"Honey and Bread: An Evolutionary Story"

Fascinating essay on plant defenses against herbivory (previously) by Mr. "Elite Overproduction", Peter Turchin.

[P]lants are constantly waging chemical warfare against most animals. There are zillions of animals that love eating plants, and plants really resent it. I can kind of relate to that, because my wife, who is an avid gardener, hates herbivores with a passion (especially when she finds in the morning that deer ate her favorite hostas).

Plants cannot take up a Kalashnikov and start shooting herbivores, but over the millions of years they’ve been evolving increasingly effective methods of protecting themselves against herbivory. The most effective way for them to fight back is by chemical warfare.

This would be why De Vany calls bread "poverty food".

Review of Enriching the Earth: Fritz Haber, Carl Bosch, and the Transformation of World Food Production by Vaclav Smil

Very typical of Vaclav Smil, we have Enriching the Earth, about the Haber-Bosch invention of synthetic nitrogen fertilizer, which was once the "holy grail of synthetic inorganic chemistry." He calls it the most important invention ever because the fixation of nonreactive, atmospheric, molecular nitrogen into usable form is alone what has allowed the world to swell to seven billion people.

Leibig's law of the minimum says that plant growth is limited by whatever substance is present in the soil in the least adequate amount. Many times, this is nitrogen, which is why most of the world's civilizations independently discovered intercropping of legumes in order to add nitrogen to soil, as early as 12,000 years ago.

Liebeg described agriculture's principle objective as "the production of digestible nitrogen," and as a 19th century chemist noted, "every vital phenomenon is due to some change in a nitrogen compound and indeed in the nitrogen atom of that compound".

But nitrogen was very scarce for humanity, because plants cannot use atmospheric nitrogen, and the only technology for increasing soil nitrogen was the symbiotic nitrogen fixing bacteria associated with legumes. The result was that the nitrogen cycle had to be kept very tight, with nitrogen wastes being returned to the soil, and even going so far as to harvest nitrogen-rich seabird guano from islands off the coasts of South America. There was federal legislation enacted in 1856, the Guano Islands Act:

"Whenever any citizen of the United States discovers a deposit of guano on any island, rock, or key, not within the lawful jurisdiction of any other Government, and not occupied by the citizens of any other Government, and takes peaceable possession thereof, and occupies the same, such island, rock, or key may, at the discretion of the President, be considered as appertaining to the United States."

In 1910, Fritz Haber developed a process for making ammonia (which can be used for fertilizer, or to make explosives) that would scale. The reaction N₂ + 3 H₂ → 2 NH₃ uses an iron-based catalyst and extremely high temperature and pressure, which together overcome the strong triple bond holding the molecular nitrogen together.

The hydrogen for the reaction generally comes from natural gas, although if you have surplus electricity from wind or hydro or solar, you could make it by electrolysis of water. But apparently less than 5% of world natural gas production is used to make fertilizer, so there is no immediate need to worry about alternate supplies.

Depending on your theory of simultaneous invention, many people may owe their existence to Norman Borlaug and to Fritz Haber.

Another funny thing to think about is that given the ubiquity of nitrogen fertilizer in agriculture, and that the human body is 3% nitrogen by mass, everyone is carrying around a hefty slug of nitrogen atoms that streamed over a catalyst at an ammonia plant!

3.5/5

Some other Vaclav Smil books look interesting.
Prime Movers of Globalization: The History and Impact of Diesel Engines and Gas Turbines
Energy Transitions: History, Requirements, Prospects
Energy in Nature and Society: General Energetics of Complex Systems

Update on Ceres Global Ag Corp: Building The Northgate Commodity Logistics Hub $CRP

Press release:

"Ceres Global Ag Corp. (TSX: CRP) announces that it has received equity and debt financing proposals to advance the construction and development of the Northgate Commodity Logistics Centre. The major aspects of the proposals include: 1. an offering of rights to purchase common shares for gross proceeds of C$70 million. VN Capital Fund C, LP, a limited partnership controlled by the two principals of VN Capital Management, LLC, James Vanasek and Patrick Donnell Noone, and funds managed on behalf of Whitebox Advisors, LLC, have announced their intention to fully backstop the rights offering."

Ceres is up 40% since it was mentioned here in December 2011. Here's the current business description:

"a Grain Storage, Handling and Merchandising unit, anchored by its 100% ownership of Riverland Ag Corp., and a Commodity Logistics unit, containing its 25% interest in Stewart Southern Railway Inc. and its development of the Northgate, SK Commodity Logistics Centre.

