Finance - An Industry Perspective

FOR MORE DISCOURSE RELATED TO FINANCE PLEASE SEE MY SERIES TITLED - DISCOURSE OF THE GREAT RECESSION IN THIS BLOG.  

Macro Contemplation

I view finance as the activity associated with the management and direction of the abstract representations of the economy. That would include currency through the spectrum to asset backed securities. In the world of finance speculators look after the risk taking and others secure a production related net income target. We all, as investors, speculate to varying degrees, we choose a risk profile and invest in accord with it. The first contemplation one needs to undertake when entering the arena of finance is to clearly define your mission there, is it to secure a profit position, is it to invest, is it to be a trader, is it to speculate - clarity here allows one to enter the space and govern one's self in accord with the mission, as opposed to being a news windsock with one finger over the enter button and one over the exit button.  

As an investment philosophy, the broader your scope the better, full spectrum of sectors, companies, instruments - all pursued with the tireless assessment to identify best of breed. Investment for me begins with the contemplation of the macro elements of economy; geopolitical, economic cycles, demographics, monetary policy, general product cycles ... etc.. From the macro data one discerns where the macro trends lie, Warren Buffet, when he sees a commodity supper cycle, he thinks railroads - so a economic dependent origination assessment is required, to see how a given trend will filter through the economy. Having determined the your best prediction of the economy and societal trends, one needs to find how the trends will find satisfaction for the demand they will generate in the arena of products and services; from here a list of companies or financial instruments while emerge. At this point one would choose best of breed in the company space or, for example, if gold was indicated as a holding - one would choose the appropriate ETF or instrument to take a position is gold.  At this point "trading" plays a role insomuch, as technical data will inform the best entry point to a given stock or instrument within a specified period, perhaps 0 to 12  months; during the period technical data will inform the purchase of investments intended as holdings. This is effectively, a deep value strategy, this is an investment strategy - the investments you make are intend to hold and generate growth - the only activity in your portfolio is to maintain balancing for proper sector diversification and winnowing of laggards and selection of replacements. This is conservative investing, it can be profitable, during the Japanese malaise the best 10 Japanese "blue chips" generated nearly 300% return, 10 to 15% annually, when the general economy was in deflation. 

There is reward in risk, the above strategy is for the money one needs to secure them self in their none productive years, then there is the fun money, the money you can afford to loose, the money it is ok to risk. Here you can take an aggressive option position or play in the more aggressive instruments. 

In the world of risk management, the mission is clear, secure an agreeable operational outcome - hedge inputs and sales, secure a profit level and review the position at intervals and adjust if a better outcome is indicated. 

When working in the financial space one is working with the abstract representations of the economy on the one hand, and the expansion and contraction of human sentiment on the other. The challenge with this reality is gaining resolution on which is affecting which and what is going to trigger an event. This contemplation is important in trading of course, it comes to play also in shorter term financial system participation, like managing risk - hedging production inputs or commodity sale prices for example.  

We accept cycles in nature – spring, summer, fall, winter – the predator prey cycle, etc. People not only accept these cycles, they want to preserve and protect them. Cycles are an inevitable element in the interface with the environment, the economy is an extension of the environment - ergo, the economy will have cycles – this is a good thing; we burn more heating oil in winter there is an affect on heating oil prices every year. There is a cattle cycle, absent extenuating influences, it runs ten years - it runs ten years because the gestation period of a a cow is nine months - for the overall herd to build from a low, to affect increase in supply enough to reduce prices to effect the sale of the cow herd, to increase demand etc .. takes ten years - the Real Estate Cycle 5 to 7 years, the business cycle 7 years. Government interventions work at times to lengthen or shorten cycles, the US governments monetary policy in conjunction with its inadvertent underwriting of home lending extended the housing real estate cycle with a calamitous outcome. The point here is that real world cycles are anchored in real events, there is a degree of predictability here - one needs only inform them self of there presence and act in accord with them.      

Public sentiment is a challenging element in the assessment of market behaviour, it shows up in technical assessment, news and the like, vigilance is key here, history helps, as was said once - events, dear boy, events. Public sentiment does way on entry points for trades or positions in the risk management sphere and or general investing - it is a critical point of contemplation. Public sentiment, I believe is best managed by, technical assessment, historical observations and vigilance. 

