(Interviewed by Louis James, International Speculator)
L: Doug, we talk a lot about metals and energy, but you’ve also made money in agriculture, as have our subscribers who got in early on corn and potash. In the February 2008 issue of the International Speculator, you made the case for speculating on rising cattle prices. Would you explain your rationale for that and give us an update?
Doug: Sure. There is such a thing as a cattle cycle, and right now, all over the world, cattle are in liquidation. Farmers and ranchers just can’t make any money on cattle. Nobody has made any money on cattle in North America or Europe for years, and it’s especially serious now. So worldwide, cattle herds are being slaughtered, and that’s depressing the prices.
The interesting thing is that even as prices are being depressed by all the selling, counter-intuitively, cattle herds are collapsing. That means the number of cattle and the price of cattle are going down at the same time. That obviously can’t go on forever; at some point, the relative number of cattle is going to be quite small, and prices are going to explode upwards. Why? Because people in China, the rest of the Orient, and across the developing world are going to want more beef -- in addition to the traditional consumers. And the numbers of cattle are going to be very low.
I think that cattle is an excellent place to be.
L: If it’s not a traditional part of their diet, why would such people want more beef?
Doug: As you are becoming wealthier, you want better-quality food. Beef is generally at the top of the food chain.
Why is that? It takes about two pounds of grain to produce a pound of chicken meat; four pounds of grain to get a pound of pork; seven pounds for a pound of beef. So from a production point of view, beef has always been, and I guess will always be, the most expensive type of meat to eat.
L: Of common meat animals. Some unusual meats are a little more expensive…
Doug: Yes, of common meats. Bald eagle drumsticks are much more expensive [laughs]. But beef is traditionally the rich man’s food. Crisis notwithstanding, a lot of people around the world are getting wealthier, particularly in China. India is not far behind, but there is a cultural issue with beef and Hindus, of course. I think we have a rare opportunity right now to buy low, while beef herds are collapsing.
That’s exactly what I’ve done with a number of friends; we’ve bought a lot of land in Argentina and are raising cattle.
L: It’s basically a bet on rising global affluence as the underlying trend.
Doug: To a degree. But it’s more a bet on significantly lower supply combined with steady demand. In real terms, cattle prices are at about 40-year lows. As bad as the global economy has been, one might think they could have gone even lower -- the economy does affect them -- but they’re very low. In fact, the worst day I ever had trading commodities personally was back in 1987, when I thought that cattle were quite cheap. And you remember that day in 1987 when the stock market fell out of bed like five hundred points or something like that.
L: Black Friday.
Doug: Yes, Black Friday. And I was personally one of the largest players in the cattle market at that point. I was short puts and long contracts, of both feeder cattle and live cattle. It was a horrible day, because the day after the market collapsed, the cattle market collapsed. Everybody figured: “Oh my god, it’s a depression, nobody is going to be able to afford beef, so we better sell.” It was a nightmare for me [laughs]. So, you’re quite right; cattle are a play on prosperity.
So why, if I believe we’re sliding into the Greater Depression, am I long cattle? Because you’ve got to be a buyer when everybody else is a seller, and everyone else is a seller right now, because no one can make any money on cattle. That’s number one. Number two is that, despite the fact the world is going into a depression, the world population will continue growing, and the countries in the Orient are going to do relatively much better than countries in the West, so I’m willing to bet on rising beef consumption. Number three, real cattle prices are at generational lows.
But I’m not speculating in cattle; I’m investing in cattle. I’m not doing anything with them in the futures market.
L: There’s no leverage on what you’re doing; you are actually buying cattle.
Doug: Yes. I’m buying land in northwest Argentina, which to me is the most attractive part of that country – and the country itself is very attractive indeed. We’ve bought a number of large, dormant farms where we clear the land, fence it, put in wells, and plant in grasses the cows like. We bought Braford females – heifers – and they calf every year. We now have about fifteen hundred cows. Every year we get about twelve hundred new babies, and then the babies have babies. We sell the male calves for current income, to finance the clearing and fencing of more land and putting in more wells. And we let the heifers grow and reproduce. It’s a form of compound interest. Plus, the land is worth considerably more after we improve it -- a big bonus.
And since our cattle are all grass-fed, and we own the land for cash, and the Gauchos earn roughly two hundred and fifty dollars a month, we don’t have much in the way of costs.
I’m a big fan of grass-fed beef. Most cattle spend the best part of their adult lives in feed lots. They’re packed chock-a-block next to each other (moving burns calories and takes off weight). They’re fed things cows don’t naturally eat. And they’re pumped full of growth hormones and antibiotics. The end product is okay for a mass market that wants cheap beef, but it isn’t what I want.
L: Is your reason for doing this in Argentina because the market is there (Argentines love to eat beef)? Or is it because land and labor are cheap, and it’s such a good place to be in the business? Why Argentina?
Doug: I picked Argentina because out of the hundred and seventy-five countries I’ve been to, the fact of the matter is: I just like Argentina more than any other place I can think of.
