Why Jim Rogers is Wrong

AgCommodities

“If you’ve got young people who don’t know what to do, I’d urge them not to get MBAs, but to get agriculture degrees,” – Jim Rogers

“All your viewers who got MBAs made a terrible mistake; they should try to exchange them for farming degrees or mining degrees”. – Jim Rogers speaking to a Bloomberg anchor

In 2004, Jim’s book Hot Commodities was published. In the book he focuses specifically on sugar and coffee due to favourable supply demand issues. Over the few years following publication both commodities rallied hard producing gains of 155% and 232% respectively.

We did not disagree and discussed Input Capital and their agricultural streaming model which we really liked and still do. We discussed opportunities for traders in “The Ag Trade” where Mark discussed specific trading strategies he was employing.

Agricultural CommoditiesOver the last 10 years the returns have been admirable as you can see from the chart. That is provided you’d invested in 2005 and held on till today, and refrained from investing at any of the peaks in the respective commodities.

Looking out into the blue horizon I have to remain long term bullish on agricultural commodities. The solution to insufficient supply is higher prices, and as Rick Rule is fond of saying the solution to higher prices is higher prices. Higher prices will come due to insufficient supply on the back of rising demand from a rapidly developing middle class in emerging and frontier markets. In a recent article in the Economist I read the following statement.

“In the next 40 years humans will need to produce more food than they did in the previous 10,000 put together.”

Ok, so you’re wondering why or where Jim Rogers is wrong…

The answer to this lies in a story which begins with two distinctly different types of people: farmers and bankers.

Farmers do their clothes shopping at 1960s department stores, drive anything that has a space for a dog in the rear and dine on meat and 2 veg.

Bankers line the interior of their cars with 16 dead cows, polish off filet mignon and truffles – truffles being something most farmers I know would think is a game of some sort, not a food – and they dress themselves at Louis Vuitton.

Let’s take a look at the 2014 median farm household income forecast according the the USDA’s own website. Note that this is for the total household.

Median total farm household income is forecast to decrease slightly in 2014, to $70,564, down from $71,697 estimated for 2013.

Given the broad USDA definition of a farm, many farms are not profitable even in the best farm income years. The median farm income of -$1,626 is down slightly from the 2013 estimate of -$1,141.

Most farm households earn all of their income from off-farm sources—median off-farm income is projected to increase 3.7 percent in 2014 to $64,825.

Now let’s take a gander at our Brooks Brothers wearing friends.

Well, they’ve taken a hit. Poor Jamie Dimon CEO of JPMorgan Chase & Co has just received his first bonus in 3 years while his pay holds steady at $20 million. No really, feel free to read it on Bloomberg. Try not to throw up.

Goldman Sachs paid 121 of its London bankers an average of $4.7 million last year.

In case you think I’m cherry picking the top dogs consider the following pay scales for graduates.

  • 1st Year Analyst Total Compensation Range: $135K to $145K
  • 2nd Year Analyst Total Compensation Range: $155K to $170K
  • 3rd Year Analyst Total Compensation Range: $185K to $205K

…or the following chart:

Bankers' PayThe chart above shows how incredibly profitable this has been for those in the financial services industry.

Why is it then that bankers are making many, many multiples of what farmers are making?

The answer to this lies in how our financial system is rigged and something called the “Cantillon effect” named after Richard Cantillon.

In 1719 Richard Cantillon bought shares in John Law’s infamous Mississippi company. He noticed that the paper money being created by the government which was backed by shares in the company didn’t reach everyone in the economy at the same rate. Those who were well connected would receive it first and by the time it had filtered all the way down to the minions, typically the labouring classes, it had lost value.

The vast amounts of money and debt creation, QE1, QE2, Operation Twist, deficit spending, bail outs, bail ins, and every other absurd scheme dreamed up by central bankers all allow for those closest to benefit first and foremost. Every other participant in the market relies on the trickle down of this capital.

Water tap dripping dollar bills, Water waste concept

When you consider that banks create money by issuing debt and then charge interest on that debt then it is simply not mathematically possible for the rest of the participants in the economy to compete with that.

Those receiving lucrative government contacts for instance are close to the spigot. Consider, for example, at the heart of the death star a company such as Halliburton. It’s not lost on me that while Halliburton is ostensibly an oil company it profits repeatedly from wars waged by its directors and shareholders, using government funding for those wars.

When the US government decide to go to war against some newly fashioned enemy of the day they borrow by issuing debt. In borrowing they create money. That money goes directly to arms dealers, oil companies who are contracted in, logistics companies, and bankers putting the deals together. They receive that money, money created literally out of fresh air. How far away is the average farmer from this crony capitalism?

