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Zone of Competence

~ Dollars, Sense, and Probabilities.

Zone of Competence

Monthly Archives: September 2014

Harvest Time?

27 Saturday Sep 2014

Posted by JC in Uncategorized

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Tags

Ethanol, Farming, Farmland, Investing

I am not a farmer, but I live in Iowa so it is impossible not to care about agriculture as it is the driver of the local economy. I preface my comments by saying I know little to nothing about the business of farming. As an Iowan, I certainly hope we never have to live through another period like the Farm Depression of the 1980’s. It appears that farmers have learned their lesson according to statistics I have seen that have them taking on much less debt than the boom years before that crash. To that, I say, “Thank God.”

That said, there’s an interesting article in Barron’s titled “Harvest Time for Farming Shares.”

As anyone who has paid any attention at all knows, after an amazing multi-year run of prosperity, farming is undergoing tougher times with the prices of ag commodities down substantially in the last few years. For example, after topping out around $8.00 a bushel in 2012, the corn futures price has recently plumbed new lows in the $3.20’s. As the article states, this has potential implications for Deere (DE), Potash (POT), and Monsanto (MON). Here is the corn futures chart from Finviz.

fut_chart.ashx

Ethanol Demand Growth Fizzles

One of the main drivers of the corn boom of the last decade has been the increasing ethanol mandates. But, with refiners bumping up against the 10% blend wall, it is hard to see a lot of upside in demand from here.

This Fall’s expected bumper crops have driven down the price of corn, but who knows what next year’s weather holds. So the current price decline is likely overdone.

In the long term, expected growth of the world population should give farming a strong tailwind.

Extreme Valuations for West Central Indiana

Something that would give me pause is the following chart showing the historical farmland price to cash rent ratio. As Barron’s points out, current land prices look pretty rich by that measure.

Farmland Price to Cash Rent 092714

A report last month by Purdue’s Boehlje and his colleagues Timothy Baker and Michael Langemeier showed that central Indiana cropland has reached an average price that’s over 32 times the cash rent (as we show in the nearby chart), versus a 50-year average of 18 times. ‘Help us understand why you would pay today $32 for a dollar of earnings from farmland,’ Boehlje asked Barron’s, ‘when you can buy an S&P index stock for something no higher than 20?’

Farmland selling at a 77% valuation premium to its 50-year average seems hard to justify. But this data is only for Central Indiana.

What about Iowa?

By my back of the envelope calculations using data from Iowa State University’s website Ag Decision Maker, multiples in Iowa seem similarly elevated. Comparing the estimated statewide average value for “Medium Quality Farmland” of $8,076 an acre (September 2014) with their statewide average of $260 an acre cash rent (May 2014) gives a multiple of about 31.

No matter how you slice it, this seems expensive to me given rising production costs and low commodity prices.

Still, holding is fine if you are a farmer and your balance sheet lacks debt so you can handle a downturn, as your holding period may approximate forever.

Investors Beware

But, absent a substantial and rapid bounceback in commodities prices that could drive further cash rent growth I have a hard time seeing how you make farmland work as an investment from current price levels.

I see little reason to be a buyer of farmland here given fundamentals, valuation, and the potential for higher interest rates. And unless your time horizon is nearly infinite, it seems likely to be a good time to consider lightening up.

See also:
September 2014 Iowa Land Trends and Values Survey

Average farmland rental rates decline modestly for 2014

Is Climate Science Really Settled?

21 Sunday Sep 2014

Posted by JC in Uncategorized

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Tags

Climate Change, science

There is an interesting op-ed in the Wall Street Journal by Steven Koonin, a physicist and undersecretary for science in the Energy Department during President Obama’s first term. He is not a Climate Change denier, yet he notes that much is unknown about Climate Change and that climate models are riddled with assumptions and guesswork, and not based simply on observations and physical laws.

While some parts of the models rely on well-tested physical laws, other parts involve technically informed estimation. Computer modeling of complex systems is as much an art as a science.

For instance, the latest IPCC report uses 55 different climate models. To say they aren’t on the same page is an understatement. They have a margin of error in describing the global average surface temperature of over 3 times the warming actually observed over the last century. Similar margins of error exist in the estimation of other basic climate features such as rainfall, feedbacks, climate sensitivity, the oceans, etc.

