Blessed by the Potato

There are a great many cheeses to choose from in the world; each Eurpoean town seems to have its very own (or one for each day of the year). However no cheese can hold a candle to Cheddar, the God-Emperor of cheeses. There are a plethora of positive attributes that make Cheddar the best: its ready availability, its gentle, non-footy flavour, its pleasing colour and texture. However, the reason that elevates Cheddar to god status is its omnipresence and malleability. No other cheese can transmute itself into so many forms, from organic dairy farm goodness to powdered horror and still be recognized as Cheddar. It can be mild or aged strong; uniform in appearance or marbled (my personal favourite). It’s good cold or melted, in solid cheese form, semi-solid slices, or powered and/or liquified. As a “flavour” it can appear on crackers, gators, fish, and a variety of other fried or baked snack foods that turn your hands orange.

In fact* Cheddar is so synonymous with cheese that in some languages/dialects Cheddar is the word for cheese, and the locals may know of no other types. The French word for cheese, fromage, comes from the word for mold or form, which is used in the making of Cheddar-like cheeses. Here at UWO we are going to have a brain imaging study starting very soon (as soon as we get funding and ethics approval and MRI time) that will objectively prove that when people think about “cheese”, they’re really thinking about Cheddar (and a non-significant activation in the “smiling for pictures” region of the brain). A serving of Cheddar contains 20% of your daily calcium & B12 requirement as well as all kinds of other good stuff, yet as little as 5% of the lactose of milk, making it suitable for lactards such as myself. It’s also stable in the fridge for over a month after opened, and up to 6 months before that, very important for shut-ins who don’t like to grocery shop very often. You can find it in the deli counter, the fancy cheese section, and the general dairy case in your local supermaket simultaneously, and that’s just for its most common chilled cheese form. Cheddar is also the only product that can be put between two pieces of bread on its own and still be considered a “sandwich” (indeed, two sandwiches depending on whether heat is available: a cheese sandwich or a grilled cheese — peanut butter requires the help of one other item, usually jam or bananas; bacon, itself a prince amongst meats, requires both lettuce and tomato to become a BLT). Cheddar is often the glue holding together other foods, originating all around the world, such as KD, quesadillas, casseroles, grilled cheese, nachos, and cheeseburgers (note that it requires two pieces of cheese to hold a cheeseburger together; this is not the common distribution of double cheese cheeseburgers, but should be).

Cheddar also does not rely on the action of mould, nasty fluffy stuff that invades your basement, to make the magical transformation from milk to manna in its wax chrysalis. Many other cheeses mistakenly went bad in antiquity, picking up mould veins or fuzzy coatings, and people ate them. Continue to, in their ignorance, despite the fact that starvation is no longer the only alternative, and that mould and fungi are not from one of the three kingdoms of life that humans have evolved to eat (plantae, animalia, and petrochemical). This makes Cheddar one of the few cheeses actually suited to human consumption and digestion, even without the purifying effects of fire cooking. If we need an antibiotic we’ll call you, Roquefort, but for something to put in my mouth I’m going to stick with Cheddar.

Yes, if it weren’t for the need to have mozza (the queen-consort of cheeses) for pizza we could in fact get by with Cheddar as the only cheese in our society. And we would be happy to devote ourselves to the God-Emperor of cheeses.

* – not an actual fact.

[Photo credits: wikipedia, flickr user srboisvert, Kraft Canada. The idea for this post came from Mr. Cheap]

Continuing with my efforts to get free food from President’s Choice PC Points, I tried PC Organics microwave popcorn, the butter-flavoured variety. It was actually pretty tasty, however when looking at the nutritional information on the side after getting it home I saw that it had 10 grams of fat per serving (50 g). That’s a crazy amount of fat! Sure, it didn’t have any of the weird chemicals associated with other microwave popcorn (just lots of palm oil and butter flavour), but I typically associate popcorn with the lighter side of the salty snack spectrum, but that’s right up there with chips and nachos bad! And I’d rather have the nachos all else being equal, since they’re less hazardous to my gums. Just another reminder that organic does not equal healthy.

