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A Good Meal After the Deal


Developing markets like China will experience sharp and terrifying corrections for investors but such is the price of admission to watch a developing market become developed...

Capitalism is responsible for the most dramatic changes I have ever seen in world history but there is always one thing in common at any time, on any spot, around the globe – a good meal after the deal.

For many years Wall Street has clinked wine glasses and clicked steak knives trying to figure out how to make money from China's unrelenting growth. Many dinners ended with power point presentations showing the extension of the U.S.'s best brands into new markets, with lasers highlighting which companies sell their stuff to China. I always found myself looking down at the empty plates instead.

I went home one night after another mediocre steak and full screen of disclaimers and decided to do a little old fashioned homework with a guy whose idea of a fancy dinner meant leaving the mesh ballcap from the feedlot on his dresser. I should disclose right here that I am severely biased. My family grew up dirt poor on a farm whose lessons have been worth more to me as a money manager in the past few years than anything else. It was 2003 when I placed that call to find out the tiny dusty old Krueger farm in the middle of Texas had just turned a profit for the first time in years.

Around the world we were witnessing a food-chain reaction that Wall Street dinners were overlooking. A couple of billion new capitalists meant new eaters. Over a recent five year period, the world saw an increase in approximately 25 million tones of meat consumption from developing markets, growth that is estimated to double by 2015. If you are at all optimistic about the introduction of capitalism to more diets then this estimate may be far too skinny. The old farm I checked on had made a few bucks selling what meat needs to eat – grains. Who knew I'd find the best idea for China in Miles, Texas? The China trade I have been working on ever since is to sell what they make, and buy what they take.

For years a perfect storm happened to be brewing while a lot of my Grandpa's buddies were praying for rain and going out of business. Demand was soaring while supply had dried up. The world wide hectares of farming land per person was 0.5 in 1950, today we have less than half of that available for crops. World grain inventories peaked in 1987 at 460 million tons. Now, inventories are less than 200 million tons.

The seeds were planted years ago for higher prices paid for grains by more developing markets to fewer farmers and then gasoline was thrown on this fire. In the U.S. we began debating about how to use crops in our car while other countries were desperately bidding for something eat. The amount of grain it takes to fill a 25 gallon SUV tank with ethanol could feed one person for an entire year. The stage is now set for several hundred million aging drivers versus a few billion new eaters in a history making battle that has only one small group smiling in agreement – everybody who makes stuff for the farmers who make the stuff that meat needs to eat.

My firm's work led us to several names that could benefit from a farmer's expanding budget if we are correct. Often times, the seeds come from Monsanto (MON), get fertilized with Potash (POT), have the fields plowed with CNH Global (CNH), ship their dry bulk with Quintana Maritime (QMAR), and then let end producers wrestle with the increasing volatility in grains' prices by consulting and hedging with FC Stone (FCSX).

Each of these and many other companies have been or are holdings of my firm, some for quite some time. They present extra ordinary risks at these levels, to be sure. Developing markets like China, celebrating the "Year of the Pig" in 2007, will experience sharp and terrifying corrections for investors but such is the price of admission to watch a developing market become developed, and can pay for a few good meals. I like what the pig likes.
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