28/08/2007 - 22:00

Switch to soft is on the cards

28/08/2007 - 22:00

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Going soft is not usually an admirable trait in anyone, and certainly not when it comes to the hardheaded world of investing. But, if Briefcase and his old mate Jim Slater have got it right, then soft is the way forward.

For non-followers of financial jargon, and for anyone younger than 40 years old, Mr Slater is one-half of the famous Slater Walker share raiding combination that terrorised the corporate world in the 1970s – and soft is the generic name applied to non-metallic commodities, such as corn, wheat, cocoa and soy.

In London last week, the topics of Mr Slater and soft commodities were all the buzz thanks to a dramatic change of direction by the one-time takeover guru, which has very interesting implications for Australian investors, and government, particularly in Western Australia.

Rather than sticking with his most recent fad, investing in metals such as gold, copper, uranium and molybdenum, Mr Slater has orchestrated a wholesale exit from those metals by a company he helps run, and is re-directing capital into soft commodities.

Galahad Gold, a London-listed company which has delivered excellent returns to investors since joining the commodities boom in 2003, is turning itself into a cash box with about £140 million ($350 million) ready to spend on “softs”.

If Mr Slater has it right, and his track record is extremely impressive, (and he owns 10 per cent of Galahad Gold), then Australia is in for a game-changing event – a time when the miners give way to the next crop of investment heroes, the farmers.

Long forgotten as an industry capable of making money, farming, according to the hottest investment advice around, is facing a bright new future.

This is due, in no small part to the fact that (a) people have to eat, (b) a richer China means richer appetites, and (c) crops once destined for tables now have an alternative destination in vehicle fuel tanks, either as ethanol or biodiesel.

What this means for Australia, and investment strategy is fascinating. Not only will crop values increase (yippee for the farmers), but retail sales in country towns will rise (yippee for the corner co-op), and property values will rise (yippee for investors), and people will return to the rural life.

Before considering why Mr Slater and his mates in London are making the switch to softs and how you might benefit, think about the big loser in this dramatic change in investment philosophy – the state government.

As far as Briefcase can see, the return of the farmer, as predicted by Mr Slater, corresponds neatly (but unfortunately) with the withdrawal of services from country towns.

Hospitals, schools and police are being consolidated into fewer centres because of the relative population decline caused by 30 years of falling real incomes in rural WA.

The tragedy of this services withdrawal is that government is basing its decisions on what has happened in the past, and is not looking forward to a brighter future.

Perhaps this is because it believes global warming will further decimate the bush, but also because the country no longer counts in the ballot box following the latest electoral redistribution, where the rural vote was reduced to an irrelevant rump.

For students of future investment trends, who also keep an eye on government, a fascinating scenario is evolving in that public services are shrinking just as investment capital rises, leading to this very simple question – who’s right?

•••

Mr Slater’s argument, expressed in a letter to shareholders in Galahad Gold, is pretty much along the ‘it’s time’ line.

He believes that investing in metals has been terrific (a 68.9 per cent increase in returns per year since 2003 for Galahad Gold), but that they’ve done their best work and now its time to go soft.

Asset disposal, to clear the way for a switch to soft, includes the sale of shares in Northern Dynasty Minerals, International Molybdenum and UraMin.

Galahad will continue to “evaluate” mining propositions, but “the board considers the market for hard commodities to be considerably more mature than when it made its first investments in the sector”, with new investment opportunities being investigated.

“These include a partial diversification into soft commodities, such as grains, other crops, livestock and dairy products,” Galahad said in its letter to investors.

“In the view of the board, the macro-economic indicators for the market in soft commodities, including grain and corn, have similarities to those of gold and copper when Galahad first invested in the mining sector.”

The Galahad letter covered the fact that grain stocks are at an historic low and the demand for better quality food was being fuelled by strong economic growth, with some resources “being diverted towards ethanol production”.

“The Galahad board believes that investing in farmland and related assets could be an attractive way to take advantage of the expected increase in the price of soft commodities,” the company said.

“Productive farmland that can be developed efficiently is a scarce resource and we believe that prices have the potential to continue rising over a period of several years.”

It is, of course, possible that Galahad has got it wrong. One of the key differences between minerals and soft commodities is that the barriers to entry are not as high in the softs.

Rural efficiency continues to rise with farmers producing more per hectare than ever before. Science, such as genetically modified crops, is increasing yields, and farms are a perpetuating source of revenue whereas mines run out of ore.

•••

On the tricky subject of getting it wrong, Briefcase cannot shake off a foreboding that Wesfarmers is walking into years of trouble with its continued pursuit of Coles.

What triggered this latest concern was the receipt from a kind reader of an old study into takeover failures, addressing in particular why there are so many, and what goes wrong.

The key thoughts came from Martin Sikora, a professor of management and editor of Mergers & Acquisitions, who wrote about the problems of culture clash, retaining good employees, and the absolute imperative of remembering to keep the customer informed of change.

But layered on top of the academic stuff is the attempt to unwind the failed merger of Mercedes carmaker, Daimler, with Chrysler. This attempt to marry German and American “culture” has been a spectacular flop.

Closer to home, there is an even more pertinent flop, the failed attempt to marry Myer with Coles – the very reason Coles is for sale today.

Which all comes back to the key point of why anyone should believe that Wesfarmers will successfully marry Coles with its retail arm, Bunnings.

•••

“Management is the art of getting three men to do three men’s work.” William Feather

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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