The Importance of Political and Economic Climate on Investment Selection.

Based upon anecdotes from farmers with neighboring properties to mine, one would conclude me to be the worst farmer ever.

“McDuff? He runs a terrible operation. Look at those fields; subpar yields, crops coming up that we have never grown around here, not heavily mechanized, no commercial fertilizer or pesticides, too few employees to complete a major harvest, how does he make any profit on this?”

“We know he has money, but he consistently turns down multiple chances to acquire additional acreage in the region and consolidate his land holdings. Why, he just walked away from the opportunity to buy my field, directly adjacent to his. How will he ever get the economy of scale from his farm?”

“Just between you and me, when we do see him, he’s always carrying this stupid scythe and has a ridiculous grin on his face from ear to ear. Goodness, it’s so annoying, he looks like an upbeat version of the Grim Reaper.”

“That is just not how modern day farming is done. It is as though he has completely thrown out the manual, assuming he ever had one.”

Superficially, every point made from the farm community, in regions where I have land-holdings and actively farm, is absolutely correct.

I do operate relatively compact tracts of land in relation to the industrial farmers of the 21st century. I don’t care one bit about maximizing crop coverage on my lands. And having read the modern day farm manual, cover to cover, backward and forward, I promptly shredded the pages and added it to my compost pile. Because, the modern day farm manuals completely miss the key point of farming; they teach you how to get the most crop off the land, but they don’t teach you how to get the best return on your capital, start to finish. The best return from farming doesn’t always come about from getting the most crop off the ground. It doesn’t necessarily come about from having the highest degree of mechanization. It doesn’t always come about by attending symposiums with agricultural reps promoting their GMO seeds. It doesn’t even come about by putting in more hours than other farmers.

Farmers are trained, more or less, to make the best of a suboptimal situation. Universities with agricultural faculties educate nepo-farmers on continuity, or teach industrial farmers how to subcontract out everything, but they never assume that one starts off of a clean slate, unconstrained.

Yet, my agriculture business did just that, it started off with a blank page.

1. What non-commodity, legal, crops could I grow to generate the highest profit margin possible? What can I grow and serve as a price-setter, rather than be a price taker?
2. Where are the best lands globally to grow these crops? How can I minimize operating expenses in order to maximize return?
3. And, of equal importance, what is the LEAST amount of work that I can put in while ensuring that I get the top return on my farm investment capital? Because the less time I put into running a farm, the more time I have to enjoy other pursuits.

What I focus on in farming, above all, are net profit margins. And in order to maximize my profit margins on farming, I need to own maintenance light lands, with permanent access to water supply, in a climate so optimal that profit maximizing crops will flourish, largely unattended. And that differs greatly from most farmers, because most modern day agriculture assets are either legacy farms or industrial farms, trying their best to earn a living off of inferior lands where they grow commodity type crops and have done so for centuries. Legacy and industrial agriculture operations alike share one profit limiting attribute; they grow what they can, where they are.

The battle of legacy farms is not crop prices in isolation. Rather, it remains the constant, increasing, expense of restoring organic content and minerals to depleted soil against a revenue level with limited profitability. Differing from them, I grow superior, non-commodity crops where I maintain control over pricing, a price-setter rather than a price taker. I only own superior land and I eliminate most conventional input costs in order to reduce expenses. My operating overhead is down to a level that competing farmers consider me to be almost a dormant operation. I don’t “work” the soil, what comes up does so without interference.

So, of course industrial farmers sniff at my operation; they only see one part of the picture, they do not see the net bank account increase from that crop sale at the end of a farm year. And why wouldn’t they conclude that I lack scale, when they make a blanket assessment based upon a single field?

Ownership of lands that are standard, substandard or that have been worked so hard, for generations, that they no longer can produce an optimal yield, were out.

This excludes entire regions, sometimes, entire countries.

Crops that everyone grows, ie commodities, they too, are out. You cannot earn more than another farmer when you own the same lands and grow the same crops.

Quality and fertility of the soil is paramount; my criteria are such that I expect to visit my fields a total of just 2x annually, when I put seeds in the ground and on the day of harvest. If I have to spend more time on that field in order to generate a productive result, then that farmland just isn’t good enough. I may visit land more frequently, by choice, not by need.

“Harrumph”, go my farm competitors. “There are very few high quality pieces of land that meet your objectives, certainly nothing here. I have to spend far more time on my fields than that.”

Exactly. There are very few pieces of land that meet the cut. Yet, that number is not zero.

