teenth Amendment (1868) had granted-rather than recognized-rights to life, liberty and property to certain people, mainly blacks and perhaps Chinese Coolies, who while having been born in one of the several States were not citizens and had no fundamental rights. They had been slaves-the property of other men. On the other hand, while white Americans born prior to passage of that Amendment were con-sidered citizens merely as a matter of being born in one of the States. Black people were not. That legal doctrine was one of the more repugnant and widely-known aspects of the famous decision Dred Scott v. Sandford (1857), 60 U.S. 393. The Fourteenth Amendment did not confer or grant upon white Americans any new right of citizenship or any fundamental right. White people already held such rights "naturally". That Amendment conferred citizenship and rights on recently freed slaves.
Let us recall that such racial issues (which strike us as so repulsive today) were commonplace in caselaw during the eighteenth and nineteenth centuries. For instance, all southern states had myriad cases and decisions on how much "black blood" a man could have and yet still be considered "white" (usually one-sixteenth). Like it or not, such decisions form a part of southern heritage.
The regulations for the U.S. tax code refer to United States citizens and imply the meaning of the term as contemplated in the Fourteenth Amendment. For example, it is interesting to note that in trying to interpret who owes the income tax under Title 26, the Code of Federal Regulations 1.1-1(c) states: "Who is a citizen. Every person born or naturalized in the United States and subject to its jurisdiction is a citi-zen." Compare that statement to the Fourteenth Amendment to the U.S. Constitution: "All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside." Do you think it is fair to say that the CFR is effectively quoting (or at least paraphrasing) the Fourteenth Amendment in its definition of a citizen of the United States? Do you think that CFR 1.1-1(c) thus implies the meaning of that term as interpreted by the U.S. Supreme Court in The Slaughterhouse Cases-which ruling has never been overturned? Is it fair to say, therefore, that having a rudimentary understanding of citizenship is important for a primary understanding who must file a tax return?
Considerations of citizenship should give all of us some food for thought. And they might even change the way you file your taxes.
According to the IRS, a taxpayer can be "out of compliance" for any number of reasons: checking the wrong box, taking a disputed deduction, misinterpreting a regulation, etc. Tax experts cannot agree among themselves what actions are "in" or "out of" compliance. Indeed, the IRS code is the most compli-cated and convoluted tax legislation in the world. Do you have reason to believe that you are "out of com-pliance with the law" from either a civil or criminal standpoint? Most of us are not tax experts and, there-fore, few of us would presumably be able to determine whether or not we are "in compliance" anyway.
Nevertheless, let's take notice of four recent cases where non-filers were found to be innocent of charges brought against them by the IRS: (1) on June 27, 2005, former IRS special agent Joseph Banister, CPA was acquitted by a jury in U.S. District Court in Sacramento (Case No. S-04-435, E.D. Calif.) of charges surrounding conspiracy to defraud and assisting with the improper filing of income tax returns-note: Joe Banister does not file an income tax return, (2) on August 8, 2003, Federal Express pilot Vernice Kuglin was acquitted by a jury in U.S. District Court in Memphis for willful failure to file a tax return (Case No. 03-20111, W.D. Tenn.), (3) on July 9, 2007, Tom Cryer of Shreveport was found not guilty for "willful failure to file an income tax return" by a 12-0 jury decision in U.S. District Court (Case No. 06-C-2176, W.D. La.), and (4) on May 12, 2006, the U.S. Attorney filed an emergency motion in U.S. Dis-trict Court in Peoria to drop the charges of failure to file and tax evasion against Robert Lawrence-just three days before his trial was to start (Case No. 06-CR-10019, C.D. Ill.). Isn't it curious that important verdicts like these are not widely reported in the standard reporters like the Federal Reporter (F.2d)? Nevertheless, the news media has picked them up, as a simple Google search will show. Take a look!
One term of interest for non-filers is the meaning of "United States Citizen". Here are a couple of key questions that we might all ask ourselves: (a) "Do you know of a statute that requires that all United States citizens who earn an income must file an Income Tax Return with the IRS?" and (b) "How do you contemplate the term "United States Citizen" as used in the Internal Revenue Code?"
