Sustainable Approaches to Reducing Food Waste (Continued)

The following is a guest post from my good friend and former research colleague Paul Artiuch. Paul and I previously conducted a research study focused on market-oriented approaches to reducing agricultural food waste in India. Paul has since conducted some comparative research in the US, which he describes below. Our original research, including our report and the associated blog posts, can be found here as well as on the MIT Public Service Center website.

Over a year ago, my colleague Sam and I researched and documented breakdowns in Indian agricultural supply chains in order to provide insight into a problem which costs India around 40% of its annual output.  Since then, we’ve been in contact with entrepreneurs, researchers and the media who are looking for ways to tackle this problem.  We have also continued to study this issue globally, albeit in our spare time, and wanted to provide a brief update contrasting the Indian and U.S. systems.

The issue of food waste isn’t unique to India, or even to developing countries, but rather a global problem which needs urgent solutions.  Even in America, nearly half of all purchased food is thrown out, wasting roughly $165 billion per year.  But the nature of the problem in America is different than that of many developing nations – Indian waste occurs upstream of retail markets while in the U.S. most of the food is thrown out by consumers.  In fact, the upstream food supply chains in developed nations such as the U.S. are remarkably efficient.

I had a chance to see this first hand, as part of my work with the Commodities and Energy team at Thomson Reuters, during a visit to a large U.S. agricultural Coop.  The operation provided a contrast to what Sam and I saw during out trip through the agricultural belt in Northern India.

Last week I spent a few hours driving around Elburn Coop’s facilities with my host Mike who manages one of the Coop’s locations.  Elburn serves, and is owned by, a few thousand mostly corn, soybean and wheat farmers in northern Illinois.  Each year Elburn handles roughly 40 million bushels, which is about 1 million metric tons of grain.  (In 2012, U.S. production was 479 million tons while India harvested 231 million.)  The Coop does much more than buy and store grain for farmers.  It also sells seed, fertilizer and fuel, provides credit as well as transportation and has a fleet of high tech agricultural machinery.  It’s basically a one stop shop for farmers.

Mike told me about the Coop’s operations and gave me a tour of the facilities and surrounding countryside.  Thinking back to our research in India, a number of differences were apparent:

-The size of the operation, both the storage facilities as well as the farms.  Mike’s site can securely store 6 million bushels of grain and the average size of a farm in the area ranges from 1000 to 1500 acres.  Even the largest storage depots we saw in India were one tenth that size and an average farmer works only a few acres.

-The enormous investment in capital equipment.  A grain storage silo which can hold 750,000 bushels costs $1.3 million.  Mike had several of these at his site.  The machinery – planters, fertilizer spreaders, sprayers – typically cost a few hundred thousand dollars each.  Outside of a few exceptions closer to the major cities we saw very little advanced machinery or large scale storage in India.

-The public infrastructure, including roads, ports and railways.  The U.S. has the most roadways, railways and airports out of any nation in the world.  It also has well developed waterway and port infrastructure.  This helps get goods to market, or export, quickly and efficiently.  While India has a surprisingly well developed road network (#2 in the world) the quality is often poor.  Similarly, the rail network is fairly extensive but highly overcrowded, making overland transportation time consuming, unpredictable and expensive.

-Commonly available financial tools to manage risk.  Mike mentioned that by law, his Coop had to hedge 100% of their grain in order to eliminate the risk from price fluctuations.  Similarly, the Coop’s farmers have access to derivative products such as options and futures through a network of brokers.  Mike mentioned that most farmers would take advantage of these tools in some way.  While in India, crop insurance is commonly available, we did not come across the use of any derivatives that help smooth out incomes, especially at the farmer level.

-Availability and reliability of information.  The Coop office had a direct feed of the latest commodity prices from the financial exchanges on a wall mounted flat screen.  Everyone in the office had access to at least basic price quotes, government production figures, weather forecasts and agricultural news at their fingertips.  Same goes for farmers who use a range of mobile and desktop devices to access data that helps them make critical decisions on where and when to sell their crops.  This perhaps is the most stark difference from India where many farmers have no way to assess prices outside of visiting the local mandi (market) and there is little reliable news or fundamental data.

Some of these gaps will be narrowed as India develops its infrastructure as well as financial markets and continues to expand rural access to information through mobile networks.  However, a few key differences will persist and will need to be incorporated into the modernizing Indian food supply system.  These include:

-The necessity of the agricultural system to not only provide food but also employment for hundreds of millions of people.  The U.S. system employs a fraction of the labor of the Indian one.  Mike, for instance, has 23 full time employees at his site who look after the storage infrastructure and machinery for the 6 million bushel facility.  Some employment for rural Indians will be created through investment in infrastructure or with the expansion of the rural financial system.  However, many will still need to find jobs in the millions of small farms that dot the Indian countryside.