“Harrumph“, huff my farm peers. “There aren’t many crops you can grow that meet your objectives. You are lucky, you have an artesian water supply and also a stream bisecting your property. I’d either have to drill some wells, or sell my entire farm and start fresh and I’m not about to do that”.

Exactly. Which is why I didn’t purchase your farmland when you offered it up, at what you believed to be a sellers’ market. I chose to own land with water assurance, you chose to pay less, for land without reliable water.

“Harrumph“, wheezes my farm neighbor. If I don’t actively monitor my fields, a lot of the crop will be eaten by critters or birds and crowded out by weeds.

Exactly. Which I why I grow non-commodity crops carrying monopoly margins. If the price is high enough (and being a price-setter it always is), then I can more readily tolerate periodic loss of yield. I make it up on the margin.

“Hhmm” mutters the farmer. “Then if I am not devoting my entire life to monitoring my farmlands, purchasing inputs to prevent depleting my soil, trading plots of land among other farmers just to earn what my other farm friends are earning, what will I do with my life?”

Exactly. I have this ridiculous grin on my face, every time you see me, when on the field, for a reason. Because I am not working pointlessly for an inadequate margin. I earn exactly what I expect to earn, by design.

From time to time, offers come my way to purchase some crop seed, in efforts to replicate the job of growing these non-commodity plants in another area or another country.

An inquiry came up months back by an interested party with a foreign tract of land. That person was hoping to change an unproductive farm to something more profitable. They informed me of the variety of crops that they had tried to grow, all without success. I dutifully called up the soil map, overlaid it with the climate growing zone grid, determined the level of ongoing water requirement needed and looked at the normal groundwater availability from the soil formation in that region. Regretfully, I had to break the bad news to that party; the land was not productive enough and the climate was unsuitable for their objective.

“What will I do then, what crop can I grow?” was the response. “You cannot generate monopoly profits on inferior lands” was my reply, “so you must either accept a commodity result, or sell that land and find something superior”.

“Well, I don’t really want to sell this land. On the off-chance, is there any farmland in my immediate area that looks attractive, suitable for a monopoly crop?”

“No”, was my reply, after pouring over the map. “There isn’t”.

My recent piece on Oracle, indicating that the enterprise AI data-center buildout was excluding Europe and focusing entirely upon the United States, possibly the middle east and the implications to be drawn, generated an enormous pushback, even some outrage, from European, Canadian and extra-national parties.

My response to each and every harrumph is a brief variation on exactly same point:

“the political and economic climate in your region is unsuitable”.

Larry Ellison, the second wealthiest man on the planet, did not achieve his net worth by being stupid, by engaging in unproductive tasks. He, not I, has determined that Europe lacks the present infrastructure for large scale data centers. The timeframe needed to build out AI centers to house this data is too short, and the European obstacles, both economic, political and social, too great, to meet his hurdle rate. As a pragmatist, I just happen to concur.

Furthermore, the nature of an enterprise data center is such that warehousing of data may be done anywhere. Why would one set up shop in a high cost, politically unfriendly environment when a low cost, business and tech friendly jurisdiction is readily available?

Larry Ellison is not alone with his assessment on the favorability of data center location in the United States. Mark Zuckerberg of Meta fully concurs and is more than tripling US capex for supercomputer data centers, with the “Prometheus” complex to be powered off of natural gas turbines. In fact, the largest Meta builds are being undertaken with power supply from conventional, baseload natural gas utility grid generation.

https://www.datacenterdynamics.com/en/news/meta-to-invest-hundreds-of-billions-of-dollars-into-compute-to-build-superintelligence-with-several-multi-gw-data-center-clusters/

European politicians are obsessed with the policing of data, more than the productive use of data.

This is the antithesis of the AI proposition. European political leaders will rather turn over the entirety of their business and personal data sets, to be stored within American domiciled servers, and then be forever rented back, at a 50% profit margin, to Oracle, rather than provide a baseload utility grid power supply domestically. Political obstinance may win some brownie points from an electorate, but it steadily wears down what “arable economy” that still remains in Europe.

A pragmatic viewpoint explains away the relatively small number of secular monopoly businesses globally; monopolistic profits cannot be earned by every business, in every nation, because monopoly conditions may not exist.

The output of the EU is produced, not on virgin, untapped, highly productive “economic soil”; but rather, on badly depleted tracts lacking a natural level of productivity. The costs to remediate this farmed out land is sufficiently high that the profit margin to be earned from operating an AI data center network just isn’t there.