Micro Contemplation 

In the micro financial space, contemplation centers around decision making; predicting, to the degree possible decision outcomes and the assessing of financial outcomes of decisions to inform future undertakings. To lease or not to lease, to borrow here or there on what terms, to engage in expansion or not, to do capital improvements or not. The joy in currency, and the other abstract representations of the economy, is the ability to see clearly in a concentrated way what is occurring as a result of your actions. There is always the bottom line, the cumulative outcome of choice, financial assessment when done correctly, gives resolution to or puts a fine filter on, the financial outcomes of operational decision making. 

I believe in taking the time to quantify and qualify business choice, to apply as much objective assessment as possible - science and data. When the science ends however, judgement takes over, as the saying goes - it is the eye of the master that fattens his cattle - to put another colloquialism to work, two heads are better than one - an outsourced perspective is help in this space.  

General Comment on the Financial Space

In 1980, the abstract representations of the economy were at about par with world GDP, by 2006 they exceeded world GDP by approximately %300 - a phenomenon referred to by some as financial deepening. There are very real repercussions the emanate from this reality, John Kennith Galbraith in his book on the causes of the Great Depression, used another name, but sited financial deepening as one of five causal elements of the great depression. The financial fluff that was created in those years, in large measure still exists, the challenges that arouse from opaque trading systems and layered abstract representations of the real economy have found no real redress, window dressing and lip service mostly. With that in mind, in the context of business management, the financial system should be viewed as a short term tool to manage the financial matters. 

The financial sector requires representation in a investment portfolio, but vigilance is certainly required. At some point there will be a rationalization of the abstract and the real economies, and tactile assets will be your friend. We have recovered in large measure from the ills of exuberance, the recession took care of that, the un-anchored collective human psyche will come to play again - that is the reality of currency volume that is in no way dependent on the volume of goods and services in the economy - instability will be our constant companion - the key is to have it work in our favour.  

FOR MORE DISCOURSE RELATED TO FINANCE PLEASE SEE MY SERIES TITLED - DISCOURSE OF THE GREAT RECESSION IN THIS BLOG.  

Forestry - An Industry Perspective

The forest industry was the mainstay of British Columbia's economy for generations; while it's percentage of provincial GDP has fallen, it's importance remains. We are generally healthier for less predominance over the economy by the forest industry, we are more diversified now. 

I prospects for wood-fiber are good, stick frame construction - long a North American preference - is gaining traction in the emerging markets - the BRICKs and the like. It is the adoption of stick frame construction in China and the resulting demand for fiber that has shored up an otherwise challenged US-centric market. It is the sense of the writer that the US housing market will show mild improvement until about 2018 and at that point it should move into a long and strong growth pattern. This prediction is based on the belief that there was a confluence of cycle ends – major economic cycle, business cycle and technology cycle and well as, the resulting the commodity supper cycle correction or slowing – all of which collided with a grotesques financial deepening to create the down turn in 2008 – the real world economic cycles are now, one by one, running their course. One would anticipate that the inverse of 2008 will be true in 2018 – this thesis is shored up to some degree by severe downturns, 1930 etc., normally taking a decade to recover from. The future is bright for the forest industry in terms of product offering and a broader deployment of wood fiber in regional diversity, and in existing and new uses.

The challenge for the industry at large, but an opportunity for some, is the reductions in Annual Allowable Cut the are sure to follow the devastation that the Pine Beetle infestation inflicted.  The post infestation pine forest viability is extending as the industry adapts processing and marketing to the present reality, soon however, stand viability will be gone and with it timber supply. This will leave a lot of stranded capital in milling plant sitting or looking for fiber to feed it - the combination of excelled demand for fiber and reduced supply is sure to drive fiber prices upward. This reality bodes well for privately held and managed stands of timber.

There is going to be a girth of "none-viable" fiber laying in waste thought out the province for years to come, as transportation costs drive reduced the viability of the fiber source and or the fiber source decays; there is opportunity here, I've donated considerable thought to how one might unitize this material - I believe there are many. There may be some answers in the history of logging and milling in the province, perhaps mobile milling and other mobile utilization holds the answer to overcoming the transportation challenge. Transportation holds a high degree of sensitivity in material value being hauled - this presents an opportunity.