That term was a source of significant controversy, resulting in the U.S. Supreme Court ruling In Re the Slaughterhouse Cases (1872), 83 U.S. 36 (Wall.) and many similar rulings afterwards. The Four-teenth Amendment (1868) had granted-rather than recognized-rights to life, liberty and property to certain people, mainly blacks and perhaps Chinese Coolies, who while having been born in one of the several States were not citizens and had no fundamental rights. They had been slaves-the property of other men. On the other hand, while white Americans born prior to passage of that Amendment were con-sidered citizens merely as a matter of being born in one of the States. Black people were not. That legal doctrine was one of the more repugnant and widely-known aspects of the famous decision Dred Scott v. Sandford (1857), 60 U.S. 393. The Fourteenth Amendment did not confer or grant upon white Americans any new right of citizenship or any fundamental right. White people already held such rights "naturally". That Amendment conferred citizenship and rights on recently freed slaves.
Let us recall that such racial issues (which strike us as so repulsive today) were commonplace in caselaw during the eighteenth and nineteenth centuries. For instance, all southern states had myriad cases and decisions on how much "black blood" a man could have and yet still be considered "white" (usually one-sixteenth). Like it or not, such decisions form a part of southern heritage.
The regulations for the U.S. tax code refer to United States citizens and imply the meaning of the term as contemplated in the Fourteenth Amendment. For example, it is interesting to note that in trying to interpret who owes the income tax under Title 26, the Code of Federal Regulations 1.1-1(c) states: "Who is a citizen. Every person born or naturalized in the United States and subject to its jurisdiction is a citi-zen." Compare that statement to the Fourteenth Amendment to the U.S. Constitution: "All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside." Do you think it is fair to say that the CFR is effectively quoting (or at least paraphrasing) the Fourteenth Amendment in its definition of a citizen of the United States? Do you think that CFR 1.1-1(c) thus implies the meaning of that term as interpreted by the U.S. Supreme Court in The Slaughterhouse Cases-which ruling has never been overturned? Is it fair to say, therefore, that having a rudimentary understanding of citizenship is important for a primary understanding who must file a tax return?
Considerations of citizenship should give all of us some food for thought. And they might even change the way you file your taxes.
Sovereign? That's A Funny Name For Private Money.........
800 Pound Market Gorillas
Tuesday, August 28, 2007 - FreeMarketNews.com
As if the prevalence of hedge funds, automated computer trading "black boxes" wasn't' enough to deal death-blow from the blue to unwitting individual investors in today's marketplace, now comes another omnivore able to crush just about everything in its path – the "sovereign fund."
As if the prevalence of hedge funds, automated computer trading "black boxes" wasn't' enough to deal death-blow from the blue to unwitting individual investors in today's marketplace, now comes another omnivore able to crush just about everything in its path – the "sovereign fund."
Scotiamocatta.com, a member of Scotia Bank Group, in its June report discusses this concept, noting: "Another potentially dollar bearish development is the growing interest by governments to set up sovereign funds. So far, as mentioned above, dollar diversification has focused on a few central banks spreading their reserves across a basket of currencies, but the next wave of diversification is likely to focus on commodities and other alternative investments. As China's move to set up a $300b sovereign-wealth fund to diversify away from the dollar, other countries are following suit."...Some estimates reckon that by the end of 2007, the assets in these types of funds could reach $2.5 trillion dollars. This compares to the estimated 1.6 trillion dollars that hedge funds have under management. In addition, it is thought that these funds could grow by $450bn a year. David Galland, editor of Casey Research writes:"Not only can the new money-bags move markets, up or down, in a big way… but, as commented on in a recent edition of this column, the attempt to unload some of their cash for tangible assets can and already is causing some serious talk of protectionism. We mention this again here, because it is a powerful new force in the market and one to keep a very close eye on." Staff Reports - Free-Market News Network
Nicely Said.............
