Thursday, March 6, 2014

Review of The Farming Game by Bryan Jones

A trusted Credit Bubble Stocks correspondent and gentleman farmer recommended we read The Farming Game. How can you resist a book with observations like this?:

"Rich to a wage freak means having lots of money to spend on himself. Rich to a capitalist means adequate funds to invest in schemes to produce profits that can be invested in other schemes."
That is precisely how the best investors think about money. Someone who finds a $30,000 watch interesting is at a disadvantage compared to a value investor who would rather spend his time and money learning about wealth generating activity.

When farmers engage in status display, they buy farm equipment. Park your brand new Deere tractor with the Integrated Refrigerator Option out front where the neighbors can see it after you take it home. But, at least those are tax-deductible capital goods.

The Farming Game consists of a series of character portraits of the different types of people found in the High Plains farm country: the frugal farmer Ike Grable, the organic farmer, the cattleman (all of whom are apparently crazy), scalpers and traders, land flippers, and so forth. Grable's advice on getting started in farming is that,
"A young guy ought to be able to work a forty-hour week for someone else and have enough vinegar left to work another forty hours for himself."
This reminds me of how Buffett describes Charlie Munger in Snowball,
"Charlie, as a very young lawyer, was probably getting $20 an hour. He thought to himself, 'Who’s my most valuable client?' And he decided it was himself. So he decided to sell himself an hour each day. He did it early in the morning, working on these construction projects and real estate deals. Everybody should do this, be the client, and then work for other people, too, and sell yourself an hour a day."
Grable's advice would be that you should farm part-time (although the second venture obviously doesn't have to be farming) until you can own enough land to farm full-time.

Agriculture is fascinating because it is at the beginning of the value chain, producing new wealth constantly from the sun's energy. The Farming Game says,
"The renewable nature of agriculture is the basic reason why farmers can become wealthy so easily"
The only problem with this logic is that, since farmers buy their inputs retail and sell their outputs wholesale, it is very difficult to make abnormal profits except during temporary price price spikes when you have something like a crop failure to temporarily reduce supply.

Meanwhile, land rents get bid up so that the residual is a minimum wage. Jones calls it "buying yourself a $7,000/year job." He thinks there is somewhat of a barrier to entry in farming because farms are too expensive for most people to buy - people seldom enter agriculture except through inheritance.

Farming also suffers from capital expenditure arms races. Look at this comment on the lowered Section 179 depreciation cap, and the likely results on purchases of farm equipment,
"Today, the $25,000 election will change some decisions. Combine that with lower corn prices and will farmers stop investing? I doubt it. It may slow some choices, but you know that to succeed today you'll need to push the envelope and you can't do that from the back of a 15-year-old tractor pulling a 20-year-old planter. Too much is happening with engineering and technology."
It's like the original Berkshire Hathaway! Your competitors keep investing in new equipment which they think will result in increased profits. Except, everyone's output goes up and the price of the crop goes down. The good news is that it feeds the planet and means that a "commodity supercycle" is just bubble talk.

Thus, the High Plains. Marginal land costs maybe 15% as much as prime land in Iowa and has the same amount of sun - energy - hitting it. The main question is water. Using wind or solar energy to pump from an aquifer is great, if available. Otherwise maybe there's a government boondoggle water project or else being sure to capture rainwater.Within the High Plains approach, we also find that higher rates of return (but maybe less scalability) are in the lower status forms of agriculture, like raising sheep. Apparently, the cattlemen look down on the shepherds.

The lesson of Farming Game is that abnormal returns come from creative approaches - if the competition is chasing X, you move orthogonally and chase Y. If it's "cheaper to rent grass than to own it," as the shepherd observes, you do that.

If you're the Scalper - buying and selling animals - you go to auctions and buy what bidders are ignoring,
"The reason Sherman [the Scalper] has been able to maintain a $50 profit margin through bull and bear is that he is quite capable of sitting on his hands. Blessed with infinite patience, he will wait until his price will buy."
Like a value investor! Farmers are also a lot like shipowners,
"Everyone else does nothing but talk about the very good and rational reasons they have for not doing deals."
And, commodity brokers are like the floor brokers in the Chicago futures markets. To try to get farmers to trade, they try to generate volatility and market moving news: "To avoid stagnation, it is necessary to develop stories." So they cold call farmers with rumors about bugs in Iowa corn to get them to trade grain contracts.

This made me want to buy a 40 and plant some stuff!



whydibuy said...

You totally ignore the incredible amount of petroleum products needed to farm.
Besides the obvious gas for tractors and trucks, most all fertilizer and pesticides come from fossil fuels. In the documentary Crude Awakening, they talk about the direct correlation between the calories you eat and the amount of it that comes from petroleum. Its actually like you eat oil, in an economic sense.