As a result, the models give widely varying descriptions of the climate’s inner workings. Since they disagree so markedly, no more than one of them can be right.

And let’s not forget the natural variability of climate. The models and modelers aren’t even close to untangling human influence and natural variability, and human influence is much smaller than natural variability. This explains the current 16 year observed pause in warming that none of the models predicted.

The IPCC Report versus the “Summary for Policy Makers”

Yet these doubts and concerns in the IPCC report are not contained in the political document, the “Summary for Policy Makers,” which animates the press and the left in their calls for punitive carbon taxes and other austerity measures. Such austerity measures resemble a penance for humanity, rather than a reasonable and exhaustive search for a cost-effective solution.

What Should We Do Now?

Still, Koonin doesn’t believe this is an excuse for inaction.

Society’s choices in the years ahead will necessarily be based on uncertain knowledge of future climates. That uncertainty need not be an excuse for inaction. There is well-justified prudence in accelerating the development of low-emissions technologies and in cost-effective energy-efficiency measures.

But climate strategies beyond such ‘no regrets’ efforts carry costs, risks and questions of effectiveness, so nonscientific factors inevitably enter the decision. These include our tolerance for risk and the priorities that we assign to economic development, poverty reduction, environmental quality, and intergenerational and geographical equity.

This gibes with my view that we should take reasonable steps, such as investing in technology to improve the efficiency of solar power, that will be beneficial in any case. Approaching the problem by investing in a technological Manhattan Project should allow us to solve the problem out of abundance, instead of the costly and punitive prescriptions for austerity through carbon taxes and such.

Post Climategate, Let’s Have an Honest Re-Opening of the Debate

This is where cost-benefit analysis, consideration of tradeoffs, and an honest political debate should enter the picture. So much of the scientific community seems to have discredited itself through Climategate, with their admitted attempts to “hide the decline” and with claims that “the science is settled,” that it will be difficult for them to backtrack.

They have compounded that error with Stalinist smears of any scientist that deviates from the orthodoxy. Whatever your views of the Climate Change issue, such witch-hunting and smears of those who disagree are hardly indicative of a scientific cast of mind.

We need other, more honest voices in the scientific community to rise and admit what science knows and what it doesn’t know. Then it should be left to the electorate to make priorities and decide what should be done as the science hopefully advances over the next decades.

In any case, the idea of scientists as some “high, priestly caste” (in Peter Robinson’s phrase) that should rule over the rest of us is deeply flawed. They have no expertise in economics, cost/benefit analysis, or determining societal priorities. The people should be educated honestly and trusted to decide their own fate. This, after all, is the way of democracy.

Despite the statements of numerous scientific societies, the scientific community cannot claim any special expertise in addressing issues related to humanity’s deepest goals and values. The political and diplomatic spheres are best suited to debating and resolving such questions, and misrepresenting the current state of climate science does nothing to advance that effort.

See Also:

The Scientific Method and Climate Change

The Biggest Problem in the World Today? Disconnection from Reality

18 Thursday Sep 2014

Posted by JC in Uncategorized

≈ 1 Comment

Tags

politics, problem solving, Reality

With all of the unrest and conflict in the world today, the news seems to be an ever-growing miasma of negativity. It is easy to get lost in hopeless resignation or casting blame on others for all of the problems. It seems this is where many if not most people stay stuck.

A constructive approach requires seeking solutions instead of just wallowing in negativity. But before you can seek solutions, you must see things as they are, and not as your prejudices and illusions make them appear.

Kent Thune, The Financial Philosopher, has a great post addressing the dysfunction in the world and the blindness of most to the causes thereof.

The Symptoms of Disconnection From Reality

Here are 3 of 5 of Thune’s symptoms of Disconnection from Reality, followed by my comments:

Lack of Understanding: When we fail to see, respect or at least tolerate the perspectives of other people, we create separation, conflict, and related problems. This is the work of ego: We fail to listen because the ego only listens to respond. We are knowingly or unknowingly rejecting and disconnecting from reality, the only place where peace, love and understanding can be found.