"I cannot find any authority in the Constitution for public charity. [It] would be contrary to the letter and the spirit of the Constitution and subversive to the whole theory upon which the Union of these States is founded." -Franklin Pierce
Reco From The Boys At AGORA.
Expensive Food, Cheap Stock
By Chris Mayer
China's last emperor, Pu Yi, loved his soybeans. They were a staple of the Manchurian diet in Northern China. In the 1930s, a forward-thinking Brazilian friend asked Pu Yi if he could take some soybeans back to Brazil. Pu Yi agreed. The beans eventually made their way to bustling Rio de Janeiro.
In Brazil's fertile soils, soybeans found a welcome new home. Over the ensuing decades, they would become one of Brazil's most important crops. Today, soybeans are Brazil's largest export.
So there are historical roots for the boom in trade between China and South America. Trade between the countries has really surged in recent years. For example, China gets about one-third of its food supply from South America - with a good chunk of that from Brazil's vast farmlands. It's a natural, too. Not just for China, but for the world.
In Brazil and Argentina, you have one of the few places left in the world where you can acquire large tracts of land in temperate climates with plenty of rainfall to support large-scale agriculture. Already, the two countries produce about one-third of the world's agricultural commodities. As China is the world's workshop and India its back office, so has South America become its breadbasket.
Brazil is already the world's largest producer of coffee, sugar cane, ethanol and fruit juice. It is also near the top in soybeans, beef, poultry and tobacco. Brazil's agricultural sector alone has grown at a 5%-plus clip since 1999. That's pretty good for such a big sector. Agriculture represents about 8% of the economy, employs one-quarter of its work force and supports some 8 million enterprises. Likewise, Argentina is also a leader in beef and grains - it is the largest consumer of beef on a per capita basis in the world. In beef production, Argentina is behind only Brazil and Australia. Argentina is big on soybeans, wheat, sorghum, rice and barley. Argentina also produces an abundance of fruits - lemons, apples, peaches, pears and more.
But - as hard as this may be to fathom - there is the potential for so much more. The rise in the living standards of hundreds of millions of people in China and India, the resulting shift in dietary habits and the global push for alternative fuels derived from agricultural products put South America in the catbird seat.
The agricultural markets are abuzz these days. The prices of corn, barley, soybeans, coffee and cocoa are all well above their averages over the past five years. Meat and poultry prices are also on the upswing. You can see it, too, in the behavior of the companies involved. Dannon recently announced it would boost prices for its dairy products. That follows on the heels of similar announcements by Nestlé, Unilever and Cadbury Schweppes, Kellogg's, General Mills and others.
As an investor, I think I'd like to own companies that make the stuff that everybody else wants to pay more for. So it's not hard to see why I should gaze at those lush farmlands in South America.
Historically, the productive capacity of this region is underdeveloped - despite its chart-topping production. Some 90% of Brazil's fertile and productive land has not yet been cultivated. Similarly, the United Nations' Food and Agriculture Organization estimates that farmers have cultivated only 3% of Argentina's fertile land. So there is lots of land to accumulate and turn into a top-notch farming operation.
Only in the last decade or so have producers in these countries applied cutting-edge technologies in managing their farms. The result has been a great expansion in crop yields. In today's markets, farmers in Argentina and Brazil are highly competitive in the global market for corn, wheat, soybean, sugar and other products. In fact, some of the success in Argentina and Brazil has come at the expense of American farmers - especially in the area of soybeans, for example.
Brazil and Argentina have something else of great value: water. Take a look at the chart, which shows that South America has about 26% of the world's water supply, but only 6% of the world's population. Asia, by contrast, has many more people to support with its water supply. Then again, this chart makes things look better than they are. Most of China's water supply is in the south, while most of its people live in the north.
In any case, Brazil alone holds 14% of the world's supply of fresh water. I remember, too, visiting a ranch in Argentina and having the owner proudly show me how water generously bubbles out of the ground from underground streams and then waters acres of crops. Quite a natural advantage.
Perhaps it goes without saying that the biggest risk down here is the populist and interventionist policies of governments. That is a risk one takes everywhere these days -even in America, and even in Canada (remember the income trust fiasco?). Political risk seems to be on the rise the globe over, something we should expect after a long period of fat years. People get complacent and take economic growth for granted.