I have contemplated extensively, forestry as an adjunct to an agricultural enterprise, a companion enterprise if you will. Forestry works well in this space, many forestry activities labour demands are counter-cyclical to agriculture or can be made to be so. There is skill cross over between agriculture and forestry that permits work force substitution. The two industries have operational similarity and in the longer term, growing trees is really just crop management. The challenge here to some degree is government policy, an over emphasis on volume based timber tenure, rather than area based timber tenure, has taken the long term management of the forest out of the hands of people and put it in the hands of government. A number of distortions have emerged out of the province's forest policy, there are avenues to access timber supply in the longer term. I believe the government will be compelled in the years to come to give area based tenure its due in forest policy - perhaps there is a new era about to emerge. 

There are a number of opportunities now; wood electrical generation, private portfolio of timber properties, localized milling, harvesting technologies geared to low volume salvage of fiber in conjunction high efficiency remote mobile milling - the list is extensive - all it needs is the confluence of capital and people.  

I am excited about the prospects for forestry, if you are too, the opportunities are waiting.  

Tourism - An Industry Perspective

Tourism is an industry about sharing, sharing experience - culture, history, nature, each other, tourism is all fun all of the time. It is often asserted that WW2 saved the economy, brought the world out of  a depression - if that's true, it should the tourism industry's mission to effect prosperity through happy human exchange. 

To some degree it is the case that tourism is generating prosperity, tourism's "multiplier effect" is better than most industries. Tourism has a good capital invested versus revenue generated ratio relative to other industries - good margins. Tourism has an excellent environmental footprint versus revenue generated ratio, in the main tourism's environmental foot print is light or rides on whats in place anyway - by way of example - the transportation network is there anyway.  Tourism holds as a priority the athletics of its operating area, in British Columbia, it has been the tourism industry that has lobbied for visual quality maintenance  and enhancement along major transpiration corridors for example.   

The tourism industry spans camping at one end of the use continuum and 5 star resorts at the other, the common theme throughout is people. People and expectations, meet expectations - people have what they expected, exceed expectations - people are pleased. The definition of excellence is as diverse as the people people involved, this is both the challenge and the interest of the business. The key in to success in the tourism is an intimate - in-depth understanding of your patrons. In provisioning opportunity for enjoyment, it almost becomes necessary to know the patron better than they know themselves. People live with ostensible interests, the ones that market them socially and then they have their real wants, needs and desires. It is the marrying of the ostensible with the underlying interests, while ensuring expectations are met, that finds success. 

         

My background in tourism stems from operating a fly fishing resort for a number of years, the resort was remotely located, fly in or horse in only. The largest number of guests was 20, but rarely did we exceed 12 people, the day rate was $200 / day plus transportation, normally helicopter. It was a highly personalized environment, one came to know the guests - this was a unique industry circumstance in that many guests came for years. The ostensible rationale for attending the resort was fly fishing, and there where some fly fishing fanatics to be sure, where I witnessed the most joy however, was at the dinner table or visiting at the lodge. For the most part, the joy emanated from a fresh social environment, the unique coalescence of as social opportunity absent history or baggage and a socioeconomic natural zone - it really gives people the opportunity to be the best version of themselves. The point of the discourse is that the underlying interests where more important than the ostensible interest for coming, this was particularly true in this operations case, as this fishing resort was atypical in that a large number of our patrons were women. An effort to engineer a group of people to facilitate fulfilling exchange was, as important, perhaps more important, than people having the opportunity to catch fish. 

In life, people have needs, wants and desires, in tourism people have wants and desires - see to them and success will come.  

As tourism is a business about people, it is, like no other, a marketing dependent business - unless you've established a clientele. A start up tourism enterprise requires a large marketing budget, and in a normal tourism offering with flux and change in clientele, maintenance marketing efforts need to be as high as 10% of gross revenues. In pursuing marketing venues or avenues, vertical efforts nearly always out perform non-specific or horizontal venues - this industry likes targeted efforts. The goal of course is to establish a steady group of patrons that share the love of the experience offered, that happens readily in some operating circumstances. 

In Canada, we have seasonality that affects our offerings, likely in a larger degree than other jurisdictions. The challenge we face in the industry is to ensure complete asset utilization - destination resorts often see assets at or near idle for half the year. The key then is to seek means by which to build out usage into the shoulder seasons and off seasons. In designing a business approach to tourism, one needs to be cognisant that the excellent margins in the business can be challenged by overhead and plan accordingly. 

I've always been a believer in essentials, invest in essentials because people always need them, the tourism industry has challenged that thesis - even in economic downturns, people need fun and seek it out. There are instances where the utilization generally migrates to areas of less compensatory requirement, but if you positioned yourself in the right space you can skirt this as well. 