L: Even Thailand?
Doug: Well, it’s perverse. Thailand is exactly the antipodes of the globe; it’s as far from Argentina as you can get geographically, and it’s about as far as you can get from Argentina culturally as well. They are just opposite and antithetical in so many ways. But the fact of the matter is, those are my two favorite places on the planet.
L: But Argentina edges Thailand out…
Doug: It does. That’s because I like the wide-open spaces. I like the estancias [ranches]. I like the barbeques. And in Thailand, as much as I like it, the fact is that as a Westerner, you are never going to be a part of Thai society. Forget about it. No matter how many Thai friends you have and so forth, you’re still always going to be an outsider. But that’s not true in Argentina, because it’s the most European country in the world. It’s more European than Europe at this point, quite frankly. And, completely unlike Thailand, it’s a country of immigrants. So, especially as my Spanish improves, I can actually become part of the society. Entirely apart from the fact that the upper classes, and the kids, all speak excellent English.
On the other hand, in Thailand maybe there’s an advantage to not being part of the society, because… you really don’t exist. You are like what Chinese would call a Quai Loh – a foreign ghost or foreign devil. You are not an element to officialdom; you’re a permanent tourist. It’s a double-edged sword; it depends on what you like.
L: If you’re an anarchist, why would you want to be part of society?
Doug: Well, I’m a fairly social anarchist. We like society as well as anyone -- we just don’t like the state. I just want to be left alone by the authorities. An anarchist can feel pretty mellow in Thailand because of the foreign-ghost effect. And pretty good in Argentina for different reasons – it’s full of Spanish-speaking Italians who don’t like to do what they’re told.
We got into the cattle business as a consequence of wanting to buy estancias, because the land prices were so low. They were just begging. The country is so pretty, and the society is just so nice, I wanted to become a part of it. When you have this land, you have to do something with it.
In addition to buying a beef cattle herd with some friends, I personally bought a dairy farm -- but, again, with no cattle. I bought the dairy herd from another farmer – a wealthy guy – who wanted to get rid of it. This was during the soybean and corn boom of eighteen months ago. He had a hundred and thirty Holstein dairy cows, and he told his farm manager: “Get rid of these things. They are a rounding error on my balance sheet, and the ground they are taking we can use to plant soybeans and corn.” So I bought them at an excellent price.
In fact, the deal I cut with the guy, because dairy herds were also already in liquidation then, was this: he said, “Alright, you take the cows in exchange for one year’s milk production from them.”
So, the cows graze on land – that doesn’t cost me anything. And my Gauchos, they were just sitting around, and I had to find something for them to do. So now they can milk the cows, and I just gave him a year’s milk production.
L: So, in addition to the beef play, is there a dairy play? I’ve heard that not only beef cows are in liquidation, but milk cows are being turned into hamburgers. That should create a supply crunch, and there should be money to be made in the dairy business. Is that right?
Doug: That’s totally true. Dairy prices have fallen about fifty percent in the last couple of years.
L: But are dairy prices really falling? It doesn’t seem that milk is any cheaper in the supermarket…
Doug: They must be, because the milk prices the farmers receive most places in the world are down fifty percent.
Going back to what you said earlier, one of the reasons I thought that Argentina would be the best place to do this, is because of the stupid fascist government down there. They try to control everything, including the price of beef. All your input costs are very low, partially because it’s a depressed economy, and partially because of price controls. Land and labor are extremely cheap. But when you sell beef, you don't sell it at the world market price in Argentina. And when you sell milk, you don’t sell it at the world market price in Argentina either. So, I’m looking for significant profit from the fact they are now controlling the prices. But that will come to an end.
Want to hear something unbelievable? It’s possible Argentina will soon become a net beef importer. One reason is the drought in Buenos Aires province, which is exacerbating the already extraordinary liquidation of herds. But more important by far are the price controls. Between the drought, the boom in grain prices, and the controls -- meant to artificially depress beef prices to bribe poor voters -- Argentina is creating a beef shortage for itself. It’s like creating a sand shortage in the Sahara. Reality alone will bring the controls to an end.
Also, I have a feeling that we may see a shift to the right when the next elections come up in 2011. Two of the leading candidates to replace Christina [Argentine President Christina Kirchner] are both free-market-oriented guys. I don’t mean radically free market, but pretty free market. Either could turn the place around, however, much the way Roger Douglas turned New Zealand around in the mid-eighties. And if that happens, Argentina could boom and blossom, and the value of my land and cattle would jump just from the releasing of controls. Joining the real world market could result in a double overnight.
L: So, there’s a political speculation as well.
Doug: Yes. The best speculations always capitalize on a politically caused distortion. My dairy herd, within the next couple years, will be up to three hundred cows, which is the maximum capacity of my milkery or tambo [the word “tambo” comes from the Inca language, and in Argentina it’s a synonym for dairy farming]. And eventually, we should get our beef herd up to ten or twelve thousand head.
And of course, when we are up to twelve thousand head, we’ll have ten thousand head that we can sell into the market every year. This would be a significant income stream.