It doesn’t matter how money is created in this monetary chaos, whether it be via quantitative easing, deficit spending or bail outs. Banks are always sitting at the top of this house of cards.

Jim Rogers is right about one thing: agriculture will require large amounts of capital investment. But until we have a reset in the way the financial world operates bankers will continue to be the ones making all the money.

In the next post I’ll be speaking about an agriculture based economy which is largely devoid of bankers.

- Chris

What Parenting Has in Common with Raising Capital

Dynamite with Money

Fathers and mothers everywhere recall with a certain fondness the years BC. For the average pre-family adult, life was starkly different before children (BC). Responsibilities ended at the individual level and oh, the freedom. Money was yours, time was yours, and you could do with it all as you damn well pleased.

Come home late? Sure!
Not come home at all? Of course!
Take off on a whim? Hell yeah!
Spend silly money on things you don’t need? All the time!

Dynamite with Money

Being a parent changes this. Sure, there are parents who ignore responsibilities, but that’s why they’re called bad parents. They’re scowled at by their peers, and the neighbors secretly all expect to see their children end up on Jerry Springer.

When that little ball of screaming flesh drops out of… oh, never mind. You know how it all works. As soon as you become a parent that child is your responsibility. Period, end of story. No going back. If you don’t like it you should have thought more about what you were taking on, or more precisely what you were putting where, and the potential ramifications. After all, a vasectomy could solve the problem and you get to walk around like John Wayne for a week. A win, win if that’s what you’re after.

After children everything you do going forward is done with the knowledge that there is this underlying responsibility. It can be a burden, or it can act as a massive, awesome driving force – this all depends on temperament. The question then becomes what temperament are we dealing with?

Starting and running a company with your own capital is like being a bachelor. It’s your baby, your problem and you answer to nobody but yourself.

You wanna blow money on expensive office space? Sure!
Business class travel and high end hotels? Sure, why not!

When a founder raises capital it’s akin to having your wife give birth… everything changes. No more late night drinks with the boys, no more dragging yourself out of bed at 10 AM on a lazy Sunday. Hell no, you’ve got others to think about and take care of, and guess what – they come first. They’re called shareholders and they’ve worked hard to acquire the money you as a founder are now responsible for.

In a recent email exchange with one of our Seraph portfolio company CEOs, this particular gentleman mentioned half jokingly that he’s the indentured servant of his shareholders. This CEO has an immense amount of experience in both public and private companies and he “gets it.” He knows that the responsibility is his, is large and can’t be taken lightly.

Not all founders think like this. Some raise money thinking that its somehow a given, and that once they have the money that this is now “their” money with which to build “their” company. For irresponsible founders this type of reckless attitued can be as dangerous as spilling an Englishman’s pint.

I like to see a company where founders have a meaningful stake in the business, and I want to see them treating the company as their own (not just acting like employees). The fact that should not be lost however, is that shareholder’s funds are money entrusted to founders in their position of managing the company. As a matter of due diligence this is a distinction I like to determine. It’s dangerous to place capital with founders who can’t tell the difference.

As soon as you sell equity in your business, a piece of that business is NO LONGER YOURS and your responsibility is now to shareholders. Directors in a business, whether founders or equity holders, or as the case typically is, usually both, also have a responsibility for looking after the interests of a company’s shareholders. One way to ensure this takes place is to insist that there is a separation of roles between the board of directors and management. This is just good corporate governance.

Annual and medium term objectives for management need to be laid out. There is a large risk where a company who’s management are majority shareholders perform poorly or even destroy shareholder value out of sheer incompetence, lack of adequate skills or in some instances by fraud. The board’s responsibility is to be able to ensure that corrective measures are taken.

In discussions with our many advisors, who collectively have decades of experience working with companies right from start-ups through to multi-billion dollar enterprises, the consensus is that at a minimum at least half of managements’ compensation needs to be tied to their achievements. This compensation can be in way of equity or salary, or a combination of the two.

Results should be measured by results such as EBITDA, return on capital and/or revenue growth. It’s the board’s responsibility to ensure that management are executing on the business plan, which includes ensuring managements performance and the ability to remove management in the event that metrics are consistently not met.

Investors – when you start to see mismanagement, incompetence, breach of fiduciary duties and abuse of funds… start asking questions… a lot of questions.

Founders – bad behaviour can quickly turn ugly when you don’t take your responsibilities seriously, and where recourse is available, either by means of step in rights or by legal action, you should expect your shareholders to not sit still.

- Chris

“A hero is someone who understands the responsibility that comes with his freedom.” – Bob Dylan

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