Burry likes farmland

[rogermunibond]

http://www.bloomberg.com/news/2010-09-07/michael-burry-predictor-of-mortgage-collapse-bets-on-farmland-and-gold.html

 

[twacowfca]

Great article, Roger.  Thanks for posting.  It's interesting that he sees an incredible correlation between all asset classes.

[rogermunibond]

I think Burry might be interested in Brazil.

 

http://www.economist.com/node/16886442?story_id=16886442&fsrc=rss

[Ballinvarosig Investors]

Bizarre choice. Land and property were some of the assets that went to the most extreme prices during the credit bubble. When you pull trillions of dollars of credit from the system, it's extremely hard to see how prices can even remain as high as they are. Burry has either lost the plot, or he sees something that no one else does.

[ExpectedValue]

Bizarre choice. Land and property were some of the assets that went to the most extreme prices during the credit bubble. When you pull trillions of dollars of credit from the system, it's extremely hard to see how prices can even remain as high as they are. Burry has either lost the plot, or he sees something that no one else does.

 

I think there is a big difference between buying farmland and buying a house in Florida.

[Ballinvarosig Investors]

Bizarre choice. Land and property were some of the assets that went to the most extreme prices during the credit bubble. When you pull trillions of dollars of credit from the system, it's extremely hard to see how prices can even remain as high as they are. Burry has either lost the plot, or he sees something that no one else does.

 

I think there is a big difference between buying farmland and buying a house in Florida.

Of course, but farm land got artificially expensive in the credit boom.

 

http://www.bullfax.com/imgs/b44ce4470a319e04e189d9e902f1adaa8de4ae0e.jpg

[ExpectedValue]

Of course, but farm land got artificially expensive in the credit boom.

 

http://www.bullfax.com/imgs/b44ce4470a319e04e189d9e902f1adaa8de4ae0e.jpg

 

Over the same period of time shown on that graph, the population of the world has increased from 3.7 to 6.7 billion people... If you expect that trend to continue and that living standards will rise globally - farmland might be in greater demand.

 

So even though I wont invest in it, I dont think it is so crazy.

[shalab]

To buy gold and farmland, one must believe in inflation.

[Ballinvarosig Investors]

Over the same period of time shown on that graph, the population of the world has increased from 3.7 to 6.7 billion people... If you expect that trend to continue and that living standards will rise globally - farmland might be in greater demand.

 

So even though I wont invest in it, I dont think it is so crazy.

Well, let me put it like this. People on this forum have discussed RRGB quite a lot. To me, it's quite clear that there's value here. It's a $300 million company that's generating $90 million in cash from the business, management have already started to try and turn the company around, so it's clear you already have an instant catalyst for a great turnaround here.

 

Farmland though, I dunno, I just can't see the value.

[twacowfca]

Burry's interest in farmland is reminiscent of WEB's interest in silver in the late 90's.  Not the greatest idea, but a red flag that there were few good ideas available.

[rick_v]

Twacow, I disagree. Buffet made a genius investment in Silver. His problem was he didn't hold it long enough. He bought 130m ounces at an avg cost of 4.50$ per ounce. Silver closed at 19.84. Buffet would have made 2b$ on this investment.

 

Believer it or not, I have some theories as to why Buffet doesn't make these types of trades any more. I think he truly feels responsible to exude confidence in the system so he doesn't go for the easy trades such as buying up x% of the world's gold supply or y% of the world's silver supply as he did.

 

If you look back to 1997 when he made this investment, he talked about the fundamentals of Silver. Buffet knows that commodities too have fundamentals.

 

One more thing you guys may not have realized about Burry. He made about 100m$ in carry from Scion pre tax, so all these investments he is talking about now are his own with his own permanent base of capital... ie: farmland.

[rick_v]

(The following is a reformatted and edited version of a

press release issued by Berkshire Hathaway.)