The tourism industry is a exciting space, people pursuing their passions, escape, adventure - it is all people all of the time - you just have to get to know them.     

Agriculture - An Industry Perspective

Agriculture offers a complex management challenge, it is the harnessing and enhancement of natural systems; natural systems and all their complexity. Business and the bucolic ideals of rural life find both harmony and conflict in the modern agricultural complex, where agro enterprise is gradually usurping the family farm. One laments the de-ruralisation of Canadian society, as with it goes more than just the bucolic ideals of farm life, with it goes the agrarian culture that made Canada a place of compassion, independence and community.

Agriculture now, more than ever, has as its stock and trade commodities. Commodities have a market characteristic of having a trading price that hovers at or near the average cost of production, in this environment success and failure occurs at the margins. Efficiency is found in an agro enterprise that is at the optimum scale, to ensure full asset utilization, to ensure sufficient mass to access the technologies that come into play in the modern agro space and to have sufficient product volume to access the full array of financial management tools, so one can step away from being the speculator and focus on production.

There is opportunity now to occupy more and more of the supply chain given the panoply of technologies available, the business of agriculture no longer has to stop at the farm gate. As is exemplified by most of the livestock industry, as margins become compressed as the industry matured participation extend along the supply chain.  To be effective in extending participation along the full supply chain, from the field to the consumer, sufficient scale to have a presence in the market for the end product is required. For those who venture in to this space successfully they are supported by every trend in the modern food consumption matrix. People today want to know where their food is coming from and whats in it - the key here is to have the consumer pay a little extra as opposed to a lot and as the producer enjoy the profit garnered from every stage in the supply chain.   

It is critical to examine the land base as more than a farm or ranch, it is critical explore it opportunity across industries. Companion enterprise opportunities abound, and they add more than just revenue, they add human resource actuation that is synergistic and beyond what agriculture alone can offer. By way of example - a cabin on one acre of land can net $3000 dollars annually, that exceeds cropping opportunities by a considerable margin. The Poundmaker ethanol plant has been very successful in exploiting the synergies that arise from the proximal location of an ethanol plant to a large feedlot. Ethanol plants as stand alone entities are very marginal, feedlots as a stand alone entity are marginal - as companion enterprises they can become profitable.

See link below for land purchase assessment and market opportunities 

http://nthomson2.blogspot.ca/2014/03/the-right-time-of-rural-land-in-bcs.html

The dominate trend in agriculture is the burgeoning emerging economies and the capacity for them to generate a expanded middle class - people are going to eat more and better foods. The question then becomes, how can a specific operation access the benefits inherent in that trend. The challenge here is sufficient product mass to address export opportunity, much of the government's thrust in the integration of the supply chain has been for the domestic market - policy has been developed with the market garden mentality. The key here is to generate enough product mass to generate interest in any given market channel - the key here is scale scale scale. One needs to contemplate the product spectrum, assess a given landbase's capacity to produce a given product, determine the product mass required to effectively access a market and build the business model to suite. For this to occur one needs to free thinking from an existing landbase's dimensions and operating conventions.

  

In general today, the scientific expertise - agronomists, veterinarians, animal scientists etc.- are detached from the production process, it is rare for an operation to be of sufficient size to hold this talent in house. Much of the operational intelligence at play in agriculture comes from government extension programs. The the challenge that arises is acre by acre site specific data that informs the management process. How many operations have accurate enough yield versus input data to calculate accurately the marginal benefit of excelled use of one input or another. The calculations are simple enough, the challenge is getting the source data specific to a given operation. There is detailed work to be done to determine yield volumes vis a vis a given variable - variety, fertilizer application, water application etc.- yet farm specific data is lacking. By way of example, fertilizer recommendations are often regional, when there are variances in requirement at the field level. When operating in an environment affected by the realities of  commodities for an extended period of time - generations in some cases - investment in truly understanding your immediate circumstances can pay massive dividends, as small returns are compounded over a long operating horizon.

Applied technology today offers much opportunity, there is a massive amount of latent marginal benefit to be garnered by the application of technology - in today's environment its hard to know what is there functioning and its potential, and its even more difficult to be innovative in applying emerging and desperate technologies to optimize a given operation. You know as you read this that opportunities are passing you by, you are just unable to process the mass of information to find them - it is the corundum of the known unknowns. 

The future of agriculture is bright, people have to eat, there are going to be more and wealthier people - the key is to look at the horizon, pick the trends that suite your circumstance and build the business model to suite - of course I would love to help. 

