Agora Financial’s Rude Awakening

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Baltimore, Maryland

• Access to our Special Inauguration Day Technology Alert,
• A boots-on-ground look at farmland in Canada’s bread basket,
• Plus betting the farm, “tossing the keys” and a different kind of dirty money…

Chris Mayer, reporting from a chilly Maryland suburb…

Cycles are an inseparable part of the landscape of markets. Fortunes are often made in the valleys. I was thinking of this after I read several obituaries of Trammel Crow, who died last week. He was a guy who saw many booms and busts over his 94-year life.

Trammell Crow was a big-time developer and died a rich man. The Wall Street Journal once described him as “America’s biggest landlord.” His firm, Trammell Crow Co., estimates it built some 500 million square feet of real estate space. But it was a long road to get there from humble beginnings. His life is one of those great American success stories.

Unable to attend college because of the Great Depression, he took a number of odd jobs, including plucking chickens and unloading boxcars. Eventually, he landed a job at a bank, and then studied to become a public accountant. By 1938, at the age of 24, he was the youngest CPA in the state of Texas. After World War II, he got his first experience in construction building grain elevators with Doggett Grain. Eventually, he managed to build his first warehouse with a partner and leased it to Rayovac Battery Co. It was his first real estate success. He was on his way.

There would be good times and hard times on this journey. The 1970s downturn nearly bankrupted him. But it didn’t take out any of his risk-taking nature. “I once heard it said that the cat that is burned on an oven range will never touch a hot one again,” he said in a 1980 interview. “True enough, but that cat won’t go near cold ovens either. The same is true for business. Failures that transform a businessman into a super-cautious individual can cripple.”

I also remember Trammell Crow from my career in banking. I started out banking when I was 22 years old. I remember working with a senior lender on a deal to finance a big real estate project. He pointed out that we had to be sure we liked the collateral because the developer might toss us the keys, like Trammell Crow. I must’ve had a somewhat puzzled look on my face because the lender asked me, “You know who Trammell Crow is, right?” And he asked it in a way that you might ask someone today if they know Barack Obama.

I honestly can’t remember what my answer was. I remember the embarrassment of not knowing who he was. Yet he was among the most famous developers in the country. A 22-year-old always thinks he knows more than he does. It’s one of those things.

Anyway, the senior lender was referring to a well-known episode Trammell Crow had with his bankers. He basically tossed a bunch of keys on the table on told them they could either give him new terms on his mortgages or take the keys. They reworked terms.

Old Crow was an American original. He left quite a legacy, and not only in the millions of square feet of real estate and the fortune he leaves behind. Many talented people came out of the Trammel Crow ranks and went on to become major real estate players. He had a huge influence on the industry.

One last anecdote about Crow: He didn’t like to sell. Crow liked to hold onto his investments and let time do its thing. He once said: “You can get rich selling real estate, but you can only get wealthy by owning it.” Crow counted on rising inflation to lessen the burden of his debts and raise the value of his assets. It worked for him, most of the time.

In today’s edition of the Rude Awakening, we’ll examine an entirely different sort of real estate from the type that produced Crow’s fortune: farmland. We admit that farmland is not as sexy as commercial real estate, nor as alluring as beachfront property in some exotic locale. But farmland can be a mighty fine investment, as the nearby chart illustrates.

Of course, not all farmland is created equal, which is just one of the reasons we are intrigued by the farmland of Saskatchewan, Canada.

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Saskatchewan!
By Chris Mayer

Indisputably, a slowdown of sorts now unspools across the markets of the world. But you’d never know it looking at Saskatchewan. What follows is another look at the great boom taking place here and a couple of ways to participate. There are more wrinkles to explore in what is shaping up to be a robust investment idea.

To begin, let’s add a bit of color to this unique story. As far as natural resources go, Fortune has smiled broadly on this land between the 49th and 60th parallels. It is the world’s largest producer of uranium and potash. The former is a critical component in the “nuclear renaissance.” The latter is a key fertilizer that sells for $1,000 per ton, compared with only $300 per ton a year ago. Saskatchewan is the world’s largest exporter of chick peas and lentils. And it is also rich in oil and gas. The U.S., in fact, buys more oil from its northern neighbor than it does from Kuwait.

