Biofuels may be a non issue

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Biofuels is a topic that divides many people. To some, it is a solution to reduce dependence on oil, and to others it is an insane idea.
I do not think that biofuels will be a discussion topics for very long, and here is why.
Very likely, the future of cars will be electricity. Inevitably, at some point oil prices will rise again to very painful levels and stay there. This is what will make alternative energy sources economically interesting, even without government subsidies.
One of the major opposition to the electric car is being handled in a very smooth way by the Obama administration. General Motors and Chrysler were strong opponents of the electric car, and helped send it to the landfill for a while, but neither company is around anymore. The Obama administration just put an end to the outdated automobile gas guzzler model once and for all, with the new regulations on gas mileage and car emissions. Fact is that an important page has been turned for good.
Just realize that if all US cars have a similar mileage as their Europeans counterparts, the gasoline use would reduce to substantial amounts, in the vicinity of an equivalent of 80-100 million cars less (old US mileage standards). Normally, this should make the price of oil drop, therefore reducing the need for biofuels. And when oil prices increase again, then electricity will take over.
Other signs that biofuels do not have that much of a future is the lack of excitement from the investment community for it. Wind energy attracts investors (for instance think of Boone Pickens’s energy plan). Solar energy attracts investors. But biofuels? The main party that seems to be pushing for it is Brazil, for internal reasons mostly.
The fundamentals do not look good for biofuels, either. They score negatively on all three bottom line criteria.
As such, this is good news for food supplies. If biofuels made out of edible grains do not have much of a future, the situation is different when it comes to biofuels made out of cellulose. These probably have a decent future, as they do not compete with human consumption, and can be a good way of using and recycling materials that further would be of little interest.

Copyright 2009 The Happy Future Group Consulting Ltd.

Financial markets and food prices

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food protest in MexicoLast year, we have had a flavor of things to come when the prices of oil and of agricultural commodities skyrocketed, creating inflation and in many places food related riots, even in Western countries’ supermarkets.
On the contrary to the “official” version that the media were presenting us about population increase, emerging countries economies growing, the spike in price was not all that linked to supply and demand of the commodities.
What was exploding was the demand for future contracts for these commodities, and that is demand for contracts on paper. Many players who were trading these future contracts were investment banks, financial institutions and private investors, mainly hedge funds. These people are not physically involved in the trade of the commodities. I cannot remember any oil tanker with a bank’s name on it, nor on trucks transporting corn or wheat.
Wall Street-NYSEMoreover, such transactions were highly leveraged. For oil, I have seen numbers varying between 11 to 22 times leverage. This means that the demand was artificially boosted on paper by people who are not physical buyers of the commodity they trade, but who want to create a momentum in the market so that the prices of the contracts increase significantly, with as only goal to take as much profit on the paper transaction as possible.
This would not be bad if the futures prices were not becoming the “official price” in the real economy. We have seen the result: strong inflation and social unrest for very fictive reasons, because we were not close to actual shortages.
Future contracts had been introduced as a tool for the producers of commodities to fix a price in advance for their production. As such, this is a very good system that offers more security, and especially more market predictability to producers.
The problem is that these futures contracts have now become an investment product that is not connected anymore to the real market numbers. They live a life of their own and they are priced by the market on paper with high leverage levels, but they can directly influence the prices of goods to consumers, and therefore skew the economic situation.
At some point in time, governments shut down a number of markets for basic commodity, in particular in India.
For the future, we can expect that a drop in the US dollar will encourage financial investors to “hedge” against inflation by rushing into futures markets; therefore, they will create inflation by giving the impression that there is a strong surge in demand for commodities. For investors (or more accurately I should say speculators), commodities have now become currencies, they do not represent actual products and the investors do not link them to the consequences that will hit the real economy because of that.
This will translate in major inflation, which combined with a very slow economic recovery could cause two recessions back to back, or extend this one much longer. In such a scenario, especially the USA will be hit quite hard.
Unfortunately, it probably will take much longer for governments to see how this loophole works and to act firmly to regulate the futures market. We might have a bumpy ride ahead of us.

