Greetings, everybody, and welcome to the May Eye on the Market podcast. This one is called Animal Farm because it's an investor's look at agricultural investing. 

Before we get started, just a quick couple of words about the inflation and growth outlook. Our soft landings thesis that we wrote about in January is still alive. GDP for Q1 is tracking down at about 1.5% because of some inventory and trade headwinds, but Q2 is still tracking around 3.5%, which is pretty good. 

CPI has done a U-turn this year. A lot of the structural fixed categories have gone up, but labor market indicators are softening. So one or two Fed cuts still seems plausible for 2024, but that's all I think we get. And you may not get much in 2025, either, but that's what the outlook looks right now. 

And if I had to pick, I'd be more concerned about the risk of weaker growth than the risk of rising inflation given all the indicators we're looking at. New orders, less inventories is our preferred leading indicator, and it weakened recently in the U.S. But bottom line, a reasonably stable backdrop for investors and the soft landing thesis, which seemed really implausible a year ago, is still alive. 

So topics for today are what happened to agricultural and food prices in the wake of Russia's invasion of Ukraine and lessons for investors there, a look at public and private equity investing in agriculture and farmland and what the drivers are, a quick update on a company that's doing some interesting bioengineering of seeds to reduce consumption of fertilizer and fungicide and water. The Eye on the Market, the written Eye on the Market has a section on satellite data of the immense agricultural damage occurring in Gaza and also in Israel. I'm not going to cover that in this podcast. And then I just want to do some quick follow-up on Tesla from last time. 

So now, on agriculture, to start, I am also a citizen farmer and I grow tomatoes and cucumbers and figs and herbs, peppers, strawberries, things like that. All my flower beds are raised and fenced because of the deer. So I have a picture here. If you're watching on video, that's a picture of our tree house in construction as I was building it. And if you are an accomplished bow hunter, from October 1 to January 31 each year, you can sit up in the tree house with a coffee or a cocoa or something, and then cull the deer for us with your bow hunting, but only if you're good at doing that, which I am not. So OK. 

Food prices have a really interesting thing happened. When Russia invaded Ukraine, there were a lot of really scary Malthusian projections that there were going to be massive food shortages. And the ripple effects were substantial at the time. 

But you remember all the stuff we've written about, how geopolitical impacts tend to be temporary on equity markets? It now looks like the world's a resilient place with respect to agriculture and food prices, as well, because look at these two series on the World Bank and the UN on oils, meats, grains, fruit, sugar, cereals. These prices skyrocketed by 30% to 40% in 2022, but have since come all the way back down to where they were before the invasion started. 

Now, CPI measures facing consumers are a different story. In the U.S., they went up 20% and haven't declined. But that includes labor costs, distribution, energy, and a bunch of other policy issues. And it also includes the fact, as I'll show you in a second, that profit margins for the grocery sector are much higher than they've been in a long time. But the key takeaway here is the world's a resilient place. And sometimes when bad things happen in one place, good things can happen in another place to make up for it. 

Here's the slide I mentioned on grocery store profit margins. At around 7%, that's as high as they've been since the year 2000. And the FTC published this last month or two months ago as a way of partially explaining why food prices, why consumer price inflation in the U.S. for food haven't come down as much as global commodity prices for food products. 

We have a chart on here on all the different components of fertilizers. There's a couple of different phosphate measures, potassium, nitrogen. All of these prices have come back down to where they were before Russia invaded Ukraine, again, in part because of increased production in the U.S. and Europe to offset declines elsewhere. 

There were also some concerns that fertilizer prices would be so high that farmers wouldn't use them and lead to food shortages. That also didn't happen. Here, you can see that global fertilizer consumption, using a proxy for exports, have risen back almost to where they were in 2021. 

And then here, look at this one. A 35% decline in Ukrainian wheat production is a big deal. It barely made a dent in global production because Brazil and Canada and the U.S. and Kazakhstan, and places like that increased output. And the same took place with corn. 

Now, this is not to minimize what's taken place in Ukraine. Around a third of Ukraine's territory is now contaminated with lead, cadmium, arsenic, mercury, and things like that, leaching from unexploded munitions and squeeze by the Russians. All of that's leaching into the soil. The Russians have burned almost 10,000 acres of forests. They've polluted the rivers. They've decimated the wildlife. So the impact on Ukraine of this war is environmentally catastrophic. 

So let's talk about investing in agriculture. How do you do that? Well, one way is to invest in companies that do business with farmers. And that's probably the simplest and most straightforward way. So we have a chart in here that shows a basket, equal weighted, of the seven large-cap stocks in the U.S. S&P 500 that are involved in farm machinery, fertilizer chemistry, and agricultural products, like Archer Daniels Midland and Bunge Global, companies like that. 

That index has roughly tracked the S&P 500 Ex Tech, which is a proxy that we use for old economy investing. John Deere stock surged in 2021, which is why it looks like this basket has outperformed the S&P Ex Tech. But that was kind of a unique situation related to John Deere. But I think that's a pretty positive sign that agriculture investing can keep pace with the market Ex Tech, which is what it's done for the last few years. 

