The Big Picture for the Week of December 19, 2010

Earlier in the week I was interviewed for an article about farmland investing. I'm not sure how I was found for this or when it will run by I first explored this about two and half years ago. Coincidentally this came up in the comments on yesterday's post in terms of my interest in exploring things like farms and fisheries. I am a big believer in blending together holdings with different types of attributes in an effort to deliver a better risk adjusted result, manage the correlation of the portfolio to the broad market and manage the volatility of the portfolio compared to the broad market.

The space, that being farmland, is very difficult to access. There are a couple of US based companies that sort of fit the bill including a bulletin board stock that seems to be popular in this context but the last time I looked there was no information to try to research. I think the potential is as a foreign component to a diversified equity portfolio; a small component. If you click through to that post linked above you will see plenty of names to research some of which are gone due to take over (not aware of any failures but maybe there were), they generally have English versions of their websites and the information is not that difficult to navigate--note that I am giving the benefit of the doubt that none of these are fraudulent companies.

Another coincidence is that Alphaville linked to a post from big picture agriculture that is a great read for doing some learning. Although the post is more about actual farmland than related equities I was struck by this comment; As I stated in my recent post about this subject, I consider investing in land across borders to be very high risk. Our world faces too many insecurities and global risks to assume that new or old foreign farmland ownership contracts would be honored during times of national stress or leadership upheavals.

This is probably less of a risk if you are buying shares of an Indonesian plantation, especially in the proper moderation, but is not impossible depending on where you buy. I isolated some more practical risks in the interview. I noted that most of these names went down plenty during the financial crisis. They may not fit the bill in terms of low correlation although the extreme nature of 2008 might not be a useful test. Additionally these are capital intensive businesses, meaning a lot of them has sizable debt loads.

One of the appeals of this niche is that the businesses are so simple. They own land that is farmed, cattle for dairy and meat or both and generally these are things we understand.

Unfortunately these things are not true in the manner portrayed in that sentence. If you look at a half dozen company sites at random I think will find information about constant buying and selling of land and cattle. Being very transaction oriented, more so with the land, is not simple and most of us are unlikely to understand the nuance here. You will also see information about a lot of science and technology in terms of rotating which parcels get farmed this year versus another year, changing of crops for various reasons beyond just perceived supply and demand and different ideas about increasing efficiency of cattle management.

These things complicate the theme and buying one of these stocks boils down to a faith that the management generally knows what they are doing in this regard. This is not necessarily a bad thing or even a unique thing as I think it applies to just about any individual stock you might buy.

I've been writing about this for a while and studying/following some of them for a while now. They got hit hard in 2008, have done very well since but I have not done anything for clients yet. I find the segment to be fascinating, will continue to study/follow it and it may lead to something for clients. To the extent you can accept that investing is about patience and long term themes, this is a great example of that. It is things like this that make the job so fun.