Burry likes farmland

[scottyjukebox]

Well guys I happen to live in a part of illinois with some of the highest yield per acre farmland in the country.  It was going for around $5500 per acre in 2007 and i believe that it has yet to drop much at all..just fewer transactions.  My family owns land but its quite a crappy investment its pretty much just in our hands for family nostalgia...we receive i think around $150 an acre in rent per year.  If you actually farm it yourself and have no or very little cost basis thats a different story...but you can still lose your ass doing that.  One thing that holds price up artificially high is the fact that farmers buy or inherit and hold forever.  Im sure some farmers have leveraged way up to buy land in recent years but there are many more who have not. Anyways im waiting for it too crash again like the mid 80's so i can buy some..lol

[biaggio]

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

 

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

 

 

yes

[uncommonprofits]

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)

 

The special share structure came about due to the American owned company merging with a Canadian company structured as an Income Trust.  Income Trust rules forbid non-Canadians from controlling ownership.  The special ownership structure was a work-around.  The bulk of the special shares are owned by the CEO and COO -- who combined own around 50% of the company.  Special share structure is not an issue for me.  And btw, the company has since converted to a corp.

 

 

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

 

 

I think you are under-estimating FCF significantly.  The 2009 calender year reflects a severe down cycle under a severe recession.  I find it far more accurate to use the trailing 12 months to June 30.  During this trailing 12 month period the company generated $19.4 million EBITDA.  Capital Expenditures were $2.2 million.  Interest expense was was $2.9 million.  That leaves about $14.3 million pretax and before derivatives, non-cash changes and such (which to the best of my ability figure they wash out in the end).  By the way EBITDA was higher in 2008 at $21 million+.  Since that time the company has had some growth initiatives such as adding third party distribution and the very recent opening of a 30,000 square foot value added packaging/distribution facility.   

 

As for debt - don't forget to discount the cash on hand.  I come up with present net debt of about $43 million.  They have made paying down debt a priority and I definitely find it within their means to get this down to <$30 million (2x pretax FCF +/-) by this time next year. 

[biaggio]

uncommonprofits,

 

I have only looked at 2009 annual report.

 

Have you had a chance to look at other years (other than 2008 you mentioned). Wondering what a typical/normal year would be for FCF?

 

I was interested in your idea, as the small town of Leamington, near to me, has produced quite a bit of wealth to several local families with greenhouses  + I foresee  inflation of food prices  in future.

 

 

 

 

[uncommonprofits]

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.

 

See my previous note regarding my calc on free cash flow and the mistake it would be to use 2009 financials as this is far removed from the realistic view.  If on the other-hand one believes in persistent deflation then this and/or farm land may not be a good place to be.  What I do know is that farmland is NOT trading at 3x pre-tax FCF -- in fact far from it!

 

I would agree with you that this is a commodity type business in terms of the produce they sell having to compete with other edibles (egs when things get tough ... perhaps people eat more potatoes.  Or, if apples drop below $x/lb it puts pressure on tomato pricing).  But with tomatoes being a staple of the typical diet -- I still categorize this as a moat.  And the moat I am referring to is within the produce category (primarily tomatoes) -- the competitive strength they have over other producers (both field growers and greenhouses).  Now with that said, I also believe in such a thing as building a stronger moat -- and I see that developing here.  VFF is establishing a distribution network with pricing policies that have far less volatility than their commoditized counter-part.... and they will gradually be the ones dictating the product price (ie. a formula equating to a fair return to themselves).

 

As for ROA's etc -- this is how I figure it.  Based on pretax FCF of $14 million+ I figure there to be after-tax FCF of at least $10 million.  I come up with net assets of $80 million for a RONA of at least 12.5%.  And I am hopeful that will improve as they improve yields at existing facilities, roll out the smaller but bigger bang for the buck biospheres and continue adding the low capital cost third party distribution. 

[tyska]

Timely thread in that I just received a Country Guide magazine today that has the ROA's for various ag ventures. Greenhouses, nursery and floriculture came in at the top with an ROA of 6.52%, followed by potato farms at 5.23%. At the bottom were cattle at .84% and hog at 2.8%, although grain and oilseed was only 3.33%. These would be Canadian numbers but should be helpful in comparisons to other investments. The numbers are from 04-08. I'm also old enough to remember farming in the 70s' and the world is running out of food and they aren't making any more farmland hype then to fuel a spike in land prices. Along with the Ice age is coming and production will fall, but why worry about history when we have the future.

 

Dan

[Ballinvarosig Investors]

I think it's amusing that Jim Rogers has been talking about agriculture and gold for years, yet some here regard him with a little derision. Michael Burry talks about the same thing, and all of a sudden there's serious debate ;D

[twacowfca]

I think it's amusing that Jim Rogers has been talking about agriculture and gold for years, yet some here regard him with a little derision. Michael Burry talks about the same thing, and all of a sudden there's serious debate ;D

 

Hey!  He's got the hot hand!   Besides, farmland is real.  None of these electronic credits that might go poof!  There might even be animals to take care of!  Nice place to rear kids.  Work ethic--"You can take the boy out of the farm, but you can't take the farm out of the boy.". BRK's Chairman to be likes the land better than those electronic $$$.