Now, from a cyclical perspective, things look like they're weakening; 2022 was an incredible year for revenues and fundamentals for farmers, but as we showed on the first page with the UN data, a lot of crop prices have come back down. So now we're seeing a five-year high in unsold inventories for tractors and combines, and things like that. That's one way to think about the cyclical pressures on agribusiness. 

Another way is to just look at the USDA projection of net farm income, which is falling pretty fast because of falling prices for soybeans, cotton, corn and hogs, let's say price declines of 20% to 25%, larger percentage declines for dairy and poultry. And then you've got just continued 5% to 10% price increases for labor, herbicide, seeds, repairs, livestock, interest costs, things like that. 

There is also, for the farmers that do it, there's quite a steep premium, a green premium for green fertilizer. In other words, if you start with green hydrogen made from electrolysis powered by wind and solar, which you turn into green ammonia, which you turn into green nitrogen fertilizer, there's a pretty steep premium for that. And for farmers that are seeking to decarbonize by buying electrified farm equipment, there are very steep premiums for those vehicles compared to their internal combustion engine counterparts. Bottom line is falling prices, modestly rising expenses are putting a big squeeze on farm income right now. 

Now, that's the public side of investing in agriculture. There is a private side, too, although it's a lot smaller than you might think. So NCRIEF is the source that we look to when we want to look at estimated, very estimated returns on real assets, whether it's timber, farmland or all the commercial real estate segments. And NCRIEF has a lot of institutional investors contributing data. That data on total return is based on the income they earn, plus the change in the value of the underlying asset, which is normally done by appraisal. 

So there's a couple of things to understand about farmland. First of all, the percentage of the total farmland universe that NCRIEF tracks is minuscule. It's like half a percent. And secondly, the amount of transactions taking place within institutional farmland ownership are really tiny relative to the assets they track. So appraisals are driving almost the entire thing. 

So it looks like farmland has generated an 11% return, with 5% or 6% balls for institutional investors in farmland. I wouldn't take this NCRIEF data super seriously. Farmland values have gone up in part because of falling interest rates, which decreases cap rates used to value these things, but I wouldn't put too much faith in the NCRIEF data. 

Here's that table I was discussing. Look at—so for example, farmland, the NCRiEF universe they track is $16 billion. There's $3.5 trillion worth of farmland in the United States, so that's half a percent. 

And what's interesting is there's a lot of angst about institutional ownership of certain assets, and I understand why. Blackstone, for example, and other institutional investors now own, according to Harvard, around 25% to 30% of all the single family rented home stock. So not all single family homes, but the single family homes for rent, institutional ownership is about 25%, which is big. 

Very different situation in farmland. Small family farms still account for 45%, mid and large families account for another 50% or so. And non-families, whether it's corporates, partnerships, institutional ownerships, foreign entities in Canada and Europe, in aggregate, they own 4%. So this is not an asset class that has been heavily invested in by passive vehicles or institutional investors. 

And I mentioned the Twitter sewer again. If you go on Twitter and you look up farmland, you'll see a lot of tweets about how Bill Gates is buying up and monopolizing U.S. farmland. This is why Foreign Policy magazine had an article that referred to Twitter recently as a sewer of misinformation. Bill Gates owns something like 0.2% or 0.3% of all U.S. farmland. So don't go to Twitter for news or facts. 

So let's see. Let's switch topics now a little bit to agricultural productivity. 

Over the last 100 years, there's been a lot of innovation in the sector. And over the last 20 years, we've seen the emergence of genetically modified things, whether soybeans or cotton or corn. There's machinery now that has autosteer capability. There's variable rate seeding, which is becoming more popular. People are using satellite imagery. And I wanted to focus on a company that I think is doing  something very interesting for those of you that like this kind of thing. 

If you think about fertilizer, because that's the really interesting one, farmers tend to apply a lot of fertilizer. Only half of it, roughly, gets taken up by the plants. The rest of it leaches into waterways or gets broken down in the soil, and then eventually that becomes nitrous oxide, which is hundreds of times more powerful as a GHG emissions agent than CO₂. 

And similar story for water and fungicides. Farmers either use them too much or they don't use them enough. And when they use them all the time, they apply them constantly. And so the question is, how could farmers get better at targeted applications of all these things, only when plants need them and not when they don't? It would reduce their expenses. It would reduce emissions. It would improve productivity, lots of good things. 

So InnerPlant is a company that's doing this. They've got their first USDA-approved, genetically modified seed for soy. And the way it works is they genetically re-engineer the seeds, the DNA of the seeds, to emit these fluorescent biomarkers when they're stressed because they haven't had enough water or they have a fungal infection, or they're infected with insects or they have inadequate fertilizer. 

And what's amazing about their biomarkers is that they've got different biomarkers that flash for each one of these things. And even within fertilizer, it makes different signals, whether it's a shortage in phosphorus or potassium or nitrogen. That's kind of amazing. And then these biomarkers are visible by satellites or drones or tractors, and then communicate the need for remedial steps to be taken to fix them. 