PC Financial has had* a deal on where you could get 5000 PC points for purchasing any organics or blue menu item. That’s a pretty sweet deal, since 5000 PC points is worth about $5, and there was no minimum purchase, so you could buy a $2 organics chocolate bar (which I did) and get paid to eat.

Unfortunately, that PC Organics chocolate was pretty nasty. It was billed as “European style rich milk chocolate” but it wasn’t yummy at all. It just wasn’t sweet, kind of like baker’s chocolate. However, it didn’t have the bitter rich cocoa that some dark chocolate lovers go for either (not surprising since it was milk chocolate).

I don’t know how they managed to make chocolate not tasty, maybe it’s the lack of fertilizers or whatever, but I’d give this one a pass if you’re looking for a PC Organics product to get for free.

* – Oddly enough, the banner ads for “get 5000 PC points on blue menu items” are still around, but they’ve killed the link for the actual coupon, so if you try to get it now you’ll just be stuck in a loop on the website. While no one else can get the coupon now, as far as I can tell they’re still honouring it in-store.

I talked earlier about useful holidays gifts… in addition I got myself an Xbox with the monetary gifts. At $240 on a boxing day sale it seemed like a steal even if I only use it as a media centre… however, with another $100 needed for a wireless adapter (or $50 and a headache to set up an access point near the TV) and $60/year for Xbox Live, I’m not sure anymore that it was the best use of my money. Ah, well, the PS3 might be a better media centre (with blu-ray) out of the box, but all my friends have Xboxes so I hope to actually game with it. I also planned to pick up Rock Band for it, but holy crap, that’s another $200! Add in two more games at $80 each and that’s my entertainment budget for the whole year blown! On top of that I got a return or refurb unit, as it already had an Xbox Live ID set up as well as a connection to “Aaron’s HP Media Center” set up, which kind of bums me out (but not enough to actually get my butt down to the store to return it).

From Wayfare I got a Soda Stream/Soda Club home carbonated drink maker. It’s basically a CO2 tank that you can use to make carbonated water at home, to which you can mix in concentrated syrup to make your own sodas. I haven’t tried their cola flavour yet — as a die-hard Coke (or recently, Coke Zero) fan, I doubt I would like it — but the lemon-lime and root beer has been pretty good. It’s a bit of a novelty to mix up your own drinks at home, and they also claim that it’s cheaper and more environmentally friendly to do so. On the surface, that makes a lot of sense: why ship fully prepared/diluted pop around the country along with the extra packaging that entails? You’re basically paying to ship water, when it makes much more sense to just send the syrup and dilute it with carbonated water at home/on site (like movie theatres and restaurants do with fountain pop).

Unfortunately, while it might be slightly better for the environment, at the prices they’re charging it’s not cheaper. A big part of the problem is just with their implementation: they don’t have the kind of volume or distribution network that Coke or Pepsi have. I think this scheme would work really well if Coke or Pepsi decided to start offering in-home fountain pop units and sold syrup boxes at the grocery stores instead of cans and bottles. For Soda Club though, you don’t just walk down to your local grocery store (at least, not in Canada) and pick up a bottle of syrup and a carbonation tank. There are only two places that seem to sell the carbonation tanks, one in Paris, Ontario, the other in Mississauga; and nowhere local that sells syrup.

To order online, you can get 2 carbonation tanks at $25, which is rated to carbonate 120 L of water. In testing, we found that the sodas were fairly flat at the recommended carbonation level, so realistically this would probably carbonate 90 L. A syrup bottle is $5, which can be diluted into 12 L of pop, but again in testing we found the sodas “weak” at the recommended dilution, so 9 L would be more realistic per bottle. So to make 90 L of pop would cost $25 + (10x$5) = $75 plus $5 shipping, or $80. And that’s US dollars. To be generous, let’s peg the exchange rate at 1 USD = $1.10 Canadian, so $88 for 90 L (or to be very optimistic, 120 L), and we’ll also ignore the cost of the machine and CO2 tanks in the first place. To put that into 355 mL can servings, that would be $0.347 per “can” (or $0.26 per “can” if we want to be very generous with how far the supplies will stretch and what the exchange rate will be).

