I just received my Annual Report from The Leopold Center for Sustainable Agriculture, which was organized by the Iowa Legislature in 1987 as part of the Iowa Groundwater Protection Act. It's an organization that does valuable, high quality work, and they produce very informative publications.
We've had an ongoing water quality problem in the Gulf of Mexico, alarmingly called a "dead zone," which is a fairly wide hypoxic area that is being studied by the EPA and by a number of academic and quasi-governmental institutions, like the Leopold Center. The sad fact of the matter is that we know why the dead zone exists, and it's based on good science, not goofball, second hand citations.
One participating organization stated, "The most intensively cultivated watersheds of the Mississippi River Basin have been found to be sources of nutrients that create the dead zone and have numerous other detrimental environmental and social effects." Intensive corn monoculture has produced hockey stick growth rates of yield per acre since the 1950's, but the yields have been driven by intensive use of nitrogen-based fertilizers. Those yields has been relatively flat for the past decade, according to one of the working groups.
We also know that about 80% of the nitrogen applied to farmers' fields dedicated to animal production, that is planted with corn and soybeans, are lost to the environment. The nitrogen is released to the air as ammonia and oxides of nitrogen, and partly to the groundwater, rivers and estuaries as nitrates. So, we know a large part of why the dead zone exists.
Growing corn to fuel our vehicles is not a viable answer to our energy problems, neither to import dependency nor to the environmental problems. Going deeper, corn monoculture itself is a deeper part of the onion that needs to be peeled back.
Since 80% of the nitrogen applied is lost to the environment, that means that only 20% is captured by humans in their meat, as the bulk of corn grown is feeder corn for cattle and hogs. Our system of captive animal, meat production on huge feedlots is itself energy inefficient and harmful to the environment. Manure and animal waste being dumped into canals and rivers is another source of excess nutrients that accumulate downstream in areas like the Gulf. I'm certainly not a vegetarian myself, and I'm not proselytizing for compulsory diet change. However, our system of production--and it is a huge, industrial, low cost system--makes little sense when the externalities are made visible and the system boundaries are pushed out to include these costs that are now invisibly borne by the public.
Now, the Leopold Center does lots of fine work on land use conservation measures like conservation tillage, crop rotation, reduced inputs, stream widening, and plantings of grasses and hays to increase infiltration. The problem is that most of the programs are voluntary, and the farmers that have the greatest impact on the environmental measures are generally not participating.
Under a "business as usual" scenario, the number of farms continues to decrease, and the average farm size increases to about 360 acres. Just as in other industries, we get a concentration among producers, and the larger producers are the ones tied into the large, industrial model for agricultural production.
Corn-based ethanol makes as much sense as moonshine (which it is) does for a dinner table beverage. However, the larger question is how we start to politically look at our food system. We need to connect people to the land and food, and to understand how things are grown and who grows the food. We need to produce a wider variety of crops on a sustainable basis, and we need to internalize costs associated with the rehabilitation and conservation of our air, land and water resources.
Sunday, February 14, 2010
Monday, February 8, 2010
Black and White
Framing discussions in "black and white" is part of our DNA in politics, journalism and financial reporting. As Paul Simon writes, "...everything looks worse in black and white." ("Kodachrome")
American companies navigating through the global financial crisis have generally reported solid quarterly comparisons, against depressed prior year periods. The comparisons have been helped generally by one-time items and by cost-cutting, including large layoffs. Investors applaud, the market goes up and everyone feels good, until we suddenly realize that the next set of comparisons will be extremely challenging. This short-term mentality is what has been decried by coalitions of institutional investors, academics, accounting firms, and executives, as for example in The Aspen Principles.
For the most part, I don't see much change in the actions, as opposed to the rhetoric of global American multinationals, which remain focused on the short-term. Talking heads are fearful of American firms adopting "the European model," whatever that means. We do know that it is the polar opposite of the American model, which is driven by profits, even if these profits are ephemeral and not sustainable. Giles Moec, a Deutsche Bank economist, quoted in the New York Times, wrote that "American companies have been faster to adjust their work forces and protect their profit margins than European companies." There's the black-and-white comparison, but reflecting on this, it's really not that simple.