-The necessity for food prices to remain low enough to be affordable to the ~68% of the Indian population living on less than $2 a day.  This results in the involvement of the government in everything from farm subsidies to price controls and food distribution programs.  These programs will likely need to continue.  However, with prices of staples costing 2/3 less in India than in the U.S. , the economic viability of capital investments, whether for yield improvement or waste prevention, is hard to achieve.

There are a few elements of the U.S. system that, with time, will likely emerge in India – access to information and public infrastructure are two of these.  However, ultimately the country will have to create its own model for a food supply system that limits waste, provides employment and keeps food prices low.  We will continue to study this issue.

1 2 3 4 6 5

Rules of Investing

Barry Ritholtz has a great list of investing rules, originally posted in two parts with descriptions in the Washington Post here and here. He recently reposted the consolidated list on his blog, The Big Picture, and it’s too good not to share. Every investor has their own process and decision-making rule set (or at least should), and while there’s no one approach that’s right, there are plenty that are wrong.

Barry’s rules, at least in my opinion, are effective guides to help avid common mistakes and pitfalls. They’re broad enough that I think they’re applicable to investment activities ranging from managing a personal 401k or IRA all the way up to running a hedge fund or advisory firm. At the risk of upsetting his attorneys*, here’s the list:

1. Cut your losers short, and let your winners run.
2. Avoid predictions and forecasts
3. Understand crowd behavior.
4. Think like a contrarian (but don’t always act like a contrarian).
5. Asset allocation is crucial.
6. Decide if you are an active or passive investor.
7. Understand your own psychological make up.
8. Admit when you are wrong.
9. Understand the cycles of the financial world.
10. Be intellectually curious.
11. Reduce investing friction.
12. There is no free lunch.

The most common question people ask me about investing is whether I think the market will go up or down over a certain period of time. My answer is always that I have no basis to know, and anybody who says they do is either lying or breaking the law (or both). Barry’s rule #2 sounds simple, but it might be the most important one to me. There’s a big difference between making thoughtful investment decisions based on an understanding the current market environment, and basing investment hypotheses on some (misguided) belief that you have a unique ability to predict the future. Sometimes speculators get lucky, but over the long-run it seems that speculating is generally not a very successful strategy.

*I once quoted a post from Barry’s blog (with proper citations and references) and got a slightly threatening, but lighthearted email telling me that I was violating their intellectual property rights, and that I should take the post down and never do such a thing again. To me, quoting someone else’s blog is usually a nice gesture. We’ll see what happens this time.

Great Investing Advice

Many people often ask me for investment advice, usually with questions about individual securities. I generally don’t like to respond to these questions for two reasons.

First, I believe asset allocation is the single most important decision in the portfolio construction process. For this reason, I like to evaluate investments in the context of a diversified portfolio, not in isolation. There are always exceptions, sometimes for good reason, but I try to avoid them.

Second, I can’t predict the future, and anyone who claims to be able to do so is lying. I have opinions on which companies, markets, and sectors appear to offer favorable opportunities, but if you ask me if a particular investment is going to go up or down in a particular timeframe, I won’t answer because I don’t know. And nobody else does either.

With that in mind, Barry Ritholtz published a post with his rules of investing this morning, and they’re very much in line with my own personal investment process. For any readers who are interested, here’s Barry’s list:

“1 Cut your losers short and let your winners run: Perhaps the best investing advice ever, its sophistication is belied by its apparent simplicity.

Letting your winners run generates all sorts of desirable outcomes: It allows compounding to occur, gives you the benefit of time and keeps your transaction costs, fees and taxes low. Since this rule does not allow you to take a quick profit for no reason (other than having one), it also forces you to develop an actual exit strategy.

Similarly, cutting your losers short forces you to be humble and intelligent. It rotates you away from the sectors and stocks that are not working. Best of all, you are forced to admit your own fallibility — crucial for all investors.

Avoid predictions and forecasts: Humans are very bad at guessing what the future will bring. The academic literature overwhelmingly proves this.

If you prefer anecdotal evidence, recall how many economists forecast the Great Recession (almost none), the initial reviews of the iPad (mostly panned) or even the iPhone (meh!).