And so you can imagine how by only applying fungicides and herbicides and water and fertilizer when the plants need it instead of all the time, that's a big potential benefit. And these biomarkers tend to show up, or they're designed to show up two to four weeks before the visible symptoms of these things would otherwise be seen. So I thought that was really interesting. And we have a brief write-up discussion of what this company is doing. 

I mentioned that I'm not going to discuss the Gaza-Israel situation. It's written up in the piece. There's some satellite data of massive damage to tree crops and greenhouses in Gaza. We also discuss some of the agricultural damage that's been done in Israel. This is really—this war is going to have a really long-term impact, not just on all the people that are being killed, but on their ability to feed themselves. 

As an example, when agricultural areas are affected by war, it takes about five years to resuscitate the soils to make them ready for planting and another five to seven years for replanted tree crops, as one example, to start to bear fruit again. So if you want to read more about those issues, just look at the Eye on the Market itself. 

I wanted to finish up this month's podcast with a follow-up on a couple of Tesla-related issues from last time. And one of the things we mentioned last time is how Tesla management, Musk specifically, mentioned a pivot to robotaxis in some public statements about what Tesla was going to be doing next after all the problems they've had with the Cybertruck. And he's kind of hopscotched back and forth between talking about emphasis for the new Model 2, the cheap $25,000 version, and robocars as the key initiatives. But there's been a lot of attention paid to this robocar thing. 

And it made me wonder because there's a cap of, I think, 2,000 to 3,000 autonomous vehicles in the United States, the whole country, whether that's ones that you own or robotaxis, $2,000 to $3,000 cap. And the Department of Transportation is going real slow on these approvals. There's only a couple of places like Phoenix, San Antonio and Austin that are—wait, I think I might have that wrong. It's Phoenix, San Francisco and Austin, right, that are actually having on-the-ground, customer-facing trials of robotaxis. 

And so last year, towards the end of the year, the autonomous vehicle lobbying industry wrote a letter to the DOT saying, we're falling behind China. This is a big risk. The administration needs to get up and do something to facilitate greater development of robotaxis and autonomous vehicles. 

The Department of Transportation then announced something called AV-STEP, Autonomous Vehicle STEP, which was a program that was designed to put milestones in to allow for greater adoption and permitting of autonomous vehicle programs. And they announced it, and then nothing happened. Nothing. There's not a peep from them since. And so I was wondering what happened here. And then I think I know at least part of the answer. 

So last November, 26 unions with more than 5 million members across United Auto Workers, fire, aviation, rail, marine, sheet metal, Teamsters, they wrote a letter to the DOT that basically said autonomous vehicles are unsafe and untenable in their current form. And they argued that sometimes police and fire have to evade rogue autonomous vehicles in restricted areas. They trap sanitation workers. They cut off transport workers. 

They don't like the fact that autonomous vehicle companies are only required to report data on actual crashes but not near crashes when they drive into construction sites, bike lanes and pedestrian crossings, if they malfunction, if they require remote human intervention, if there are connectivity incidents. In other words, all these things don't have to get reported if a crash doesn't happen. And they're arguing that the kind of fail fast, fail hard approach that the tech sector likes to take is not consistent with public safety. 

So I think, for me, this is probably the primary reason why the Department of Transportation hasn't really done or said anything since last year on autonomous vehicles. The reason I'm going into all this is if it's one of the basic premises for the next 18 to 24 months of value creation at Tesla, particularly now that they fired everybody in the supercharger division, unless the cap was raised on autonomous vehicles, I don't know exactly what it is that Tesla would be doing commercially with this stuff. 

And even the most optimistic Tesla analysts on Wall Street—Morgan Stanley tends to be in charge of the Tesla fanboy community. Even their research sites caution about any near-term commercialization of revenues from autonomous vehicles. 

And now there's China, and Musk took a trip to China recently to try to pave the way for Tesla to compete in full-service driving. The Chinese appear to have announced some kind of approval for testing. But again, like everything else with China, it's very murky. It's unclear. Let's see what actually happens on the ground. 

So as things stand now, Tesla stock has rallied a little bit since the lows on enthusiasm related to robotaxis and maybe some accelerated development of the Model 2. And we have a chart here that shows that the Street forecast for Tesla range from $110 to $300. The stock price is almost directly in the middle, at about $170. 

And at the end of last—at the last Eye on the Market last month, I mentioned that I couldn't plot this chart to include all the analysts because there was a forecast of over $2,000 a share. And it came from the Ark, the group at Ark. And I mentioned that to me that it reminded me of the Arkham Asylum to have a forecast that included a couple of hundred billion dollars for just the autonomous vehicle segment by 2027, which is a business that doesn't even exist yet, any at all. And in the context of the Arkham Asylum, I mentioned that I would also be calling Clay Face, Two Face, and Doctor Phosphorus for their price targets, but I haven't heard anything back yet. 

So that's it for the May Eye on the Market. Look forward to talking to you again in June. We're going to try to get some information on what's going on with the commercial real estate, specifically what's happening to maturing loans, restructurings, loan modifications, and what are the impacts on the regional banks whose stocks are under pressure again. So thanks for listening, and I will see you next time. Bye.