June 26, 2018
“The crash will come from the gap between appearances and reality. I have never seen such stormy weather gathering.” – Felix Somary (1927)
Credit: DeLaval
The previous five posts of this blog have introduced the business objectives of Sustainable Agricultural Systems. I now intend to explore the challenges and opportunities facing this business and the agricultural industry.
This week’s post will consider the risks inherent in today’s financial system, and why this is important to analyse as it relates to an investment in Sustainable Agricultural Systems.
Financialisation
In 1984, James Tobin worried that: “we are throwing more and more of our resources, including the cream of our youth, into financial activities remote from the production of goods and services.”
Corporate stock buybacks, bank derivatives, and real estate bubbles are good examples of the non-productive and wealth extractive financialised economy to which James Tobin refers.
For more than 35 years the financialised economy has reigned supreme. But will it for the next 35 years?
According to the IMF, total global debt now exceeds $237 trillion, putting the global debt-to-GDP ratio well above 300%.
This debt is in addition to approximately $750 trillion of bank derivatives as reported by the Bank for International Settlements (BIS).
In her latest book, Collusion – How Central Bankers Rigged the World, author Nomi Prins bluntly sums up the outcome of the quantitative easing (QE) policy facilitated by the G7 central banks post 2007-2008.
“Speculation raged in the wake of this abundant cheap capital much as a global casino would be abuzz if everyone gambled using someone else’s money. Yet bank lending did not grow, nor did wages or prosperity, for most of the world’s population. Instead, central bankers created asset bubbles through their artificial stimulation of banks and markets. When these bubbles pop, the fragile financial system and economic world underlying them could be thrown into an economic depression.”
It would now appear that quantitative tightening (QT) is the latest central bank policy. But will asset values remain at unprecedented levels without the support of central bank stimulus? And after 35 years of declining interest rates, can the debt based economic system handle a return to even modest interest rates?
The only way to create prosperity is to ensure capital investment flows into the real economy. This of course has been known for decades.
Henry Ford was a well-known critic of the financial system. Ford was of the belief that many problems arise when the financial sector becomes the master of industry as opposed to its servant.
Even today, the global financial elite know the score. The following paragraph from the 2015 book – A Banquet of Consequences – (authored by Satyajit Das) summarises the situation.
“Sustainable growth must come from the real economy. Current policies are financial in their focus. They encourage, in the words of IMF president Christine Lagarde, excessive financial risk-taking and not enough economic risk-taking. They do not directly create jobs, increase wages or encourage investment. They do not increase skills or productivity, which would enhance an economy’s potential.”
Just as you can’t print prosperity, you can’t print food. For both these reasons, astute investors should consider an investment in agriculture – a genuine wealth creating and productive industry.
SAS System & Wealth Creation
The following excerpt sourced from an article entitled – Finance is Not the Economy – co-authored by the American economist Professor Michael Hudson, highlights the falseness of much of the wealth creation in recent decades.
“Capital gains via asset-price inflation must be fuelled by rising indebtedness of the overall economy. Prices for assets will rise by however much a bank is willing to lend, and asset price gains over and above income constitute debt growth in the economy.”
“In the end, “wealth creation” in the real estate market was fuelled by mortgage loans larger than the entire GDP. Each loan was a debt: total mortgage debt doubled relative to the economy in 25 years. That was the cost of “wealth creation.” It is not real wealth. It is debt which is a claim on wealth. It derives not from income earned by adding to the economy’s “real” surplus, but is a form of rent extraction eating into the economy’s surplus.”
Professor Hudson’s explanation is important to grasp, if one is to understand the investment value of a SAS System.
An investor funding the development of a SAS System is not buying into an existing non-productive and possibly over-valued (or debt fuelled) asset.
The capital required to develop a SAS System is used to acquire a small area of land (development site), build infrastructure, erect commercial buildings, install equipment and buy high genetic merit livestock.