While the political risks of South America bear watching, I believe the investment merits of owning farmland down here outweigh the political risks.
The best way to own South American farmland, short of hopping on a plane and bringing a bag full of money to a settlement table, is to buy shares of Cresud (CRESY:nasdaq).
Cresud is a big agricultural concern in Argentina. It has operations in beef cattle, grain and milk. It also has a large stake in the Argentine developer IRSA. And the real kicker - the thing that could make a mint for shareholders over the next few years - is its investment in BrasilAgro. BrasilAgro is what prompts me to write this update, as I believe that Cresud's investment in BrasilAgro could eventually exceed the size of Cresud's existing Argentine operations.
Cresud and some local investors started BrasilAgro in May 2006. The idea was to use Cresud's expertise and replicate its successful business model in Brazil. Since BrasilAgro's initial public offering, it has been busy acquiring farmland throughout Brazil. By April of this year, it had gone through about 40% of its IPO proceeds. Cresud owns about 10% of BrasilAgro.
When I was in Argentina earlier this year, I met with the management team at Cresud. I remember the team's excitement about the long-term prospects of BrasilAgro. It is easy in Brazil to acquire vast tracts of farmland. It is also relatively cheap. Finally, the business environment in Brazil is generally thought somewhat friendlier than in Argentina.
I expect the value of BrasilAgro to increase significantly in the years ahead. In the meantime, Cresud itself still looks cheap and has great trends behind it. Even the investment banking firms that are neutral on the shares still come up with a net asset value of $25 per share – 25% above the current quote. The downside on Cresud looks low here. I think the worst case is that a year from now, this stock still lingers around $20 per share. Basically, we ought to get our money back. But in the best case, you've got lots of potential catalysts for a move higher.
Cresud remains a buy.
China's last emperor, Pu Yi, loved his soybeans. They were a staple of the Manchurian diet in Northern China. In the 1930s, a forward-thinking Brazilian friend asked Pu Yi if he could take some soybeans back to Brazil. Pu Yi agreed. The beans eventually made their way to bustling Rio de Janeiro.
In Brazil's fertile soils, soybeans found a welcome new home. Over the ensuing decades, they would become one of Brazil's most important crops. Today, soybeans are Brazil's largest export.
So there are historical roots for the boom in trade between China and South America. Trade between the countries has really surged in recent years. For example, China gets about one-third of its food supply from South America - with a good chunk of that from Brazil's vast farmlands. It's a natural, too. Not just for China, but for the world.
In Brazil and Argentina, you have one of the few places left in the world where you can acquire large tracts of land in temperate climates with plenty of rainfall to support large-scale agriculture. Already, the two countries produce about one-third of the world's agricultural commodities. As China is the world's workshop and India its back office, so has South America become its breadbasket.
Brazil is already the world's largest producer of coffee, sugar cane, ethanol and fruit juice. It is also near the top in soybeans, beef, poultry and tobacco. Brazil's agricultural sector alone has grown at a 5%-plus clip since 1999. That's pretty good for such a big sector. Agriculture represents about 8% of the economy, employs one-quarter of its work force and supports some 8 million enterprises. Likewise, Argentina is also a leader in beef and grains - it is the largest consumer of beef on a per capita basis in the world. In beef production, Argentina is behind only Brazil and Australia. Argentina is big on soybeans, wheat, sorghum, rice and barley. Argentina also produces an abundance of fruits - lemons, apples, peaches, pears and more.
But - as hard as this may be to fathom - there is the potential for so much more. The rise in the living standards of hundreds of millions of people in China and India, the resulting shift in dietary habits and the global push for alternative fuels derived from agricultural products put South America in the catbird seat.
The agricultural markets are abuzz these days. The prices of corn, barley, soybeans, coffee and cocoa are all well above their averages over the past five years. Meat and poultry prices are also on the upswing. You can see it, too, in the behavior of the companies involved. Dannon recently announced it would boost prices for its dairy products. That follows on the heels of similar announcements by Nestlé, Unilever and Cadbury Schweppes, Kellogg's, General Mills and others.