First of all, the reported profits, as we noted, reflect one-time events and are against easy comparisons. Second, these large labor force downsizings are not without their costs, yet investors treat them as if they generate profits at the stroke of a pen. The black and white view says that European companies tolerate higher employment and lower productivity than their American counterparts. American executives from every industry echo this sentiment. The European practice is sometimes referred to as "labor hoarding."
Siemens increased employment at an old factory in the midst of the crisis by adding 500 jobs to a turbine business. However, the factory retrofit and new hires were put into place as part of their "green initiatives," in this case to produce the company's most powerful gas turbines that would also have lower carbon-dioxide emissions than the current products. With oil prices flagging and a weak economy, there probably won't be returns to this investment for some time, but they are still worth making.
Barbara Kux, the Chief Sustainability Officer for Siemens, had this to say: "It's part of sustainability, and it shows you (Siemens) think long-term and are here to stay...It gives you a chance to keep experienced people, to keep their knowledge in-house and to develop a high level of loyalty and trust so they (the workers) feel like part of a family rather than just doing a job." This is not European socialism, it's good business and it's actually emblematic of some of the thinking that is recommended in the Aspen Principles, which is what institutional investors claim they want to see.
In 2006, 6,000 S&P companies in the CompuStat database (1) invested $1.3 trillion into their businesses, (2) returned $1.3 trillion to their shareholders through dividends and share repurchases, and (3) spent $486 billion on mergers and acquisitions. Source: Graham, J.R, Campbell, R.H. and Puri, M. (2009), "Capital Allocation and Delegation of Decision-Making Authority," Fuqua School of Business, Duke University.
We know that pretty much all of the $486 billion will have gone down the rabbit hole and will not yield the promised returns. I suspect that much of the share repurchase activity was of marginal benefit except to the short-term shareholders, especially the hedge funds.
I can think of one very large American company that seems to have used the crisis to think long-term and to change the company for the better, and that is Exxon Mobil. I attended a presentation by Bill George, a director of Exxon Mobil, who said that he felt it was the "best run company in the world." George is a long-time Honeywell executive, and the former CEO of Medtronic. Looking at their ROIC over the cycles, I would tend to agree. Lesson 5 in Bill George's book, "7 Lessons for Leading in a Crisis," is "Never Waste a Good Crisis." He suggests taking aggressive action to improve your company in the long-term. This is exactly what Exxon Mobil did with the acquisition of XTO Energy.
Talking about American or European corporate models is more about politics than about business models, governance and returns to shareholders. We need to see the picture with all the nuances of Kodachrome.
American companies navigating through the global financial crisis have generally reported solid quarterly comparisons, against depressed prior year periods. The comparisons have been helped generally by one-time items and by cost-cutting, including large layoffs. Investors applaud, the market goes up and everyone feels good, until we suddenly realize that the next set of comparisons will be extremely challenging. This short-term mentality is what has been decried by coalitions of institutional investors, academics, accounting firms, and executives, as for example in The Aspen Principles.
For the most part, I don't see much change in the actions, as opposed to the rhetoric of global American multinationals, which remain focused on the short-term. Talking heads are fearful of American firms adopting "the European model," whatever that means. We do know that it is the polar opposite of the American model, which is driven by profits, even if these profits are ephemeral and not sustainable. Giles Moec, a Deutsche Bank economist, quoted in the New York Times, wrote that "American companies have been faster to adjust their work forces and protect their profit margins than European companies." There's the black-and-white comparison, but reflecting on this, it's really not that simple.
First of all, the reported profits, as we noted, reflect one-time events and are against easy comparisons. Second, these large labor force downsizings are not without their costs, yet investors treat them as if they generate profits at the stroke of a pen. The black and white view says that European companies tolerate higher employment and lower productivity than their American counterparts. American executives from every industry echo this sentiment. The European practice is sometimes referred to as "labor hoarding."
Siemens increased employment at an old factory in the midst of the crisis by adding 500 jobs to a turbine business. However, the factory retrofit and new hires were put into place as part of their "green initiatives," in this case to produce the company's most powerful gas turbines that would also have lower carbon-dioxide emissions than the current products. With oil prices flagging and a weak economy, there probably won't be returns to this investment for some time, but they are still worth making.
