Food vs. Fuel Round 1

As Americans turn to corn based ethanol to supplement their need to consume oil the corn demand created by ethanol distillers is beginning to drive up the price of corn. This may not seem like a big deal today, but in the near future it is reasonable to expect rising corn prices (which literally feeds into beef, pork and chicken prices) to force us to make a choice: food or fuel.

In rich societies like the U.S. and Western Europe it is easy to write off the higher cost of food in the name of the environment (or more accurately in the name of high discretionary resource consumption). This is not as easy in the rest of the world where the price of food is an important factor in regards to your ability to feed yourself.

This trend is a positive for fertilizer manufacturers and farm equipment manufactures like Deere, but a major negative for the people who will have trouble providing food for their families due to ethanol consumption.

From the Washington Post:

"Poor Mexicans get more than 40 percent of their protein from tortillas, according to Amanda Gálvez, a nutrition expert at the National Autonomous University of Mexico.

"The tortilla-making process, Gálvez said, releases antioxidants and niacin, which allows them to be absorbed by the body, and the membranes on each corn kernel provide important dietary fiber. As a result of eating tortillas, Mexican children have a very low incidence of rickets, a bone disease caused by calcium deficiency that is common in developing countries.

"It is absolutely crucial for our population to keep eating tortillas," Gálvez said.

Gálvez said she believes the price increase is already steering Mexicans toward less nutritious foods. The typical Mexican family of four consumes about one kilo -- 2.2 pounds -- of tortillas each day. In some areas of Mexico, the price per kilo has risen from 63 cents a year ago to between $1.36 and $1.81 earlier this month.

With a minimum wage of $4.60 a day, Mexican families with one wage earner have been faced in recent months with the choice of having to spend as much as a third of their income on tortillas -- or eating less or switching to cheaper alternatives.

Many poor Mexicans, Gálvez said, have been substituting cheap instant noodles, which often sell for as little as 27 cents a cup and are loaded with less nutritious starch and sodium.

"In the short term, the people who can buy food are going to get fatter," she said. "For the poor, the effect is going to be hunger."

There is almost universal consensus in Mexico that higher demand for ethanol is at the root of price increases for corn and tortillas.

Gálvez said she believes the price increase is already steering Mexicans toward less nutritious foods. The typical Mexican family of four consumes about one kilo -- 2.2 pounds -- of tortillas each day. In some areas of Mexico, the price per kilo has risen from 63 cents a year ago to between $1.36 and $1.81 earlier this month.

With a minimum wage of $4.60 a day, Mexican families with one wage earner have been faced in recent months with the choice of having to spend as much as a third of their income on tortillas -- or eating less or switching to cheaper alternatives.

Many poor Mexicans, Gálvez said, have been substituting cheap instant noodles, which often sell for as little as 27 cents a cup and are loaded with less nutritious starch and sodium.

"In the short term, the people who can buy food are going to get fatter," she said. "For the poor, the effect is going to be hunger."

There is almost universal consensus in Mexico that higher demand for ethanol is at the root of price increases for corn and tortillas."

Higher Food Prices On the Way

The USDA recently announced that corn reserves stood at 750 million bushels at the end of 2006 and are expected to decline to 519 million by the 2007. At this level the US has less than one month of corn in reserve.

The primary culprit is surging corn consumption by ethanol producers. During 2007 ethanol is expected to consume almost 23% of US corn consumption. The tight supply of corn is expected to drive up corn prices, bad for ethanol producers, and really bad for people who use corn for other things, like food.

Unfortunately corn yields are declining at the same time corn consumption is rising. yield per acre dropped from 151.2 bushels per acre to 149 bu/acre.

The one upside to rising corn prices is increased farm incomes, which should eventually lead to better machinery sales for companies like Deere and better fertilizer sales as farmers try to raise falling yields in the face of rising corn prices.

ROIC Rick, ROIC

If you are thinking about buying GM read this first:

"General Motors CEO Rick Wagoner was upbeat on a conference call with investors yesterday outlining his plan for further recovery at the world's largest automaker in 2007 and beyond. While maintaining GM's policy of not providing specific financial guidance, the company plans to address the 8% decline in U.S. vehicle sales last year by increasing capital spending to between $8.5 and $9 billion in 2007 and 2008 after spending less than $8 billion in 2005 and 2006."

So the idea is put more money into a company that seems to be burning through cash like no other. So you would expect something good to come of that right?