 

 

Omaha, Nebraska, February 3, 1998 -- Because of recent

movements in the silver market and because Berkshire

Hathaway has received inquiries about its ownership of the

metal, the company is releasing certain information that i

would normally have published next month in its annual

report.

    The company owns 129,710,000 ounces of silver. Its

first purchase was made on July 25, 1997 and its most rece

purchase was made on January 12, 1998.

    During 1998, Berkshire has accepted delivery of

87,510,000 ounces in accordance with the terms of the

purchase contracts and the remaining contracts for

42,200,000 ounces call for delivery at varied dates until

March 6, 1998. To date, all deliveries have been made on

schedule. If any seller should have trouble making timely

delivery, Berkshire is willing to defer delivery for areasonable period upon payment of a modest fee.

    Over 30 years ago, Warren Buffett, CEO of Berkshire

Hathaway, made his first purchase of silver in anticipation

of the metal's demonetization by the U.S. Government. Since

that time he has followed silver's fundamentals but no

entity he manages has owned it. in recent years,

widely-published reports have shown that bullion inventories

have fallen very materially, because of an excess of

user-demand over mine production and reclamation. Therefore,

last summer Mr. Buffett and Mr. Munger, Vice Chairman of

Berkshire, concluded that equilibrium between supply and

demand was only likely to be established by a somewhat

higher price.

    All metal was purchased for London delivery through a

single brokerage firm. No options have been or are held by

Berkshire. No purchases have been made that established new

highs for the metal and all buying has been after dips.

Berkshire has had no knowledge of the actions or positions

of any other market participant and today has no such

knowledge.

    Berkshire has no present plans for purchase or sale of silver.

[uncommonprofits]

Over the same period of time shown on that graph, the population of the world has increased from 3.7 to 6.7 billion people... If you expect that trend to continue and that living standards will rise globally - farmland might be in greater demand.

 

So even though I wont invest in it, I dont think it is so crazy.

Well, let me put it like this. People on this forum have discussed RRGB quite a lot. To me, it's quite clear that there's value here. It's a $300 million company that's generating $90 million in cash from the business, management have already started to try and turn the company around, so it's clear you already have an instant catalyst for a great turnaround here.

 

Farmland though, I dunno, I just can't see the value.

 

Best I can tell is that $90 million in cash flow is not FREE cash flow (seems like at least half this amount gets gobbled up in capital expenditures?).  Just an observation that seems to make this a bit misleading.  

 

People interested in ag plays however, might take a look at VFF (Village farms International) - trades on TSX.  

* Currently trading at about 3x FREE cash flow (pre-tax for the trailing 12 months) - has a moat in being the largest (North American) greenhouse producer and distributor of tomatoes, cucumbers, bell peppers.  [i pretty much backed up the truck on this when at 50-60 cents (so <1.5x free cash) -- but at $1.15-$1.25 as of late it still seems very cheap]

* Uses about 1/5th the amount of water as field grown produce.  

* Will eventually be building out their biosphere technology that to date is only being produced on a small scale basis - this new technology is world class churning out the highest yields in the world by a fair margin.  

 

[oec2000]

Bizarre choice. Land and property were some of the assets that went to the most extreme prices during the credit bubble. When you pull trillions of dollars of credit from the system, it's extremely hard to see how prices can even remain as high as they are. Burry has either lost the plot, or he sees something that no one else does.

 

Did farmland prices go up because of the credit bubble or the commodities boom? Not saying I know but it seems there could be a fundamental reason for the rise. Shouldn't we be discussing the ROI on farmland investment based on some assumption of commodity prices to evaluate whether prices are ina bubble or not?

 

OP did not mention it but Burry also spoke about buying gold.

 

His track record is perhaps too short to judge but from Michael Lewis' account, Burry appears to be a pretty smart investor.

[rogermunibond]

IMO, Burry's farmland investment has to do more with water than with the value of the land.

 

Under either AGW (rapid rise in temps) or GW (slow rise from last Ice Age) scenarios, increasing temperatures leads to greater volatility of extreme weather events.