Copyright 2009 The Happy Future Group Consulting Ltd.

Always be market-driven!

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This is always the right approach, even when the market is good. The alternative, being production-driven will only bring you gloom eventually.
A very recent and now famous example to illustrate this is the construction industry in the USA. Agricultural products tend to follow similar cycles and this story is just a reminder of the recurrent mistakes that occur.

The reason why they got into trouble is because they forgot to be market-driven. As their market was good, and easy, they became overconfident and instead of being business people, they actually became speculators. They assumed that the market was to never change, that the only way would be up, and they built more and more houses without having any contract at all, as they thought that there always would be buyers.
By ignoring how markets function, they created their own demise. First, markets always fluctuate; they never go up in a straight line, so they had to prepare for a downturn. Secondly, they ignored the simple law of supply and demand. By taking demand for granted, they did not anticipate the possibility of ending up with more offering than the market would absorb. And thirdly, they did not produce according to what they could sell, but they produced an inventory; that is the production-oriented error.
Of course, the number of mortgage defaults and foreclosures is pushing prices of houses down, but this is by far not the only reason why houses in the US are losing so much value. The inventories of unsold newly built houses are huge and the market will have to absorb the surplus.
By not being market-driven, the builders have brought themselves in a working capital crunch. Their accounts payable are going up (yes they have to pay their bills) and their accounts receivable are not coming in fast enough because of the inventories. So, in order to pay the bills and not get into bankruptcy, they have to move the inventories. Profit becomes second to cash. This is why they are selling much cheaper than they had speculated. If only they had been market-driven…
The US builder story is just a superb illustration of the advantage of being market-driven, but this is actually a very common story. Especially when a market is good, companies tend to think that this is the normal state of affairs. Add to this a normal dose of greed and then you have the perfect recipe for a disaster to happen.
Know your market and do not let yourself drag into overconfidence!

Copyright 2009 The Happy Future Group Consulting Ltd.

Value chains are a great way to develop a niche

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In the food production world, just like in other business sectors, there are been two major successful strategies.
One is to produce a non-differentiated commodity at the lowest cost possible. The number of units compensates what is lost in margin per unit.
The other is to produce a limited and controlled volume, and to market it to people who will pay a premium for it as they see an added value in the product.
So far, nothing too revolutionary here.
Generally, other strategies seem to have failed, either because the niche started to expand too much and was losing its specificity. The product becomes something of a better commodity, but not a specialty anymore. More players start to enter the niche and very quickly, the margin per unit drops and so does profitability. The deathblow generally comes when people start to try to counter this decreasing margin by cutting costs in the wrong places, quality being the most obvious.
The mass commodity producers, who try to create an artificial differentiation, by creating an illusion of specialty, cause another type of failure. This marketing tactics usually fails because the difference is mostly an illusion and the customers realize that quickly.

Value chains are very useful for smaller producers who want to market a good superior product.
Often, they are local producers with limited resources. They know how to produce well, but they miss the marketing arm or the industrial arm of the value chain that they are in.
On the other hand, also at the local level, there are other businesses that have the other links of the chain, but that have no production of their own.
When these players join forces and truly collaborate to offer to the right type of customers the type of product that is right for them, the value chain can become very successful. In a previous article, there is a presentation of the Angus Beef story, which also started in such a way.
In order to be successful, a value chain needs a number of basic elements.
The product must indeed differentiate itself by recognizable and superior physical characteristics. Over time the mystique will be created, but do not expect to sell hot air for very long.
The partners need to indeed be partners and play together. This is a critical part of such a joint venture. The worst thing that can happen is a lack of commitment, or worse one of the partners trying to force his own agenda before the common interest. The most successful partnerships come from a balance of power between the parties involved, and also by the necessity of interdependence, as they all should miss – and not be able to easily replace – the other parts of the puzzle.
Another key element is the will to pursue, as very often, and mostly in the early stages, the progress will meet many setbacks. This discipline needs to be applied and someone must fill this role, to constantly enforce the quality specifications and all agreements that are need and made to make the value chain succeed.