Once a SAS System is commissioned, a new and productive asset has been created. The asset value of the SAS System derives from its ability to profit from the production of necessity goods.
Although the business asset may appreciate (based on its profitability and productive capacity), capital gains are not the focus of an investment in a SAS System.
What’s More Valuable Than Gold?
Lo que separa la civilización de la anarquía son solo siete comidas. (Civilisation and anarchy are only seven meals apart.)
Unfortunately, this Spanish proverb is being demonstrated rather aptly by modern day Venezuela. Earlier this year, a video of a cattle beast being stoned to death in Venezuela made international headlines.
The modern urban lifestyle has become so removed from the basic support systems of life. More than half the world’s population now live in cities.
If the just-in-time globalised food system falters, or in the case of Venezuela, fiat currencies hyperinflate, anarchy soon ensues.
Although food is abundant and affordable today, food is likely to become more expensive as reality bites. Exactly how most people will afford higher prices for necessities is yet to be seen. But I suspect this is one of the driving forces behind the concept of universal basic income.
Chattels
Cattle (a word derived from Old French chatel, or its contemporary equivalent chattel), remain what they have been through the ages – “moveable wealth.”
A high genetic merit breeding herd of dual-purpose cattle have the potential to become rather valuable in a world demanding greater quantities of dairy products and red meat.
The highest price paid to date for a young Fleckvieh breeding bull is €97,500. Genetics has always been a lucrative business, but it is the milk and beef produced by cattle that is expected to become more valuable.
Additionally, the asset value of Fleckvieh cattle should not be underestimated. Every year (with considered breeding), these productive cattle produce genetically superior offspring. The value of the cattle increases, even if the price of the commodities they produce does not.
The Asian Future
It is becoming rather evident, that the future of the world – geopolitically and economically – lies in Asia. The strengthening partnership between Russia and China, and the development of the Belt and Road Initiative (BRI), is set to be the dominant economic event of the 21st century.
Although China has not been immune to financialisation, the Chinese government is at least aware of the threat this poses to genuine economic growth and development. President Xi Jinping has said that China must keep emphasising the development of the real economy, adding that manufacturing is essential to the real economy, which should be driven by innovation and key technologies.
Given the enthusiasm for “conjured-money” in recent years, it is also worth considering where the balance of power would lie if or when the existing fiat currencies are completely debased.
China has been acquiring gold since 1983 and encouraging her citizens to do so since 2002. As gold has been money for 5,000 years and cannot be debased, this puts China on a strong footing as a new world order emerges.
Alasdair Macleod, head of research for Goldmoney, has dedicated several fascinating insights to the subject of gold and its possible role in China’s economic future.
One of his recent articles about gold’s role in monetary rehabilitation concluded with the following paragraph:
“If the whole scheme of Asian revival through economic power is to progress and survive long into the future, it will be a precondition that gold is central to monetary policy. Indeed, given the increasingly certain fate for the inflationary dollar, which is likely to drag down the rest of the world with it, it should no longer be a matter of choice, only timing. And unless the welfare-driven nations, whose governments have waxed on the destruction of their citizens’ wealth through deliberate monetary inflation reform their ways, they will deserve to slide into obscurity.”
Despite China’s debt burdens, environmental problems, and ageing population, China and the wider Asian region are set to be the key driver of economic activity for the foreseeable future.
The opportunity to export high-quality beef and dairy products to this region of the world is immense.
Conclusion
The SAS System offers a sensible investment opportunity capable of preserving and creating wealth. The evidence would suggest that agriculture is going to do considerably better in the next 35 years than it has done in the last 35.
The risks inherent in today’s financial system are unprecedented. As Satyajit Das proclaims, sooner or later we are all going to have to sit down to a banquet of consequences. At least those who have invested in a SAS System will also be sitting down to a banquet of steak, butter, cheese and cream!
As the coming decades unfold, the ownership of a SAS System could prove to be a prudent investment decision indeed.
Edward Talbot
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