Thune sees most people as being unconscious minds cut off from reality by confirmation bias and ego. We don’t see reality as it is because it is easier to scapegoat the other party or some other group for all of the world’s problems.

Extreme Voices Dominating: The world is made to be much more complex, frightening, and contentious than it really is because the loudest voices, which are also the extreme ones, are magnifying the wrong problems (or creating ones where none exist). The way we connect to (or rather disconnect from) the world is primarily through some form of media, which includes network television, the Internet, and social media. A 10-second sound bite from one radical individual or an image of a few dozen people performing a disturbing act can color our perspective of an entire community or nation.

We tend to seek out the extreme voices that gibe with our worldview. These people are paid to gin up controversy. Talk radio, MSNBC, Fox News, etc. They are incentive-caused bias writ large. Their incentives for higher ratings run exactly counter to the best interests of the country. They paint radically different pictures of the world that are at best illusions and at worst lies. These different pictures are incompatible with one another and lead directly to our poisoned culture.

Broken Political System: Politicians today do not get elected based upon the substance of their ideas but on the effectiveness of their illusions. Money does not win elections; money buys higher quality illusions in greater quantities. In a world of illusion, the best illusionists rule. The individuals best suited to serve in government may not even run for office because they refuse to play the deceptive game. This has always been true to some degree but more so with today’s information technology.

The politics of lies and illusions is what we are left with. You almost can’t be elected as a non-extreme problem solver any more, and the few in office should be put on the endangered species list. And it isn’t the politicians fault. The politicians we have are a product of all of us as voters. We want people in office who represent our own distorted view of reality.

You Can Light a Candle or Curse the Darkness

As Kent says above, “We fail to listen because the ego only listens to respond.” The problem isn’t another party or group, we are all a big part of it until we shed our own self-serving and distorted views. This is the prerequisite to solving problems, rather than just impotently lamenting how the world seems to be going to Hell.

Like it or not, we are all in this together. Let’s sacrifice our egos and illusions to get connected with reality and start solving some of our problems.

Less than 1% of Daytraders Are Consistent Winners!

12 Friday Sep 2014

Posted by JC in Uncategorized

≈ 1 Comment

Tags

Investing, Trading

This shocking result comes from the TraderFeed blog of Dr. Brett Steenbarger, who is a well-known trading coach and psychologist. He references a study by Barber, Lee, Liu, and Odean.

Coming from Dr. Steenbarger, these findings are hard to dismiss as the ravings of someone with an ax to grind against trading.

From the study:

In the average year, 360,000 individuals engage in day trading. While about 13% earn profits net of fees in the typical year, the results of our analysis suggest that less than 1% of day traders (less than 1,000 out of 360,000) are able to outperform consistently.

Trading Is Not For Me

Disclaimer: I studied technical analysis and trading several years ago and decided that I had neither the skill nor the temperament for it. It also seemed to me like a zero-sum game that had a winner-take-all dynamic about it, with a bunch of people donating their capital or slogging along near breakeven to finance a few big winners.

I had informally figured 5% to 10% of traders made real money, so it shocked even me that the figure is less than 1%.

Maybe you figure you will be part of the lucky 0.28%. Good luck, but the upset stomach and 24/7 nature of the endeavor wouldn’t be worth it for me even if the odds of success were 50/50.

Don’t Trade, Invest

I suggest instead a lengthened time horizon and thinking like a partner in a business. Focus on intrinsic value and buying with a margin of safety.

I also suggest dropping everything to read Risk Revisited, the latest memo from Howard Marks. It is a master tour of the world of risk from one of the world’s great investors.

Associate With the Right People

And since humans are doomed to mimicry, you should follow Jason Zweig’s advice:

So try to socialize — in the real world and in online social media — only with investors who are calm and methodical. After all, whatever your peers pay attention to, you will also concentrate on — so following more-sensible people will help inoculate you against panic.

Other Links of Interest:
Video: Howard Marks on Risk Assessment, Market Strategy

Why you shouldn’t watch the market intra-day

The Stock Market’s Missing Ingredient

Even Warren Buffett Gets Killed In the Stock Market

An Important Dividend Cut Case Study

Video: Eric Falkenstein Interview on the Flawed Academic Notion of Risk

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