For your own investing, you should ignore other people’s forecasts. And you should avoid making any yourself. Why? Because when investors make forecasts they focus more on being right than making money. They unconsciously shift their portfolio toward their predictions rather than what is occurring in the markets. This is a recipe for disaster. Consider how many people completely missed the huge rally since the March 2009 lows, mostly because of forecasts of another crash. They were rooting for their prediction, instead of spotting the opportunity.

Understand crowd behavior: The investor who understands the behavior of crowds has an enormous advantage over one who doesn’t. He understands that investing often involves figuring out where the crowd is going, even if it’s objectively ”wrong.” Recall Keynes’s theoretical beauty contest, where players were not trying to pick who they thought was prettiest, but rather, select who they anticipated the crowd might pick.

Investing isn’t necessarily a process of picking the “best” asset class, sector or stock, but rather, selecting what the crowd is buying. Investors sometimes forget that, most of the time, the crowd is the market. (You can take advantage of this by, as Rule 6 suggests, becoming a index investor).

The psychology of crowd behavior is such that higher prices attract more buyers — and lower prices create sellers. Fear of missing a rally is a powerful element; fear of losses is even stronger.

Think like a contrarian: The crowd can be fickle, overly emotional or even irrational. The contrarian learns to recognize when the crowd turns into an unruly mob. When that happens, it’s time to stop betting with the group, and take the other side of the trade — betting against the crowd.

Most people accept conventional wisdom at face value, tend toward widely accepted social mores and are uncomfortable being a lone voice of dissent. There is an evolutionary reason for this: Humans are social animals, and we have evolved to cooperate with the members of our tribe and to work with the group.

But there is a qualitative difference between what the majority of rational-thinking market participants are doing and the reflexive, panicked behavior of an unthinking mob. The true contrarian can tell the difference between a crowd and a mob, a market rally and a bubble. The tricky part is the timing.

Asset allocation is crucial: What is your relative weighting of stocks, bonds, real estate and commodities? In the popular finance media, this gets little attention. Yet all of the academic studies show that it’s the most important decision an investor makes. It’s far more important than stock selection, yet that’s all anyone seems to want to talk about.

As we noted last summer, “Stock picking is for fun. Asset allocation is for making money over the long haul.” The world’s greatest stock picker would have gotten shellacked in 2008; the world’s worst stock picker made a ton of money in 2009.

The weighting you select for various asset classes is a function of such factors as your age, income, risk tolerance and retirement needs. It is what serious investors focus on.

Are you an active or passive investor: For the equity portion of your allocation, you must answer a crucial question: Do you buy indexes and garner market-level returns, or do you pick stocks (or sectors) and time the market in an attempt to beat the indices?

Those who try to beat the market have a tough road ahead: Each year, 80 percent of professional managers fail to beat their benchmark. Of the few who do, once you take fees and costs into consideration, less than 2 percent actually hit that bogey.

If you want to beat the market, understand the long odds that are working against you. That is why for most investors, indexing is a much better bet.”

All very good advice.

Shades of Green

World's most trusted travel advice®TripAdvisor has gone public:

Eleven years after it began life above Kosta’s Pizza in Needham, and seven years after it was acquired by Barry Diller’s InterActive Corp. for about $200 million, TripAdvisor is finally gaining a NASDAQ listing of its very own. The company starts trading tomorrow under the symbol TRIP, and it will also be included in the Standard & Poor’s 500 index.

I briefly worked for TripAdvisor one summer when I was an undergraduate. It was a great place to work. One anecdote always stuck with me. I don’t even know if it’s true, but I heard it from at least two people while working at the firm. The CEO, Steve Kaufer, supposedly hates the shade of green that’s used in the company’s logo and in all the website menus. But the color consistently tested well in focus groups, probably because it’s well differentiated from Kayak Orange, Travelocity Navy, Orbitz Baby Blue, and Expedia Yellow. So he went along with it, even though he hated the firm’s color scheme.

S&P Goofs Up Again

Via Kid Dynamite:

Just in case you missed the most ridiculous story of the day – the BBC has the details:

“Standard & Poor’s accidentally released a message to some of its subscribers on Thursday saying that it had downgraded French debt from its top AAA rating.

S&P said it was investigating what had gone wrong and stressed that France still had an AAA rating.”

So, Europe is a veritable powder keg right now waiting to blow, and S&P accidentally releases an erroneous message that they downgraded France.  Then they said sorry.     I’m half surprised that markets weren’t down even more this morning.

Beyond absurd.