 

Throw in increasing population, increasing income in emerging markets, inflation, change in consumption from grain/veggie to meat, what have, you and voila.

 

 

[oec2000]

IMO, Burry's farmland investment has to do more with water than with the value of the land.

 

 

If so, he would have bought the Great lakes and Niagara Falls.  ;D He was quoted quite specifically as saying that his interest was in agricultural farmland. If his interest was in water, he could have bought any land with water.

 

The agri story seems compelling (growing population with rising incomes, declining arable land per capita, dwindling water supplies) but seems a difficult one for value investors to play because of the commodity component. I've mentioned it before on other threads but SCP is, imo, a lower risk way to participate in this story. Their strategy of leasing farmland from First Nations bands gives them access without the capital costs and risks.

[rogermunibond]

Read it again.  "water on site."

 

Irrigation draw rights are non existent from the Great Lakes, IIRC.

[biaggio]

I think he wants farmland with its own water supply (the impression I got from the video)

[oec2000]

 

People interested in ag plays however, might take a look at VFF (Village farms International) - trades on TSX.  

* Currently trading at about 3x FREE cash flow (pre-tax for the trailing 12 months) - has a moat in being the largest (North American) greenhouse producer and distributor of tomatoes, cucumbers, bell peppers.  [i pretty much backed up the truck on this when at 50-60 cents (so <1.5x free cash) -- but at $1.15-$1.25 as of late it still seems very cheap]

* Uses about 1/5th the amount of water as field grown produce.  

* Will eventually be building out their biosphere technology that to date is only being produced on a small scale basis - this new technology is world class churning out the highest yields in the world by a fair margin.  

 

 

Simply being the largest greenhouse producer doesn't sound like much of a moat. They still have to compete with traditional producers, don't they? Besides, their size is not that large that it could deter someone from building a larger operation than theirs.

 

Also, their debt seems high for such an uncertain business.

 

Read it again.  "water on site."

 

Irrigation draw rights are non existent from the Great Lakes, IIRC.

 

My Great Lakes/Niagara Falls comment was obviously not a serious one. To me, the quote showed his primary interest was in agri land - access to water is just a qualifier (to ensure productivuty of the farmlands). Unless he is trying to hide his true intent, if his real target was water, there is no need for him to specify agri lands - any land should do.

[biaggio]

 

People interested in ag plays however, might take a look at VFF (Village farms International) - trades on TSX.  

* Currently trading at about 3x FREE cash flow (pre-tax for the trailing 12 months) - has a moat in being the largest (North American) greenhouse producer and distributor of tomatoes, cucumbers, bell peppers.  [i pretty much backed up the truck on this when at 50-60 cents (so <1.5x free cash) -- but at $1.15-$1.25 as of late it still seems very cheap]

* Uses about 1/5th the amount of water as field grown produce.  

* Will eventually be building out their biosphere technology that to date is only being produced on a small scale basis - this new technology is world class churning out the highest yields in the world by a fair margin.  

 

 

Uncommonprofit,

very interesting idea--it is hard to find good ideas in agricultural/food area. I had a look at there last annual report.

 

Are you concerned at all with the share structure (insiders own special shares)---I got a bit of a headache reading their ownership flowchart( it may be that I am a little tired + feel a bit slow)

 

they had $10 million but $6.3 million was from tax refund  without tax refund they appear to be selling for just over 10 x FCF

 

they have $51 million in debt but $43 million comes due next year

 

also noticed that  a couple years ago they bought 5 years worth of nat gas at >$8 per MCF (they should get some relief as this expires in a couple years)

 

Also oec2000, I think the board had a discussion last year about the investment yield of farming...I seem to remember that the consensus was that it was not very good.

 

[biaggio]

agree with oec 2000 re lack of moat. They had return of $3.7 million(take ~$10 million in FCF + subtract their tax refund) on ~ $90 million of tangible capital which to me would indicate more of a commodity type business.