You cannot convert a legacy farm to a new farm if the will and the climate does not exist to do so.

AI is not a legacy business. Larry Ellison does not intend to make the best of a bad situation, he prefers to make good from a great situation.

The “cloud” does not exist in the ether.

What individuals and the media refer to as the cloud is a massive network of data farms, right on the ground, increasingly located in the United States of America. The political and economic climate supporting the location and expansion of these farms in America is, more or less, ideal. The more data moved to the cloud means more data removed from local jurisdictions and redomiciled in the USA. This is highly strategic, because when geographic control over global data exists, the remainder of the world is beholden to the whatever company\companies stores said data.

Cheap data storage in the cloud, in my view, is hype at best, a long con at worst. Those who utilize the cloud do so on the basis that data storage is an expense, a legal requirement. Therefore, they opted to utilize a “vendor leaseback” arrangement with an enterprise data company; you transfer your data to a third party, are told that you can access it anytime, and breathe a sigh of relief to not have to buy a replacement server every five to six years.

With an assumed value of zero for the data, of course a leaseback arrangement is initially cheap, maybe even free at the outset. Now, more are are aware that data has value, but few have modeled a data revaluation expense for cloud access.

When all underpriced data is siloed, it can be repriced accordingly and then rented back to the vendor as a function of the new, higher, assumed value. Business and the public will find out, to their chagrin, how cheaply and readily they shipped it off to American server farms, when access charges start to pile on.

Once a geographic monopoly is developed, monopoly pricing, surcharges, for data access, will result. And with no place to transfer their data, other than to another American enterprise data company, that will charge the same price, regions that cow-towed to environmentalist NIMBY protests and refused to offer the economic climate for local cloud storage; the risk increases for predatory pricing, by for-profit companies, a “pay it or go without data” ultimatum. Hostages are often forced to sell their back-yard and vacate their moral high ground, in order to pay ransom.

The move towards a repricing of data value, data inflation, has already begun.

https://www.americanbanker.com/news/jpmorganchase-to-charge-data-aggregators-for-customer-data

https://www.investmentnews.com/fintech/jpmorgan-tells-fintech-firms-to-start-paying-for-customer-data/261270

Under a scenario whereby data inflation is persistent and monopoly/duopoly pricing of enterprise data storage exists, one might be well advised to include an enterprise data storage company within their portfolio, if for no other reason than to capture price increases that may negatively impact other equities within their portfolio. Whether one choose to do so, that’s not my business.

Yes, servers have a very finite life and are becoming prohibitively expensive for new entrants; not only will this limit competition, monopoly players will then build the server expense and overlay data inflation into their revised pricing schedules, once the introductory data capture period ends.

Investors can choose to start off with a blank page. More should do so.

Investors in Europe, in Canada, in other parts of the world who locally attempt to replicate the output of American tech, and fail, are the investor equivalent of a legacy farm; they constrain themselves by geography and limit their profitability by planting an investment crop that just does not grow well, due to infertile economic soil and an inhospitable political climate.

Those parties should not be upset with Larry Ellison for pointing out the obvious; rather, they should consider it a kindness to have the second wealthiest tech investor on the planet inferentially advise European investors to just stop beating their heads against a wall, for no other reason that they are born and raised in Europe. Where you invest should not be constrained by where you live, capital is fluid. You can invest your money anywhere.

Invest for the climate. Should the climate be favorable and the ground be sufficiently fertile, then the current weather doesn’t really matter. When one chooses to invest geographically, for no other reason than legacy/continuity, they risk trapping capital in an inhospitable location.

And when you invest for the climate and choose to grow profitable things, lo and behold, your worldview changes. Who knew that actual agricultural farming was as profitable as it is? I certainly didn’t and I am, admittedly, an OK farmer at best. But, because I looked at it from a business perspective, growing only what is highly profitable to grow, on the very best lands available, in the most favorable climates possible for said crops, my farm earnings are far, far higher than legacy farmers.

And that should be the entire objective for capital investment, no matter whether it is farming or publicly traded equities: when you own the best assets, in the most productive regions determined by climate, with the highest profit margins, you don’t even need to be very good at what you do, a healthy margin for error is already built in. Own optimal, even when you are just adequate.

If you, on the other hand, choose to restrict what you invest in based upon only where you live, then you are a legacy investor, operating with the same level of frustration as a legacy farmer; forever growing stunted crops that require so much maintenance that you, like a legacy farmer, may occasionally wonder:

“what’s the point“?