My Favorite Economic Dashboard

An update of one of the simplest and most useful economic dashboards I’ve seen. You need to click through, but take a quick look:


I would still love to see a dynamic version of this, updated daily. It’s not quite as relevant as it could be when it’s released June 22nd with data as of May 31st. Nonetheless, I like it.

MIT C-Bonds!

MIT Issues Rare 100-Year Bond:

The Massachusetts Institute of Technology came to market Wednesday with a $750 million taxable bond offering maturing in 100 years, according to people familiar with the deal.

Bonds of that length are extremely rare, although universities–including Yale and Boston University–have issued so-called ‘century bonds’ in the past.

With interest rates near all-time lows, ultra-long-term debt is a favorable option for issuers; and with risk premiums between 10-year and longer-dated debt narrowing, borrowers, especially AAA-rated ones like MIT, can fund themselves cheaply over extended periods.

Pricing offered on the MIT deal as of its launch Wednesday was 1.30 percentage points over 30-year government bonds, according to the people familiar with it. That was lower than initial talk of 1.50 percentage points over Treasurys, and it translates to a yield of around 5.6% based on the old 30-year Treasury now yielding 4.32%.

The Cambridge, Mass. university was authorized to sell between $500 million and $750 million. Proceeds are targeted for campus renovations, as well as on-campus academic and research-related capital projects, said Nathaniel Nickerson, a spokesman for MIT. He declined to comment on the pricing.

The deal is attractive to pension funds and life insurance companies who need to match their asset portfolios to their long-term liabilities, especially since there are not many compelling long-term deals for them in today’s yield-starved environment.

“There are so few AAA corporate bonds out there,” said Bob Hiebert, senior portfolio manager at Legal & General Investment Management America, which had $18.2 billion in assets under management as of March 31 and is participating in the MIT deal. “When we look at the long end, this has a spread that compares favorably to a BBB-rated cyclical corporate bond, but it’s a much higher-rated credit.”

Interest on the bonds will be payable on Jan. 1 and July 1 each year, beginning January 2012, according to a prospectus.

The last time MIT came to the bond market was in December 2008, said Nickerson, issuing $226 million in tax-exempt bonds due in 2016, 2026 and 2036. Its last taxable issue was in 1996 for $125 million, featuring 30-year and 100-year tranches.

Yale University issued a 100-year bond in April 1996 for $125 million with a coupon of 7.375%–the same rate as Coca Cola Co. was able to issue 100-year debt in 1993, according to data provider Dealogic. Boston University issued a 100-year bond in June 1997 for $100 million, with a coupon of 7.625%, said Dealogic.


Back of the Envelope Thoughts on Silver

I need to start this post with a disclaimer. I’m far from an expert on the precious metals markets. But I am long silver, and have been for over three years. I’ve been along for the roller coaster ride through 2008 and 2009, and (with hindsight) have made some mistakes as well as some good moves along the way. Writing about the markets is a fairly new trend for this blog, but I had fun writing about treasuries the other day, so why not delve into silver? And my recent traffic tells me that at least a few people are interested in this stuff. The following are some loose thoughts about what’s going on in the silver market.

Oh, and this is not investment advice!

So let’s start with a graph. I’ve charted silver spot prices along with the gold spot to silver spot ratio from 1997 through yesterday:

If you weren’t aware, silver’s been on a tear. Pretty much a straight shot up from $15/oz in early 2010 to a new high of $45/oz today. And considering the fact that it was as low as $9/oz in 2008, this has been a pretty extraordinary run. So what’s going on? I actually don’t know. But I do have a couple ideas that might be worth tossing around.

When most investors think about the silver and gold markets, inflation and credit risk come to mind. When the financial markets are unusually volatile, investors often move towards something that’s proven and safe. Silver and gold have served the “proven and safe” role for quite some time. That’s why they used to back (and be) our currency. Or maybe that’s why we consider them to be proven and safe. Regardless, precious metals have been a safe bet during volatile markets for as long as we’ve been keeping records.

So let’s get back the the chart above. The market tanked beginning in September 2008. One way to view the silver rally over the past two and a half years is that there’s been a flight to safety. That’s a good starting point, and I buy it, but I think there’s a lot more going on here. So let’s look at the silver and gold returns from September 2008 to today:

As you can see, gold has returned 79% while silver has returned 230% during this time period. And, at least in my mind, safety investors have historically preferred gold over silver. So what’s going on here? Why is the gold to silver price ratio at an all time low? Why the disparity?