The riches so far earned stagger the mind. At a time when governments everywhere face gaping budget shortfalls, Saskatchewan is awash in cash. On a budget of only $9.4 billion, the province reports a surplus of $3.1 billion. Of this, some will go toward highway repairs, better hospitals and improved schools. Not needing so much money, the government announced its largest cut in personal income taxes in its history.

It also paid off 40% of its provincial debt. Prudently, the government also decided to sit on a $2 billion cash cushion, just in case.

Many of these notes come courtesy of Brad Farquhar, vice president of Agriculture Development Corp. Hailing from Regina, the capital of the province, Farquhar has a front-row seat. “My house has about tripled in value in the last five years,” he says by way of illustrating the relative immunity of the province to the global ills that chill other markets. No housing bust here. In fact, values are rising for nearly everything, including farmland, which is Farquhar’s metier as an investor. His firm invests in farmland through its investor-owned funds.

Farmland stands to benefit from trends that you are now well familiar with if you’ve been reading this letter for any length of time. Some of the most important points bulls will commit to memory are these:

• World wheat consumption has exceeded production in six out of the past eight years
• World wheat stocks are at a 30-year low.

Greater prosperity in China and India lead to shifting diets consisting of more protein – eggs and meat. As reported in Farquhar’s farmland prospectus, to produce 1 pound of meat requires 10 pounds of grain: “Therefore, the dietary shift from grains to meat significantly increases the demand for grains.”

By tradition, China has usually produced and exported large amounts of grain. That is no longer the case. Rapid urban expansion and “desertification” of existing arable lands, along with water shortages, have all led to lower levels of supply. The same is happening in India.

The global urge to produce more biofuel also creates competition for a smaller base of farmland acreage. More acreage devoted to corn for ethanol, for example, means less devoted to soybeans or other crops used for food for people or livestock.

Saskatchewan is in a particularly good spot to gain from these broad trends. Almost half of all the farmland in Canada is found in its golden prairies. Wheat, canola and barley represent three-quarters of the crop acres in the province.

Even the icy-cold fingers of the credit crisis seem stunted here. Canada’s big agricultural lender is backed by the state. Farmers still have access to credit to plan for a big harvest next year.

The primary attraction of Saskatchewan farmland is cheapness. On that front, Farquhar offers the following jigsaw puzzle look at farmland prices in the region. Saskatchewan is the cheapest of the lot, at $405 per acre.

Shortsighted government policy was the main villain. From 1974-2003, you had to be a resident to own farmland. (“During this period, Saskatchewan was also a net exporter of people,” Farquhar’s prospectus points out. “It was a province whose population was in decline.”) Doing away with these restrictive ownership requirements in 2003 unlocked some of the value already. Annual declines in farmland values immediately began to reverse.

Saskatchewan farmland has a lot of ground to make up, though. Only 22 years ago, farmland here was more valuable than in neighboring Manitoba. But today, Manitoba’s farmland is more than 50% higher than Saskatchewan’s, at $668 an acre. The discount is attracting ranchers and grain farmers from neighboring Alberta, as well as immigrants from abroad. The government of Saskatchewan actually has a fast-track program in place to assist immigrants looking to farm in the province.

Statistics compiled by the Canadian government show that the average farmer in Saskatchewan is 52 years old. That leads Farquhar’s team to conclude in its prospectus: “The aging farming population in Saskatchewan has created a buying opportunity that [we] believe may not return for another generation.”

The next generation is less interested in farmland. The older generation will, in many cases, have to sell to folks beyond kith and kin.

For all of these specific reasons – and for the broader global trends affecting the grain markets – I expect that gap between Saskatchewan’s farmland and that of its neighbors to close quickly. Farmland values rose 11% last year in what I think are still the early stages of a multiyear boom.

Interested investors are encouraged to check out the company’s Web site, at www.farmlandinvestor.ca, or e-mail Brad Farquhar directly at brad@farmlandinvestor.ca. Unfortunately, investment seems restricted to Canadians. But Brad tells me, “We may have some Saskatchewan ag-related investment opportunities coming up that aren’t connected to farmland ownership and therefore won’t be restricted to just Canadians.” Worth following.

For a less restrictive way to participate in the boom, check in tomorrow…

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[Rude Endnote: After a late night trip to one of the roadside carts in Bangkok for some chow, your editor is, 15 harrowing hours later, almost able to hold down water. We’ll return tomorrow with a more robust final thought for the day… provided we graduate to solid food and energy drinks in time.

Until then…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com