Farming is quite capital intensive and highly leveraged. Get a good season and you win big but you can also spend a bundle on a failed crop and go bust.
My read of farming is that it is more and more becoming a scale business. You'll need 1000 acres, not 40, to produce enough to make it worthwhile.

Stagflationary Mark said...

Meanwhile, land rents get bid up so that the residual is a minimum wage. Jones calls it "buying yourself a $7,000/year job." He thinks there is somewhat of a barrier to entry in farming because farms are too expensive for most people to buy - people seldom enter agriculture except through inheritance.

$1 Million Medallions Stifling the Dreams of Cabdrivers

“Like a lot of the economy, the taxi industry has become a winner-take-all industry where the profits at the top are very large and the wages at the bottom are grindingly low,” David S. Yassky, the city’s taxi commissioner, said in an interview.

CP said...


Great example! I wonder what the cap rate (rent/cost) on a medallion is?

Also, I bet if there were no medallions then a TON of cabs would flood the market, and the cabbies STILL wouldn't make much money.


CP said...

I said in the post that the only abnormal profits in conventional farming happen during "good" seasons, and otherwise it's a Red Queen race.

By the way, a "good" season it one where your competitors' crops fail and you still have some.

Anonymous said...

There ARE no medallions:

Stagflationary Mark said...


By the way, a "good" season it one where your competitors' crops fail and you still have some.

I think this theory at least partly describes the USA as a whole.

We had a very "good" manufacturing season during World War II. Our competitors' manufacturing "crops" were bombed and ours were mostly left untouched.

Unfortunately, many seem to think that we can repeat that great success in the future. I have my doubts. How many of Detroit's manufacturing plants are now growing actual plants?

Oh, the irony. Sigh.

Stagflationary Mark said...


From your link:

"It's like a car crash - you can't look away," says Hansu Kim, owner of DeSoto Cab Co.

My blog resembles those remarks. Sigh.

Anonymous said...

Nice review--I give it a 5/5.
Pastoral systems like grass fed beef are not fossil fuel intensive. Ruminants grazed on a well managed system of multiple paddocks to ensure that the pasture is not overgrazed are acutualy beyond sustainable and are regenerative to the land. These types of systems can have a good ROI to the farmer as money is kept in livestock that are increasing in value as they get heavier rather than heavy equipment which is always depreciating.

Anonymous said...

Anon, what kind of calories/acre come from free range cattle operations? How does that compare with industrial corn growing? I'd imagine it's much less given the efficiency loss from animals converting grass to weight alone.

CP said...

Mark - good point about the WWII manufacturing "season". Maybe that's exactly what happened?

Stagflationary Mark said...


Maybe that's exactly what happened?

It certainly helped! Would we be where we are today if our manufacturing plants had been bombed as much as others in WW2? Or worse, what if we'd have actually lost the war?

We should be very thankful that we have oceans to the east and west of us and friendly neighbors to the north and south. I believe it gave us a great advantage. Still does.

That said, the new "war" is global economics. Based on our massive trade deficit, one could argue that the war isn't going all that well for us.

On the other hand, we send China "easy to print" paper dollars for "harder to manufacture" physical goods. In that sense, perhaps we're winning (at least temporarily). Sigh.

Anonymous said...

Not to deviate too much from the farming topic- to answer your question on the cab thing...

As a back-of-envelope analysis, if we (1) say it's an even $1MM for the medallion, (2) use the 40% LTV that Medallion Financial claims, (3) assume 7K/year depreciation on the car, (4) assume 10% downtime / off-lease time per year, (5) and assume the gross potential lease revenue is ~82K per year (as seen in article linked), and (6) assume an administrative (dispatch, etc) charge of 10% of revenue (8K per cab - this one is a straight up guess). Then...

Revenue = 74K
Op Exp = 8K
Deprec = 7K
Op Inc = 59K (80% OPM) - so a ~6% cap rate on the $1MM all-in
Int Exp = 15.6K (3.9% on 400K)

Net Income = 43.4K (59% NIM)
ROE = 7.2% on 600K of equity.

Or in other words, if someone offers you $1m for a cab medallion - hit it. You can mess around with the numbers, but given my limited political analysis skillset, with Uber/Lyft etc. etc., I would be wary of the sanctioned cartel model standing as permanently and profitably as the prices seem to imply they will.

CP said...

Nice, thanks for the calculation.

CP said...

I was just reading that the NYC taxi medallions have plateaued at $1mm.. People hitting bids?

CP said...


CP said...