I would argue it’s a supply squeeze. Historically, there were only two primary ways to invest in silver: you could buy futures contracts, or you could buy physical silver and keep it in a safe deposit box (or bury it in your back yard). And then came the iShares Silver Trust, a silver exchange traded fund (ETF) that trades on the NYSE under the ticker SLV.

Started in April of 2006, the trust issues exchange traded shares that are each worth approximately one ounce of silver (although the share value trails the spot price due to fees). And each share is backed by an ounce of silver sitting in a vault in London. As of this morning, there were 359,563,836 ounces of silver in the trust representing over $16,100,000,000 in market value. You can even read the silver bar serial numbers here. That’s a lot of silver. And for all practical purposes, it’s not going anywhere.

The five year birthday of the trust will be next week. So let’s take a look at what it’s done over the past five years. iShares provides all of the vault data right on their website, so it’s easy to chart the silver trust growth:

And here are the annual additions (fiscal years April-April):

Now, this seems like a lot of silver. I mean, it’s $16B of silver. Sitting in a vault, doing nothing. But is it? It’s just smaller than Bolivia’s economy, and just larger the Uganda’s. Does that help? I’m going to take a look at two things to try and put this number in perspective, and to determine whether or not the new investment demand coming from silver trusts is fueling the rally.

1.) Silver Production: We can get some insight into the scale by comparing the annual amount of silver added to the vault with annual silver mining production. In 2010, 735.9 million ounces of silver was mined globally. So last year, the trust added 10% of the annual silver production to its vaults in London. Or put another way, the trust currently holds just under half of the annual production of silver. That seems like quite a bit to be sitting underground in London, but what about the other 90%. Where’s that going?

2.) Silver Uses: Unlike gold, silver has some serious industrial applications ranging from photo paper to medical devices to electronics. In 2010, silver industrial consumption was 487.4 million ounces, or 66% of the annual production. And total investment demand, including the 73 million ounces added to the SLV trust, reached 279.3 million ounces, or 38% of the annual production.

Astute readers will notice that the investment and industrial consumption combined exceed 100% of the total production. In fact, total demand, including jewelery and other non-investment, non-industrial applications, was 1.06 billion ounces, or 137% of the annual production.

So the reason for the excess silver returns over gold appears to be pretty simple. We’re using much more silver than we’re mining, which is obviously not sustainable in the long-run. Something (price) has got to give. Supply, at least in the short-run is fixed within a range of mining capacity. Given the recent rise in prices, I would expect to see mining firms ramp up production, but we probably won’t see meaningful jumps in capacity for years.

Demand on the other hand is a bit more tricky. From an industrial consumption standpoint, I would guess (but I really don’t know) that there are viable silver substitutes for many products that currently rely on silver. But I would also guess that the process to change the production methods will take time and/or require new investment. So I wouldn’t expect industrial demand to change all that much over the next couple years, even at higher prices, except for maybe a few uses on the margins.

Investment demand seems to be the real wildcard here. The SLV trust, and others like it, have allowed all types of investors to easily invest in silver, quickly. Historically this was never possible. You either had to be a somewhat sophisticated investor and go to the futures markets, or you had to deal with buying physical metal and storing it.

I would expect silver prices to keep rising as long as annual demand exceeds annual production (not the most profound statement, I know). As silver sources from historical mining efforts become depleted, the price impact should be even more extreme (less supply elasticity). So the silver price trajectory seems to depend on whether investors will continue to demand more silver at the current quantities. The growing popularity of ETFs such as SLV coupled with continued inflation and credit concerns makes it seem completely plausible that current demand levels could be maintained for some time.

I know what you’re thinking. This looks a bit like a bubble. That’s because it probably is. When the music stops (and investment demand drops) the price should come crashing down.

So is it rational to buy silver at these prices?

Well consistent and sustained irrational behavior can make bubbles rational. That’s how it always works, and that’s why bubbles are so unpredictable. Even when you know you’re in one, you never know when it’s time to bail.

Kid Dynamite offers some more eloquent thoughts:

Silver is part of the momentum rally.  It’s one of the Friggin Picassos – it’s a momo favorite.  Enjoy the ride – profit – but don’t go off the deep end and delude yourself into thinking that it means we’ll all be lugging around carts full of canned food, sawed off shotguns under our soiled trenchcoats, as we wander from one post-apocalyptic wasteland to another looking for fuel, shelter, and a better life now that we’ve defeated the Imperialist pigs and their Fiat experiment.

I obviously don’t have the answer, but I am still long silver. Again though, just in case you missed it the first time, this is not investment advice!