    

Inverine Logo

Inverine Logo

The Right Time for Rural Land in BC's Interior

There are always junctures that provision an entry point to a market, it maybe that in British Columbia Agricultural land is at that point. There is a large inventory of substantive properties available, this large inventory has suppressed price of late – under 1 % per annum increase in the price since 2008. This flattening of the curve, seemingly at its nadir, has taken place with interest rates at an all-time low. There is a matrix of influencing factors that affects land prices, the ability to buy land and the ability to support that purchase ultimately are the key determinants in price setting.

Agricultural Lands in British Columbia have prices far beyond the ability of agriculture to support, agriculture land quality or capacity affects prices, but in no way accounts for the full value or the floor on land value. In British Columbia only 2.5 percent of the province is arable land, 95% of the province is crown land, couple these realities with the Canadian / Western cultural inclination to want to own land and one realizes that British Columbia ought to be exceeding the national average.

The matrix below indicates the degree to which BC has lagged the balance of the country in property price increases.  

Data - Farm Credit Corp.

The graph below indicates how little agricultural activity affects land prices; only when the orange line is below 1 are fundamental farm factors supporting price, if that is true of US crop land it is likely to be true of BC as well, perhaps more so given this graph focuses on cropping land. 

 Data - USDA

The challenge we face in BC is in having agricultural properties being self-supporting entities. Various farm types are more affected than others, note Beef Cattle operations in the matrix below – it has historically been the case that cattle have failed to carry land ownership cost or to withstand opportunity cost assessment.

Data - Farm Credit Corp.

Presently, throughout the province there is a large inventory of Ranch properties and prices are remaining flat, even, as stated above, in the face of low interest rates.  Throughout the interior, the predominate agricultural activity is ranching and ranching is presently enjoying a relatively good period – improved cattle prices and low interest rates, so one may deduct that the agricultural activity on ranches is less influencing on price than is ancillary factors (as supported by the USDA graph above & FCC quote below). There has been a long evolution in the lumber industry that has reduced labour requirement, thus, stifling local economies, add to that the violent correction in the US housing market (mitigated to some degree by exports to the Chinese market) and the interior has had slow growth for an extended period of time.

“Farm Credit - Agricultural Land Value Report October 2010 - British Columbia was the only province to see a decrease in farmland values by an average of 0.9 per cent over the first six months of 2010. Values were unchanged in the previous reporting period and decreased 0.7 per cent in the first half of 2009.In the first six months of 2010, economic factors largely external to agriculture had the greatest influence on farmland values. Economic uncertainty and the high Canadian dollar hindered investment in many sectors. This, in turn, led to lower demand for land and less expansion of existing operations. Overall, the B.C. land market was relatively flat during the first six months of 2010, with slight decreases in the Abbotsford, Clinton and Cloverdale regions. Sales of land for agriculture purposes were limited in some areas of the province.”

It is the sense of the writer that the US housing market will show mild improvement until about 2018 and at that point it should move into a long and strong growth pattern. This prediction is based on the belief that there was a confluence of cycle ends – major economic cycle, business cycle and technology cycle and well as, the resulting the commodity supper cycle correction or slowing – all of which collided with a grotesques financial deepening to create the down turn in 2008 – the real world economic cycles are now, one by one, running their course. One would anticipate that the inverse of 2008 will be true in 2018 – this thesis is shored up to some degree by severe downturns, 1930 etc., normally taking a decade to recover from.

It seems a prudent time to build an inventory of agricultural land, the inventory of ranches for sale is high, there have been recent sales that have effected downward pressure on the market. Anecdotally, one is noticing a larger number of price reductions occurring on listed properties. So with a large inventory and market picture with positive characteristics; the question then remains, which properties  are best positioned to garner increased value.

It has been established quite clearly that agricultural actives, particularly cattle ranching, are a means by which to maintain lands functionality but offer little support to ownership. One then considers ancillary attributes in the selection criteria; proximity to urban centers, timber assets, tourism attributes, companion enterprise opportunities - attributes that can build returns on the land. There are many such properties available now, one needs only to develop operations that carry the land assets with respect to fair returns and the land appreciation is a clear capital gain.  If one observes the first graph for the period starting 2001 through to 2006 exceptional gains were made; there is every reason to believe that we are approaching a similar cycle – starting in and around 2018.

FCC 2013 Land Value Report

FCC - Historical Land Prices