[rmitz]

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.  

 

This definitely sounds worth reading up on.  I have one semi-rhetorical question for you--how capital intensive is the expansion of the business?  Is there anything that prevents the chinese from stealing these ideas and running with them?  Areas of the world with limited water resources would be the biggest beneficiaries of this sort of technology.

 

As a cigar-butt, it doesn't have to be more than cheap, and all else being equal it sounds like it, but certainly a lot more research would be required.

[ericd1]

Interesting discussion on agri investments.  But if one believes in the future of the industry (scarcity, incr demand, etc.) and without viable investment options (cigar butt), why not consider the Rogers Ag Commodity ETFs or other ag related ETFs. After reading about Buffetts venture with silver (supply < demand = rising prices) it might be a viable alternative.

 

In a way its an under-valued investment...

 

[biaggio]

Interesting discussion on agri investments.  But if one believes in the future of the industry (scarcity, incr demand, etc.) and without viable investment options (cigar butt), why not consider the Rogers Ag Commodity ETFs or other ag related ETFs. After reading about Buffetts venture with silver (supply < demand = rising prices) it might be a viable alternative.

 

In a way its an under-valued investment...

 

 

would that be RJI,or is there another ETF?

[Guest dealraker]

Jim Rogers made his money on the 2 and 20 plan.  Take him away from my view please.

[ericd1]

I don't care about Rogers, just his commodity ETNs...

 

Elements Int'l Commodity Ag TR - RJA  +7.6% YTD

Elements MLCX Grains TR - GRU    +7.9%

 

PowerShares, iPath and E-Tracs have a host of others, some diversified and others individual sectors...

 

In case you missed it (I did) coffee has had quite a run this year JO is up 33.5%

 

 

[netnet]

I think it's amusing that Jim Rogers has been talking about agriculture and gold for years, yet some here regard him with a little derision....

 

Because Jim Rogers is like a one-trick-pony (commodities), Michael Bury is not.

 

Rogers is many things; a one trick pony he is not.  He made his money w/Soros in the Quantum fund way back when.  I believe he was up 40x in 10 years.

 

[biaggio]

UNCOMMONPROFITS,

 

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

 

You appear to be in good company liking this company, it appears that Tim Mcelvaine has bought some. Check out his September shareholder's report:

 

http://mcelvaine.com/wp-content/uploads/2010/03/2010-We-are-here-30Sep.pdf

 

[frog03]

net of fees McElvaine has beaten his index by 1% a year over 13 years...  Don't get too excited by his ideas.

[uncommonprofits]

UNCOMMONPROFITS,

 

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

 

You appear to be in good company liking this company, it appears that Tim Mcelvaine has bought some. Check out his September shareholder's report:

 

http://mcelvaine.com/wp-content/uploads/2010/03/2010-We-are-here-30Sep.pdf

 

Tim seems to have a preference for quality type companies.  However, he did not just buy VFF.  I noticed that he was buying it about 3 years (or so) ago; however, his average cost of $2.50+ did not seem very undervalued to me.  But at about this time last year (when I bought my entire position at $0.50-$0.65/share) I felt it was a screaming bargain.  

 

Through owning and understanding VFF better for the last year or so - my thinking is Tim was finding value in the biosphere technology and that VFF would be rolling these out rather quickly (thanks to easy financing).  Then along came the financial crisis which put that thesis to bed in short order.  But in the mean time the company's balance sheet is looking better -- and they seem to be talking quite seriously about beginning to build these biospheres soon.  It's hard to put a number on it but the more I look at their Gates research facility (these biospheres) the more I think there is significant hidden value.  My feeling is the on-going operations of VFF could be worth the price Tim was paying a few years back - with Gates adding significant value over and above.

 

Time will tell but they are not building any more land.  Here in Canada if you want field grown tomatoes you would be best to grow your own - OR go to to a farmers market -- field grown tomatoes are non-existent in grocery stores.  Greenhouse tomatoes represent 99% of what is sold at Canadian grocery stores year round.  Part of that is due to our climate, part of it due to the demand for grain, part of it is due to retailer acceptance of greenhouse grown (ie. reduction of in store labour costs, increased shelf life, consumer preference and presentation, etc).  I don't know if the U.S. will ever reach 99% -- but greenhouse market share is definitely growing.  VFF is the largest greenhouse tomato grower with a first class distribution network.  The free cash yield of 40-50% from a year ago seems to be a thing of the past -- but the current FC yield of around 18% still looks pretty decent especially when the growth possibilities are thrown in for free.