Copyright 2009 The Happy Future Group Consulting Ltd.

Recycling and cleaning: the economic drivers of tomorrow?

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Here is an article I wrote a little more than a year ago.

With an increasing population, years of throwaway goods consumption, landfills full of garbage, the pollution of our drinking water reserves and a deteriorating of our air and atmosphere, there is no doubt that our survival will largely depend on our ability to clean and to recycle the waste we produce.

The recycling business has already been developing for quite some years already and the next step should be an increasing part of their products and services as the main source of raw materials for many industries.

What indeed would be the point of trying to get resources in more and more difficult conditions and at higher and higher costs and with more and more energy use while we are sitting on a mountain of metals, plastics, glass, wood, paper, etc… Those are available in many places literally in the open air. The raw materials for the raw materials industries are there. All it takes it to sort them all.

This potentially offers many jobs opportunities as the value of this waste will increase as a result of a growing population’s demand. More machinery will also become necessary to handle this waste in a faster and more importantly safer manner. Images of kids browsing on landfills in order to get a miserable income to feed their siblings and parents are not acceptable, and I bet that one day they will do this in better conditions and for decent wages, as we will have grown from a waste gathering approach to a structured and systematic waste treatment and recycling.

Down this chain, new industries will develop in the area of processing the sorted waste. Some will have as a function to clean, others to recover the main raw material, and others to transform it into semi-finished products or even reprocessed into finished goods. Most of such industries already exist, either as active waste processors or as goods producers that will over time have to adapt and just change the origin of their raw materials and use recycled products instead of “first production” raw materials.

The other main area of need is water treatment. More and more of our water reserves are being polluted by increasing industrial activity and by more intensive agriculture and animal husbandry. In many areas, water is no longer suitable for infants as the mineral content has reached dangerous level.

The level of pollution has created a strategic need to insure health and safety, and thus preserve the sustainability of the populations depending on these water supplies.
A growing need is in sight for water treatment facilities, either for large scale centralized ones as also for smaller scale even individual local solutions. Further, industries will need to provide us with more solutions on how to use less water. There already are many systems on the market to reduce water use in kitchens and toilets. Although, these systems have brought some solutions and relief, more must be done.
Just to name one example, I would like to make you think on how ridiculous, and therefore unacceptable, the amount of water that we flush in the bathroom every time compared with the amount of liquid we produce when we visit those premises. Clearly, this is out of balance, and imagine that by saving a gallon of flush water a day, we save more than our individual need for drinking water!

Copyright 2009 The Happy Future Group Consulting Ltd.

Have we lost touch with Nature?