"Still, with all the hype being created by Wagoner about how successful 2006 was for the company, GM does not expect to begin generating more cash than it spends in the coming year."

In my opinion Wagoner's record at GM is mixed. He has instituted a slew of turn around plans, but as far as I can tell, has failed to turn the company around.

(original article can be found at Seeking Alpha)

The Virtue of a Mess

Jerry Marks at AutoRetailStocks.com has such a great post today that I decided to share (steal) it (via Seeking Alpha).

“If a cluttered desk is a sign of a cluttered mind, of what then, is an empty desk?”

-Albert Einstein quoted in the book “A Perfect Mess” by Eric Abrahamson and David Freedman

Beginning with the right frame of mind (remembering there is a cost to every return) when you think about all of the news coming out of the Detroit Auto Show ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ It was really interesting watching CNBC’s reporter Phil LeBeau interview a lot of the heads of the major automakers yesterday. But before I get into what the industry leaders said, I wanted to begin with a question. Why do we spend the bulk of our time (as investors) analyzing the return, and very little time focused on the investment? Go back and read the question again. Because the point that I am making is perhaps one of the most overlooked aspects of investing. And it filters into every facet of our lives. Remember investing is merely the allocation of resources, most noteworthy being people’s time and abilities.

For example, this morning, I began with a quote from a book called “A Perfect Mess.” The book basically talks about how people fail to measure the cost of not being messy. You heard me right, some dudes wrote a book about why it is advantageous to be messy (and I bought the book.) Now I’m not ready to completely buy into the premise that things are better messy and unorganized (although I’m pretty good at making a mess.) But the authors make a good point. Life is messy and unorganized, so why should we try to put order to said disorder? I’d add, instead, people can thrive by developing the best ways to adapt to this mess and disorder versus trying to put order to it (different from chaos theory.) But maybe this is a little deep for a Tuesday morning at the beginning of the year.

The bottom line is that with any (and everything) in this world, there is a cost. Most of us simply look at the return. The result, that is. Being organized, having a clean desk at work, getting tons of sales, etc., are all simply examples of returns that are a result of some investment. And this is what I am trying to point out. We often forget the costs involved in generating this return (like a clean desk.) Here’s an excerpt from the book that I think is pretty revealing: “Izsak (President of the National Association of Professional Organizers) says he can prove organizing pays off with a little demonstration he likes to throw into his presentations. In this demonstration he takes two decks of cards, one shuffled and one ordered by suit and rank, and gives each to a different person. He then calls out the names of four cards and the two deck-holders race to find the cards. Naturally, the person with the ordered deck always wins handily.

But who puts the neat deck in order? A little experimenting with people of modest card dexterity shows that on average it takes 140 seconds to order a deck, plus another 16 seconds to find four cards in the ordered deck for a total of 156 seconds; it takes about 35 seconds to find four cards in an unsorted deck. One could argue that you only have to order the deck once, and then you can find the cards more quickly many times. But in that case, you also need to account for the time it takes to replace the four cards in an ordered deck, about 16 seconds – with cards, as with most things in life, it requires repeated effort to maintain order – compared to the fraction of a second it takes to stick four cards anywhere in an unordered deck.

Thus with a pre-ordered deck, it takes 32 seconds to find and replace four cards, versus 36 seconds with a shuffled deck, giving the pre-ordered deck a 4-second advantage. But since it requires 140 seconds to order the deck, taking that trouble wouldn’t pay off unless you need to repeat the task at least 35 times, and you’re meticulous about maintaining the deck’s order between each attempt. In real life, decks tend to get shuffled sooner or later, requiring 140 seconds each time to restore order.” And so it is with our investments as well. Whether it is getting organized, investing in a new point of sale system, new technologies (like the Ford Sync,) or even new vehicles/vehicle lines (like the GM Volt,) there is an investment (cost) required at the outset. Oh yeah, and those pesky maintenance costs need to be kept in mind also.