Riverland Ag Corp. is a collection of nine (9) grain storage and handling assets in Minnesota, New York, and Ontario having aggregate storage capacity of approximately 47 million bushels. Riverland Ag also manages two facilities in Wyoming on behalf of its customer-owner. Stewart Southern Railway Inc. is a short-line railway with a range of 130 kilometres that operates in South-eastern Saskatchewan. The Northgate Commodity Logistics Centre is a proposed $96 million grain, oil and oilfield supplies transloading site being developed in conjunction with Riverland Ag and several potential energy company partners, connected to BNSF Railway."

The way you make money in grain storage is to buy grain, store it in your elevators, and sell it forward. In order to be profitable, that strategy requires the futures market to be in contango: future prices that are higher than the spot price. And in order for the market to be in contango, there needs to be a glut of the commodity. Basically, the grain storage facilities get paid the most when there is a lot of commodity to store, which makes sense.

When we wrote the 2011 post, corn and hard red spring wheat were both in backwardation - future prices lower than spot prices. That has changed and now corn and wheat are in contango. Dec 15 corn is 14% more expensive than Dec 14 and the wheat is 10% more expensive. There ought to be some money in storage now.

I don't know much about the grain storage business, but Ceres has 48mm bushels of capacity. I would think the economics are that you could buy and store say $160mm worth of corn and sell it a year later for $183mm, for $23 million in profit minus financing costs. But in their investor presentation, their 2014 EBITDA projection for the Riverland segment is $2.6mm. Of course, it's only recently developed that grains are in contango again.

The Stewart Southern Railway is a Bakken play. They own 25% of it, it does 40 railcars a day full of oil, $5.8mm annual EBITDA. Ceres' original investment in the SSR in December 2010 was $1.7 million for its 25% interest. So they picked a very high rate of return project once before.

Neither the SSR nor the Riverland segment seem like that much earnings power for a company with a $100 million market cap. So what do VN Capital and Whitebox see here? Maybe it's the company's Northgate project,

"We are in the process of constructing a new commodity logistics centre on 1,300 acres of land, located on the border between Northgate SK and Northgate ND, effectively linking Saskatchewan’s resources to the U.S. Midwest. The Northgate Commodity Logistics Centre is designed to utilize high-efficiency rail loops, capable of handling unit trains of up to 140 railcars. The site will initially contain a grain handling and shipping facility, followed by the construction of an oil and natural gas supply logistics centre to facilitate exports from Saskatchewan’s and Western Canada’s energy sector. A frac sand, pipe and cement unloading centre will be added to bring these products in from the United States to service Western Canada’s energy industry."

This could be interesting. Here's a map of where the Northgate project will go:



That looks like a good place for a rail link. Here's what they say about the cost:

"an additional investment of approximately $112 million over the next 3 – 5 years, is required for NCLC to reach full capacity including a 2.2 million bushel grain elevator, 7 2 ,000 barrels per day of oil capacity and 29,000 gallon per day in natural gas liquids capacity. Within th is budget, approximately $35 - 40 million is required to complete the first phase of the project which would enable the movement of grain, oil and natural gas liquids."

In the investor presentation, management thinks that the Northgate grain operations could generate $3.8 million in EBIT and the oil and NGLs over $20 million in EBIT.

Here is what VN Capital said about Ceres in their investor letter,

"Formerly an agriculture sector closed-end fund, Ceres is now a fully-fledged operating company with grain elevators and storage and processing facilities in the US and Canada. Last quarter we said that we would likely have more to say in 2014 regarding our investment in Ceres. We certainly do. In one fell swoop in June, we purchased 7% of the entire company. Like any other investment we make, this investment is grounded in fundamentals and is based on the opportunity to realize long term value. This situation, however, is different in that it puts us in a position where we, as the largest owner, can contribute meaningfully to the direction and pace of developments at the company, and we have wasted no time. After many years of incoherence, mismanagement and, most importantly, a lack of vision, Ceres is now moving ahead aggressively to resurrect its legacy grain business as well as build out its greenfield Northgate Commodity Logistics Hub on the North Dakota/Saskatchewan border. This last project is an enormous opportunity, the likes of which is not normally available to an investment vehicle such as the Partnership, which is why we have been aggressive in devoting capital as well as time and energy to Ceres. We have an exceptionally talented Board of Directors that is up to the task, and, although a lot of work remains to be done, we expect that Ceres will turn a corner at some point to become a meaningful contributor to the Partnership’s future returns. Our holdings of Ceres represent 11.1% of the Partnership’s assets."