 

 

[oec2000]

Biaggio, thanks for the tip. Is this the thread?

 

http://cornerofberkshireandfairfax.ca/forum/index.php?topic=2321.0

 

[uncommonprofits]

Simply being the largest greenhouse producer doesn't sound like much of a moat. They still have to compete with traditional producers, don't they?

Advantage 1. They use 1/5 of the water than field grown producers - and have been expanding on this multiple.  As water supplies become tighter in the future - the advantage increases.

Advantage 2.  Versus field grown - they are far more efficient and preferred option for the grocer (ie. the product has a longer shelf life) -- hence lower labour costs for the grocer.  Also a greater appeal to the customer (ie the product looks nicer).

Advantage 3.  Far less competition from field supply during the winter and spring months -- so at least half the year is far less competitive.

Advantage 4.  There is becoming less and less land for which to plant.  There may also be a day of reckoning for field grown suppliers when the US government makes drastic cuts to generous farm policies.

Advantage 5.  The distribution network gains competitive footing as energy prices rise as they have.  Assuming energy prices continue to climb there is a tipping point where their distribution system will have a definite competitive advantage (summer and winter).

 

Here in Canada -- due mainly to the climate over 90% of tomatoes (100% in winter) are greenhouse grown.  In the US I believe it is around 20% but growing due to the advantages and trends mentioned.

 

Besides, their size is not that large that it could deter someone from building a larger operation than theirs.

 

With who's technology?  As mentioned -- the new biosphere technology they have within their Gates facility is achieving the highest yields in the world.  And with who's distribution network?  Who are they going to sell the product to - not only do they have the distribution network but they also have their customer base in which they work closely with and have much more stable contracts with (than the general market pricing).  It would make far more sense for someone with deep pockets to buy them out.  By the way -- they are in discussions with partners in very hot climates where food is in short supply and water supply in critical shape (middle east for example -- where they could one day license their technology)

 

Also, their debt seems high for such an uncertain business.

 

They continue to pay down debt.  It now stands at about 2.2x EBITDA -- three years from now they could pretty much be a debt free company (with little focus on the more capital intensive growth that is).  Debt is getting under control -- while there is some volatility in pricing -- I think it is far more more stable than you are assuming.

[twacowfca]

Twacow, I disagree. Buffet made a genius investment in Silver. His problem was he didn't hold it long enough. He bought 130m ounces at an avg cost of 4.50$ per ounce. Silver closed at 19.84. Buffet would have made 2b$ on this investment.

 

Believer it or not, I have some theories as to why Buffet doesn't make these types of trades any more. I think he truly feels responsible to exude confidence in the system so he doesn't go for the easy trades such as buying up x% of the world's gold supply or y% of the world's silver supply as he did.

 

If you look back to 1997 when he made this investment, he talked about the fundamentals of Silver. Buffet knows that commodities too have fundamentals.

 

One more thing you guys may not have realized about Burry. He made about 100m$ in carry from Scion pre tax, so all these investments he is talking about now are his own with his own permanent base of capital... ie: farmland.

 

 

The cap rate for leasing farmland is modest, usually just a little more than the risk free rate on average.  It's usually a mediocre investment unless it's in the path of development.  Agriculture productivity has outpaced population growth by 2% to 3% annually for the last 150 years.  Of course, any asset at a bargain price can be a good investment.  Is good farmland cheap anywhere?

[twacowfca]

IMO, Burry's farmland investment has to do more with water than with the value of the land.

 

Under either AGW (rapid rise in temps) or GW (slow rise from last Ice Age) scenarios, increasing temperatures leads to greater volatility of extreme weather events.

 

Throw in increasing population, increasing income in emerging markets, inflation, change in consumption from grain/veggie to meat, what have, you and voila.

 

 

 

Rising CO2 levels and periodic warming trends have been associated with increased rainfall and better crop yields, as well as with far fewer wars during times of periodic warming.  This correlation holds for nearly 2000 years in China with extensive historical records.