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Our species has shown a tremendous capacity to understand its environment and develop all sorts of tools to thrive on Earth. Without a doubt, this is one of our greatest achievements.
Yet, this success might have brought one major drawback: because we have been able to overcome many of its challenges, we have lost the sense of how much we are connected to Nature.
We tend to take all our achievements over Nature for granted. For example, we can fly (in planes), we can swim underwater (with scuba diving equipment), or eat tomatoes all year round (thanks to greenhouses and artificial lights and climate). We just seem to forget that all of that is the result of tools and techniques that we have developed, but that are fundamentally linked to Nature providing all the components for us.
What worries me the most is that many people in the industrialized world have lost that connection.
It is simply stunning to read reports from polls among the city youth on food. When asked where meat comes from, they answer: from the supermarket. Many kids just do not realize that milk comes from cows, they do not make the connection between eggs and hens, and they do not even want to think that in order to eat meat, you have to kill an animal, which means lots of blood. No, they live in a world where they only want to consume.
Another absolutely stunning example of that disconnection came across to me on the street: a young mother (I realized her status a bit later) was loading stuff in the back of her car, while the car was running, spitting its amount of nasty fumes in her direction. I thought then: gas is too cheap since you let the engine run while doing something else. And then, there it was! When passing by the rear end of the car, I saw the buggy with the infant inside, next to the mother and just opposite to the exhaust pipe, breathing in his full load of toxic gases. Clearly, that woman has no clue of what a combustion engine produces. Just an isolated case, you may think. Well, recently and with the colder mornings, I can witness the army of those early morning windshields scratchers having their engines running, and filling enthusiastically their lungs with the fumes. Then, no wonder that some people smoke, when it says in bold letters on the package that tobacco kills them.
The funny part of all of this is that I live in a neighbourhood where there are more stores selling all sorts of organic stuff than there are butterflies. Yes, people around here are very environmentally conscious, which, by the way, I have never been able to link so far with the huge amount of SUV’s driving around.
These anecdotes just tell me one thing: we have lost touch with Nature, and I believe more and more that we will not wake up until we get punched in the nose really hard. What does not kill us, we have chosen to ignore. I am not too sure if that makes us stronger, though.
So, what to do to get back in touch with, and more importantly have the proper respect for Nature?
In my opinion, it can only come from education. Our curriculum should include a lot more of activities in which kids have to interact with Nature, and be able to physically experience it. Moreover, this should not be happening in school only. The kids and families should get assignments together as part of the education process, because many parents also need to get the basics taught to them as well. Education is the only voluntary way towards changing our lifestyle. And lifestyle is the key here. We are resisting the change because, let’s face it, our lifestyle in the industrialized world is very comfortable.
Rediscovering agriculture, working on farms, harvesting crops, dealing with farm animals, experiencing seasons and natural cycles, going fishing and hunting, learning on how to make bread, presenting in class full reports of their home energy consumption and energy saving tactics, calculating the carbon balance they produce, are just some examples of education topics that could help us reacting to the total lethargy that has been hitting us over the past few decades. We can preserve only what we know, understand and respect. It is all interconnected. If we do not respect Nature, then how can we respect others? It seems fairly obvious that if we just take from the Earth and do not give back (and on time), the “cookie jar” is going to run empty. In the end, nature is all about balance.

Copyright 2009 The Happy Future Group Consulting Ltd.

The Great Unseen Land Grab

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Interesting article from The Economist on how some countries are already organizing and securing their food supplies for the future. Major political-economic chess game in the running.

Buying farmland abroad – Outsourcing’s third wave

It connects quite well with my previous article about Jim Rogers buying land in Canada and Brazil.

And it also connects well with the move made by the Canadian investment firm Sprott Asset Management to secure a land lease of a million acres in partnership with First Nations on the Canadian prairies to grow crops as an investment in agricultural commodities.

Mergers in agribusiness are building strategic economic blocks of tomorrow

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Only yesterday, two major mergers took place in the agribusiness world.
In Brazil, Sadia and Perdigao will now form the world’s largest poultry producer, as the new company is larger than Tyson Foods. That is not nothing.
In Canada, Viterra, formerly Saskatchewan Wheat Pool is acquiring the Australian ABB Grain.
As there is a growing awareness that agricultural commodities will play an increasing economic role, we certainly can expect more of such mergers & acquisitions.
With larger and more powerful players in the agribusiness, we will see a lot of strategic realignment and shift to gain more control in teh food production chains.
This will not only have an impact at corporate levels as well among suppliers as among the distribution and the retail, but this will also reshape the world map of the politics of food.

We saw two possible strategies here, although of course not new. One is the creation of a national giant in an emerging country with great ambitions as a major economic player in general and in agriculture in particular. The other is a multinational player specialized in their own specific industry, but now active in two very critical production areas.

Copyright 2009 The Happy Future Group Consulting Ltd.