They also discussed it in Value Investor Insight (this was in 2012, before some of the recent significant changes to the business,

"The backstory here is that Ceres was formed in late 2007 by Front Street Capital to invest in the then-hot agricultural commodity boom. Within a year those markets crashed as the recession hit and management shifted focus to hard assets with the purchase of a dozen privately held grain elevators from a Minnesota-based hedge fund manager, Whitebox Advisors. In 2011, Ceres announced it was going to run off its investment portfolio and reinvest the cash into similar operating assets. As we studied grain elevators, we concluded the business was similar to that of the cement business, where we’ve invested with some success before. There are high fixed-cost assets, with a good that is fairly low in value but bulky and expensive to transport. That allows cement companies to have natural monopolies near their plants because it’s a lot cheaper to buy cement from the guy who’s 10 miles away than 200 miles away. The same thing applies with grain elevators, but kind of in reverse. If you’re a farmer, it’s a lot cheaper and easier to transport your grain to the elevator that is very close than one that’s far away. In these situations it comes down to what you pay for the fixed assets – the lower the price, the higher your return. In Ceres’ case, we believe we were able to buy those fixed assets for free.

The current market cap is around C$83 million. Using year-end March numbers, reflecting a full harvest season, Ceres had around C$40 million in cash and run-off investments. It owned C$160 million worth of grain in its elevators, against which it had C$80 million of debt. At the fund level there was also another C$40 million in debt. So for less than C$5 million at today’s price, you’re getting the grain-elevator assets and the profits they generate. It recent years those profits have been as high as C$12 million, with an average of around C$8 million. Discount that average annuity at 10%, and that’s C$80 million in value right there.

One significant thing happened in the third quarter of this year, which is that the Canadian Wheat Board officially lost its monopoly to purchase Canadian wheat. That opens up a significant new base of potential customers for Ceres’s assets, many of which are located in the U.S near the Canadian border. The business will continue to fluctuate somewhat based on weather and crop yields, but the new demand should have a positive long-term impact on both capacity and pricing. Another upside we see here is that as the non-elevator portfolio is sold off, there will be no need for Ceres to maintain its closed-end fund structure. Savings related to that could add another C$2 million or so annually to the bottom line."

The company looks worth keeping an eye on.

"How Are Farmers Making Money Off of 15 Beef Cattle?"

Interesting question:

Where I live, along a semi-rural route, you can see any number of smallholdings 10-30 acres with about 10-20 cattle standing on them (often sharing pasture with a couple of ponies or a donkey). They are generally Black Angus or Polled Herefords, so they are being eaten, not milked. I'm constantly wondering how on earth there can be any economic gain in that arrangement.

I have a few theories:
1) They are raising the cattle for their own use, and sell a few every year to a few friends and neighbors. (10 almost seems too many for that arrangement. I think it takes more than a year for the average family of 4 to eat a whole cow).
2) The animals are fine pedigreed breeding cattle that are sold to other breeders for prices higher than meat prices (although the conditions in which the cows are kept, while by no means inhumane, do not suggest the animals are of particular worth)
3) Somewhere there is a meat cooperative they can sell into (along the lines of Ocean Spray Cranberries).
4) They have a connection to a restaurant or gourmet buyer that is willing to pay extra for grass-fed, free range, never-feedlotted beef.

Review of Seeds of Wealth: Five Plants That Made Men Rich by Henry Hobhouse

Seeds of Wealth: Five Plants That Made Men Rich by Henry Hobhouse is about four wealth generating plants: timber, wine, rubber, and tobacco.

Obviously, these are and have been very important plants, and just as obviously you could argue that a more important plant should have been one of the four, and hence the list is arbitrary. Hobhouse's book written 20 years earlier was about sugar, tea, cotton, the potato, quinine, and the cocoa. Who cares which plants were "most important"; these books are good for adding to one's store of general knowledge.

Here is an interesting passage about wine:

"Wine symbolized stable husbandry. Vines are medium-term investments, not as far-sighted as olive trees but much more is implied by the planting of vines than the clearance of land for cereal production. A vineyard has an economic horizon of at least forty years, as much as a lifetime in ancient times. There was a wait of five years before full production. This meant that an adult man planted a vineyard for his successors, not necessarily for himself, and the sense of stability this involved made vines and wine an essential indicator of a certain level of civilization, of a certain belief in security, of a certain degree of faith in the future."

No one is planting vineyards in Zimbabwe right now. Wine was obviously a dense store of value for trade, and although the lead time for production was high as described above, the value of output per acre of land was ~2 orders of magnitude higher than cereal crops. And vines grow (better!) on marginal, hilly land than on good cereal growing soil!

About 25% of the GDP of the colonies was tobacco production. And the British had to invent the steam engine because they needed a way to pump water out of coal mines, since they had no wood.