As an investor, I think I'd like to own companies that make the stuff that everybody else wants to pay more for. So it's not hard to see why I should gaze at those lush farmlands in South America.
Historically, the productive capacity of this region is underdeveloped - despite its chart-topping production. Some 90% of Brazil's fertile and productive land has not yet been cultivated. Similarly, the United Nations' Food and Agriculture Organization estimates that farmers have cultivated only 3% of Argentina's fertile land. So there is lots of land to accumulate and turn into a top-notch farming operation.
Only in the last decade or so have producers in these countries applied cutting-edge technologies in managing their farms. The result has been a great expansion in crop yields. In today's markets, farmers in Argentina and Brazil are highly competitive in the global market for corn, wheat, soybean, sugar and other products. In fact, some of the success in Argentina and Brazil has come at the expense of American farmers - especially in the area of soybeans, for example.
Brazil and Argentina have something else of great value: water. Take a look at the chart, which shows that South America has about 26% of the world's water supply, but only 6% of the world's population. Asia, by contrast, has many more people to support with its water supply. Then again, this chart makes things look better than they are. Most of China's water supply is in the south, while most of its people live in the north.
In any case, Brazil alone holds 14% of the world's supply of fresh water. I remember, too, visiting a ranch in Argentina and having the owner proudly show me how water generously bubbles out of the ground from underground streams and then waters acres of crops. Quite a natural advantage.
Perhaps it goes without saying that the biggest risk down here is the populist and interventionist policies of governments. That is a risk one takes everywhere these days -even in America, and even in Canada (remember the income trust fiasco?). Political risk seems to be on the rise the globe over, something we should expect after a long period of fat years. People get complacent and take economic growth for granted.
While the political risks of South America bear watching, I believe the investment merits of owning farmland down here outweigh the political risks.
The best way to own South American farmland, short of hopping on a plane and bringing a bag full of money to a settlement table, is to buy shares of Cresud (CRESY:nasdaq).
Cresud is a big agricultural concern in Argentina. It has operations in beef cattle, grain and milk. It also has a large stake in the Argentine developer IRSA. And the real kicker - the thing that could make a mint for shareholders over the next few years - is its investment in BrasilAgro. BrasilAgro is what prompts me to write this update, as I believe that Cresud's investment in BrasilAgro could eventually exceed the size of Cresud's existing Argentine operations.
Cresud and some local investors started BrasilAgro in May 2006. The idea was to use Cresud's expertise and replicate its successful business model in Brazil. Since BrasilAgro's initial public offering, it has been busy acquiring farmland throughout Brazil. By April of this year, it had gone through about 40% of its IPO proceeds. Cresud owns about 10% of BrasilAgro.
When I was in Argentina earlier this year, I met with the management team at Cresud. I remember the team's excitement about the long-term prospects of BrasilAgro. It is easy in Brazil to acquire vast tracts of farmland. It is also relatively cheap. Finally, the business environment in Brazil is generally thought somewhat friendlier than in Argentina.
I expect the value of BrasilAgro to increase significantly in the years ahead. In the meantime, Cresud itself still looks cheap and has great trends behind it. Even the investment banking firms that are neutral on the shares still come up with a net asset value of $25 per share – 25% above the current quote. The downside on Cresud looks low here. I think the worst case is that a year from now, this stock still lingers around $20 per share. Basically, we ought to get our money back. But in the best case, you've got lots of potential catalysts for a move higher.
Cresud remains a buy.
Another Reason Mitt Romney Sucks
“There’s nothing wrong with not serving in the military… The irony is that the five Romney brothers are campaigning around Iowa in a bus emblazoned with the words “Five Brothers.” In Iowa, five brothers means the five Sullivan Brothers who died when the USS Juneau was sunk in World War II. The Romney campaign makes a flippant remark about his sons’ lack of military service at the same time it uses the epitome of a family’s military sacrifice.”
- Sioux City (Iowa) Journal
- Sioux City (Iowa) Journal
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