Don’t get me wrong, I am a big fan of better systems and processes, new product development, and just in general investing in making things better. But there is a cost to every return, and this is what I want you to keep in mind as you see new concepts, technologies, products, and strategies, being introduced this week at the auto show. And to kick off the auto show, CNBC’s reporter Phil LeBeau interviewed many of the heads of the major automakers yesterday. So below is my quick take from Toyota, Ford, GM, and Chrysler automaker heads comments in the CNBC interviews

Toyota’s Jim Press: “We want to be #1 with the customer" ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Toyota’s President of the North America’s (Jim Press) most aptly (just a cooler way to say appropriately) addressed the concept of recognizing there is a cost to every investment when he was being interview by CNBC reporter Phil LeBeau. During the interview he said sales are merely the result of investments into things like quality. And this is why they don’t benchmark themselves against the competition, or becoming #1 in the market (share.) Mr. Press said it best: “We want to be #1 with the customer.” I actually don’t care if they benchmark themselves against the competition or not (and I have a feeling they do keep a close eye on those stats,) it was his answer about wanting to be #1 with the customer, not #1 in the market that impressed me most. Sound familiar to one of my emails from last year? I said sales are not 1%, 10% or whatever figure of a marketing campaign you put in place, a sale is either 100% or 0%. What matters is the product or service is relevant and important to the customer you sold the product or service to.

Ford’s Alan Mullaly: Delivering what customers want with minimum resources (does Mercury remain?) ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ One industry leader that seems keenly attune to the competition (particularly Toyota) is Ford’s new CEO Alan Mullaly. Apparently he has been getting some “heat” for his rather public admiration of Toyota Motor Company. In the interview, CNBC reporter Phil LeBeau asked Mr. Mullaly about this and Mr. Mullaly said: “Ford can learn a lot from Toyota’s focus on delivering what customers want with minimum resources.” It is not that I am necessarily encouraged that Mr. Mulally feels he needs to look outside his own company to become a better player in the market (I don’t care where it comes from,) but I like his reason being resource maximization. Remember, it is not just the return you are getting, it is the investment (or resource) you are putting in to get said return.

So I was particularly encouraged to hear Mr. Mulally say they will “continue to evaluate portfolio of brands and product development within brand,” when asked about whether they may jettison the Mercury brand or some other brand that is not generating attractive returns. His reasoning? “Because clearly a focus and consistency of purpose and to be able to invest more in each one of products you believe in, so we will continue to look at that.” Is the quote I copied down after clicking replay some 15 times on CNBC.com.

GM’s Rick Wagoner: “We can do both” (profits and #1 market share) I give his answer a D minus ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ The CEO that didn’t seem to get it? Quite frankly was Rick Wagoner (GM’s CEO.) I have to give him a “D minus.” Don’t get me wrong, I think Mr. Wagoner has done some tremendous things in pushing the company to right size its cost structure. I am simply saying that given the emphasis and premise I encouraged above, Mr. Wagoner did a poor job in answering Mr. Lebeau’s questions. And I am specifically referring to when he was asked if Mr. Wagoner could trade being #1 for being profitable, would he take it? Mr. Wagoner’s answer: “think we can do both. . . We’re not ready to give up anything.” The correct answer (in my opinion,) is like Mr. Press said that you want to be #1 with the customer (share doesn’t matter,) and that you want to allocate your resources most efficiently (maximizing your shareholders returns.)

Chrysler’s Tom LaSorda: “I am on the hotseat” Most candor in an interview award ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Finally, the industry leader that gets the award for the best candor was Tom LaSorda (head of the Chrysler Group.) Most of the interview was pretty straightforward as he discussed things like Chrysler’s goal to maintain its leadership position in the Minivan segment (with something like 34% to 35% of the market.) But things got interesting toward the end of the interview. CNBC’s reporter Phil LeBeau really doesn’t seem afraid to ask the tough questions (as I would expect from a fellow WLTL alum.) So he wasn’t about to let Mr. LaSorda away without asking a really important: “are you still going to be CEO in 2007/2008?” What impressed me was Mr. LaSorda’s answer. He said “I am very confident I will still be CEO. . .But I am on the hotseat. Any CEO that did not deliver on the numbers is in the hot seat.” He went on to say that the company had some issues in 2006, like dealer relations, but that they are working to fix those issues.

You can say all you want about Tom LaSorda (and I have heard and read some of the comments.) In a world where management teams cry about gas prices and just about everything else under the sun when things go wrong, I think Mr. LaSorda deserves some props for bringing a new concept in industry leadership: accepting responsibility for missing the mark.

Value Destruction and Financial Reporting

John Graham and Harvey Campbell recently published a paper titled "Value Destruction and Financial Reporting Decisions" the highlight:

"Our results show that the destruction of shareholder value through legal means is pervasive, if not a routine way of doing business. Indeed, we assert that the amount of value destroyed by firms striving to hit earnings targets exceeds the value lost in these high profile fraud cases."