The Great Fire in London in 1666 happened right as the country was running short on wood and led to a 10x price increase over earlier levels. Already in 1600 most of London heat was coal, so there was plenty of time to get in on timber before the Great Fire caused the price to spike for rebuilding.

4/5, but worth the penny (!) that a used copy costs on Amazon

Good Comment on China's Pre-Modern Agriculture

y0ungmoney had a good comment on the primitive grain threshing practices described in Country Driving:

"It's amazing that they've gone on a runaway building boom while letting their agriculture stay pre-modern. In a way, I think the Chinese RE bubble is even worse than it looks-- not only are they building mm's of apartment buildings that will never be lived in, in many cases they're building them on fertile land that could have been used for farming. So the RE bubble destroys wealth multiple ways.

It's weird that China and Russia have the same problems- pervasive corruption, an aging population, higher birthrates among sepratist minority groups, etc- yet China is considered a rising superpower and Russia is considered a corrupt has-been. I'm not a big fan of investing in Russia because it's a beneficiary of the China bubble, but there's an obvious disconnect."

Review of Cooked: A Natural History of Transformation by Michael Pollan

Michael Pollan is the John McPhee of the food chain. I've read the first of his books, Omnivore's Dilemma, and Cooked: A Natural History of Transformation looked like interesting airplane reading. Some notes:

• His main idea is that the best predictor of healthy diet is whether people cook their meals at home. Two reasons - control over the ingredients used, and the time/difficulty of cooking as a price that leads to a lower quantity demanded. Also, the most unhealthful items tend to be the most difficult to prepare. Amazingly, a huge proportion of Americans are spending more time watching other people cook on TV than cooking for themselves.
• He surveys what he describes as the four types of cooking: over an open flame, in water, making bread, and fermentation. Another idea (which he has picked up elsewhere) is that these methods of transformation are like an auxilliary stomach; outsourcing digestion. Cooking is technology that gave humans time to spend on pursuits other than chewing and digesting.
• Harold McGee says that onion plant cells contain "a very effective molecular bomb"; the sulfur compounds that are released are a defense against being eaten.
• Michael Pollan probably uses the word synecdoche as much as every other writer I've ever read combined.
• Development of roller milling in the mid 19th century led to closure of millstone grinding flour mills. This sounds like it was probably a disruptive innovation where the roller mills started out inferior - grinding grain with something other than stone would have been perceived at first as low quality. 
• Roller mills were capital intensive, and the flour they produced had a longer shelf life than whole wheat flour, which was a one-two punch that knocked out local flour mills and led to consolidation of the milling industry.
• Roller mills for making white flour work best with hard wheat, but that makes whole wheat flour taste worse.
• An idea I hadn't heard - the microbiome (of bacteria) in the human gut extends the human genome. See from this presentation [pdf]: "Bacteria express glycoside hydrolase which converts glycans into useable sugars. No enzyme encoded in human genome is capable of digesting glycans—only bacterial enzymes." The Japanese tend to have bacteria that produce an enzyme that aids in seaweed digestion!

3.5/5

Permaculture - Forest Farming

I like the figured wood lumber guy! He sounds like a value investor:

"It’s all in the way you cut it, the way you market your product. A lot of things you might find here you wouldn’t think there is a market for, until we produce something out of it."

A Plant With a Clever Business Model

This is Ferocactus wislizeni, one of the barrel cactus family.

pic

"Like Sclerocactus, Ferocactus typically grows in areas where water flows irregularly or depressions where water can accmulate for short periods of time. They are most often found growing along washes and arroyos where their seeds have been subjected to scarification due to water movement, but they oddly also tend to grow along ridges in spots where depressions have formed and can hold water for some period of time.

The 'fishhook' spines and the armored web of spines enclosing the cactus body in many species of this genus is an adaptation which allows the plant to move to more favorable locations. This plant's seeds germinate in areas where water movement occurs or in areas where standing water accumulates for some period of time, and during flash floods, the hooked spines allow the plants to be caught on water-borne debris and be uprooted and carried to areas where water tends to accumulate. Ferocactus has very shallow root systems and are easily uprooted during flash floods."

Mobile! It hitches a ride to more favorable locations.

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!

5/5.

Genetic Engineering for Optimization of Crops

NYT article

"That discovery coincided with a plunge in the cost of DNA sequencing that has allowed SGB scientists to rapidly identify the most genetically diverse and productive plants and crossbreed them. It also lets them pinpoint profitable individual traits and mutations, like heat or cold resistance.

It costs SGB $350 to genetically map a single jatropha line to look for valuable mutations, a price that will drop to $50 in 2014."