I think it’s a good time to get into the business, and Argentina is the right country, because of the price controls.
L: For people who don’t want to go to Argentina or fear that the price controls may never be lifted, what other countries would you recommend? Obviously you wouldn’t want to do this in the U.S. Where would you go, if not to Argentina?
Doug: The U.S. and Canada are huge beef producers, but they’re not ideal environments. For one thing, they have long, cold winters, especially in the plains states and Alberta. Cold takes weight off animals, so you have to feed them more. And the winter pretty much precludes their eating grass, so you’re feeding them hay or silage -- very expensive.
Surprising to most people is that the largest beef-producing state in the U.S. is Florida. The winters are perfect -- but the summers are way too hot, and heat is also the enemy of beef. Plus, the pasture is generally very poor. Beef cattle can live on Florida grass, but horses, for instance, absolutely cannot. And the insects are a problem in a lot of places. Where we are in Argentina, the climate is ideal year-round, the grass is good, and insects aren’t a problem.
I’d be willing to look at Brazil or Bolivia. Paraguay is very interesting, actually, in a lot of ways. The problem with Paraguay is that there are no transportation facilities there, besides trucks. It’s one of the best places in the world for growing everything from cattle to corn to soybeans, but the transportation for shipping the stuff out is very problematical.
And if you want to get even stranger than that, I would go to the eastern provinces of Bolivia, the so-called Media Luna. Bolivia is really at least two different countries that are sociologically, demographically, and geographically as different as night and day. I think there is an excellent chance that Bolivia is going to split up in the future into at least two countries. The Santa Cruz/Media Luna area, which is the agricultural lowland, is also an excellent, politics-based speculation. The land in the Media Luna is very cheap and it’s really beautiful, albeit in the middle of nowhere. Let the Quechua and Aymara [the languages and the people who speak them in the Bolivian highlands], which Morales [Bolivian President Evo Morales] belongs to, in the dry highlands have that area.
I like Brazil, too, but it has done so well in recent years, it’s not particularly cheap anymore. So I’d rather go for places that are cheap, where I can see a possible explosive upside as opposed to a place that’s nice like Brazil, but where the market recognizes that it’s nice, and that’s already reflected in the prices.
L: Are there places you might go outside of Latin America? Europe is as controlled as the U.S., but some governments might decide to support some agriculture. Say, Denmark suddenly decided it’s going to subsidize the dairy business, would you consider going there?
Doug: Well, dairy is the biggest form of agriculture in Denmark; and since it’s Europe, I presume it’s already heavily subsidized. But I don’t know of any such opportunities there right now. Western Europe is high cost, high regulation, high tax. And too far north to be very productive. I’d forget it. Eastern Europe is a possibility. Land is still relatively cheap in Serbia.
L: Yes, and they have a flat tax structure and free trade with Russia – so you’d have access to the whole Russian market.
Doug: Yes. Ukraine and Romania might also be interesting, since the Eastern European property market has collapsed. But the problem with farming operations is that you’ve got to supervise them. There is a saying in Spanish: El ojo del amo engorda el ganado.
L: “The eye of the master fattens the cattle.”
Doug: Yes. The fact is, if you are not there, and you don’t have people who are really reliable…
L: I get it – as you said, you like living in Argentina. So you’d have to like living in Serbia or the Ukraine for it to make sense to get into the cattle business there.
Doug: Right. That goes for Argentina too [Laughs]. So that’s the problem with investing in farming, on a first-hand basis; you’ve got to be on the spot several times a year, and you’ve got to have some degree of confidence in the guys on the ground running the operation.
But I think it’s a good thing to do if you have an inclination, have the capital, and want to spend time there.
L: And for the people who don’t want to buy a ranch, is there an ETF in cows? Or is there an easier, less laborious way to invest that you can recommend?
Doug: Yes, there are a couple of relevant ETFs – at least one for cows. There are futures in all the agricultural products. But that’s a day-to-day kind of thing that requires its own due diligence and effort.
L: If you grow your own herd, you don’t have to be right on the timing, you just have to be long when the time is right?
Doug: That’s right. When you are actually growing the cattle, you just have to be right on the trend, as opposed to picking the right day when you are speculating. All things considered, I think the countries in South America are the most interesting, for all kinds of reasons. But part of that is my taste.
The key is this: if you’re going to buy real estate abroad anyway, for the kinds of reasons we discussed in our conversation on currency controls, or others, you should pick land in a place you enjoy being. And if you’re going to do that, you might as well put the land to work – with cattle and dairy herds being an obvious way to do that. For me, this adds up to a working estancia in Argentina.
For others… it’ll be wherever the stars align for them.
L: Got it. You know, I do like Serbia… and Belarus… I wonder…
Doug: Have fun.
Doug Casey is the chairman of Casey Research and co-editor of Casey’s flagship publication, The Casey Report. One of Doug’s favorite sayings is that the Chinese word for “crisis” consists of two symbols – one means danger, the other opportunity.
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