That does compare favourably to full-priced pop at $5 per 12-pack ($0.416 per can). However, I never buy pop at that price. Deals of 3 cases for $10 come up quite regularly ($0.278 per can), and I often stock up on pop at prices as cheap as $2.50 per case ($0.208/can)!

There is some benefit to avoiding the environmental impact of having to recycle all those pop cans, but I’m not sure I’m willing to pay 60% more for my pop to get it. Plus, the carbonator is loud, which makes sneaking a pop while Wayfare sleeps harder, and all this is assuming that I’m ordering enough syrup to make 90 L (equivalent to 253 cans, 21 cases of 12) at one time. I would drink that well within the ~6 month shelf life of the syrup if that was all the pop I was drinking… but while the lemon-lime and root beer flavours were passable, I haven’t tried the cola yet. If that is “off-brand” and I still drink Coke the majority of the time I reach for a soda, then those secondary flavours might sit around longer, and I might need to spread the syrup orders out, increasing the shipping costs.

I’ve been fascinated by the fertilizer story almost as much as I have been with the energy and banking sectors. I even managed to lose myself some money with Migao earlier in the year. Now that the markets are down and the fertilizer bubble looks to have popped, I’d like to take another look at things.

The Story

People like to eat. I like to eat. Most of our food is grown with the help of fertilizers, especially in the Western world. In order to grow more food on less land, you basically need fertilizers to get the yield up. Adding to this are two factors, the first of which is biofuels (predominantly ethanol from corn in the US and Canada, and from sugar cane in Brazil, and biodiesel from soy and palm oil), and the rising standard of living in China and India.

One of the neat things about becoming a “developed” nation instead of “developing” one is that you can keep more of your population from starving. In fact, it goes well beyond that: in addition to not starving, the people’s quality of life improves, and one of the first improvements they want to make is to their diet. No more fish and rice, they want a variety of food, including more meat. On top of that, more people move out of the countryside and into the cities and factories.

All that adds up to a whole lot of fertilizer demand, which makes investing in fertilizer companies an attractive option.

What Happened

Of course, a lot of people had the same idea, especially when there were rice shortages and food riots. The price of fertilizer and fertilizer companies shot up. Potash (TSE:POT) quadrupled from June of ’07 to June of ’08. It was only in November of ’07 that I started to get interested in the fertilizer story, and at that time I figured that at over $100, Potash (the stock) was too rich for my blood. While the underlying commodity had posted impressive, almost scary increases in price, I didn’t think that it would do that again, and at $100, the stock had already priced in another doubling or so in potash (the fertilizer) prices, which didn’t leave enough of a safety margin for my tastes. I wrote a note to look at it again if it had a pull-back to $80 or so (which is around where it’s at today, hence this article).

Potash (the fertilizer) did end up tripling, and there were indications that it would have another tripling on top of that on the strength of Chinese demand. POT shot up to $240, where at least another doubling in potash prices (according to my back-of-the-envelope figures) would be needed just to keep the stock there, let alone for it to hit some of the ridiculous targets being set. Analysts at the time seemed to fall over themselves bumping up the price.

And then…

And then the credit crunch really hit. Spot prices for potash (and other fertilizers) stabilized and even pulled back. Crop futures dropped, indicating that farmers wouldn’t be able to sell their crops for as much, which means that they wouldn’t be as aggressive in their planting and fertilizing, particularly if fertilizer was expensive. Compound that with a difficulty in getting loans to buy fertilizer, and a hit from high energy prices, and things suddenly weren’t looking so rosy for the fertilizer industry. POT and AGU have given up pretty much all of their gains from the last year.

However, I don’t think the basic story has really changed all that much. I still think fertilizer demand should be strong for years to come. I think that once this credit crisis and recession pass in a year or two that fertilizer demand will pick up again, that people (especially the large populations of India and China) will want to eat better foods, and more of them. There are numerous articles around explaining that fertilizer prices are a very minor input costs to farmers, so even when they go up ten-fold, it’s not really destroying demand.

That said, I’m not as bullish as a lot of analysts are. It’s hard enough to try to peg a value on a company, and trying to predict commodity prices is worse. However, you can’t really do the former without a guess about the latter in this case — and that also leads to a lot of these investments (in fertilizers and energy) being essentially bets on what the underlying commodity will do (with some wiggle room from improvements in efficiency, etc).

So I have in front of me TD’s reports on Agrium and Potash. In it, they predict that potash, which was around $150/ton in 2005 and 2006, and is currently around $500 a ton (after briefly touching the $1000 range), will continue to increase to $700/ton by the end of 2009, and to $800/ton by 2010. I can’t say whether that’s too optimistic or too conservative. I’ve traditionally felt that TD’s analysts were pretty good at being realistic without being overly conservative (CIBC seems to like to shoot for the fences). However, I want to play it safe if I’m going to invest in this. I figure potash (the fertilizer) was pretty stable for two years there, and the rocketing this year looks out of place. So a more moderate price of $250 (a halving from where we are now, a ~40% increase from 2006 prices) by 2010 might be a more reasonable assumption.

TD and most analysts predict that both stocks have 12-month returns of over 100%, and naturally rate each a buy. I’m a little less optimistic, and think that at these prices they’re probably just at fair value. I’m going to wait for a bit more of a pull-back, and just watch for a while. I figure $33 for AGU or $70 for POT (whichever one hits first) is where I’ll start buying (and even there I’m only expecting a 100% return after ~5-8 years). It seems weird to continue to wait on these, since I do fall for “the story”, and since they’ve had such huge sell-offs lately, and also have seemed to stabilize for the last two months or so. However, despite the fact that the reckless optimism seems to have washed out, no one that I’ve read has yet turned completely pessimistic on them, so I think they might have a bit further to fall.

The Case for Caution

Part of what makes me cautious is that the story isn’t completely adding up. Somehow back in the spring there were crushing food shortages. Yet now, just 6 months later, the largest chicken producer in the US could be facing bankruptcy. What happened? Yes, the credit crunch really bites companies that were highly leveraged on the ass, but does that really explain everything, or is there an underlying problem in the food business story? Is the world not quite as hungry as we thought?

Could people wanting a beefier diet simply wait a decade, or simply not be able to afford it ever? On top of that, we have the little fact that China is a communist nation, and could decide to stop importing fertilizer on a whim. It’s not likely, but that fear is there (likewise with Migao, a specialty potash producer: the government could step in and cut their margins to satisfy farmers). Also, China just announced their own stimulus plan, which indicates that all is not rosy there, and that the growth and improvement in diets and lifestyles might not continue.

The Role of Biofuel

I think that in theory, biofuels make a lot of sense for a lot of reasons: sustainability, greenhouse gasses, and energy independence. While I think that electric cars and mass transit are better solutions for most of our people-moving needs, there are cases where liquid fuels are going to be needed, and for the long-term we should look at biofuels. However, in the short term, they rely on subsidies, and their return on energy is not great (or, according to some, even above 1). Top that off with people suddenly becoming concerned that biofuels are starving people, and that could be bad for the sector.

I mentioned in a previous post that the amount of food stock going to biofuels was actually quite small, so it’s really tough to nail the food crisis on that door. However, in the US at least, biofuel almost exclusively comes from corn, which is a very fertilizer-intensive crop. So while it’s not going to change food supply overall much, cancelling biofuel initiatives might have a decent impact on fertilizer demand. And trouble is brewing, as major ethanol producers run into financial trouble.

So unfortunately I don’t have a firm conclusion here. I like the long-term prospects of the fertilizer companies, but despite the recent pull-backs in price I don’t think there’s enough of a safety factor there, or the promise of outperformance, or the obscurity needed to have a mispricing to bother investing in them beyond the part that’s already in the index.