Barbara Kux, the Chief Sustainability Officer for Siemens, had this to say: "It's part of sustainability, and it shows you (Siemens) think long-term and are here to stay...It gives you a chance to keep experienced people, to keep their knowledge in-house and to develop a high level of loyalty and trust so they (the workers) feel like part of a family rather than just doing a job." This is not European socialism, it's good business and it's actually emblematic of some of the thinking that is recommended in the Aspen Principles, which is what institutional investors claim they want to see.
In 2006, 6,000 S&P companies in the CompuStat database (1) invested $1.3 trillion into their businesses, (2) returned $1.3 trillion to their shareholders through dividends and share repurchases, and (3) spent $486 billion on mergers and acquisitions. Source: Graham, J.R, Campbell, R.H. and Puri, M. (2009), "Capital Allocation and Delegation of Decision-Making Authority," Fuqua School of Business, Duke University.
We know that pretty much all of the $486 billion will have gone down the rabbit hole and will not yield the promised returns. I suspect that much of the share repurchase activity was of marginal benefit except to the short-term shareholders, especially the hedge funds.
I can think of one very large American company that seems to have used the crisis to think long-term and to change the company for the better, and that is Exxon Mobil. I attended a presentation by Bill George, a director of Exxon Mobil, who said that he felt it was the "best run company in the world." George is a long-time Honeywell executive, and the former CEO of Medtronic. Looking at their ROIC over the cycles, I would tend to agree. Lesson 5 in Bill George's book, "7 Lessons for Leading in a Crisis," is "Never Waste a Good Crisis." He suggests taking aggressive action to improve your company in the long-term. This is exactly what Exxon Mobil did with the acquisition of XTO Energy.
Talking about American or European corporate models is more about politics than about business models, governance and returns to shareholders. We need to see the picture with all the nuances of Kodachrome.
Tuesday, February 2, 2010
Giving Up Something of Value
In looking at the summary of Paul Volcker's testimony in front of the Senate Banking Committee, I noted this item reported in the Wall Street Journal:
"Mr. Volcker said in response to a question from Sen. Mark Warner (D,. Va.) that Morgan Stanley and Goldman Sachs Group Inc. would have to make a decision if the proprietary trading ban was put in place. He said they would either have to shed their proprietary trading operations or shed their banking licenses."
That decision is the ultimate "no brainer." Investment banks would me quite mad to give up their proprietary trading operations! They are unconscionably profitable. I suspect that the decision to become bank holding companies was taken in the heat of the crisis because it was with minor incremental cost in relation to the value of Government guarantees when systemic collapse was an improbable, but non-zero alternative.
With the crisis morphing into a traditional post-binge malaise, the protection afforded by being a bank holding company is something that can be economically cast aside. Proprietary trading in an environment of volatile asset prices is exactly where adept traders make LOTS of money.
"Mr. Volcker said in response to a question from Sen. Mark Warner (D,. Va.) that Morgan Stanley and Goldman Sachs Group Inc. would have to make a decision if the proprietary trading ban was put in place. He said they would either have to shed their proprietary trading operations or shed their banking licenses."
That decision is the ultimate "no brainer." Investment banks would me quite mad to give up their proprietary trading operations! They are unconscionably profitable. I suspect that the decision to become bank holding companies was taken in the heat of the crisis because it was with minor incremental cost in relation to the value of Government guarantees when systemic collapse was an improbable, but non-zero alternative.
With the crisis morphing into a traditional post-binge malaise, the protection afforded by being a bank holding company is something that can be economically cast aside. Proprietary trading in an environment of volatile asset prices is exactly where adept traders make LOTS of money.
Monday, January 25, 2010
The Old GM Again?
I parked next to an imposing, new black GMC Terrain SUV the other day. The GMC badge, as the Sierra truck commercials say, is supposed to represent "commercial grade" light and heavy duty trucks built for the demanding user, not for namby pamby wannabes. After getting over the boxy looking body, the vehicle felt very familiar, in fact it felt just like the successful, and innovative Chevy Equinox SUV.
Going back to the Web reviews, the Terrain is in fact, just a rebadged Equinox, with a new skin. This is very disappointing, because it goes against all the hype about the new GM, namely a company with a focused portfolio of distinct brands, each bringing their own distinct combinations of innovation, performance and value to their customers.
Apparently, according to one car reviewer, the Terrain was a sop to those GMC dealers who cried for a "new" crossover SUV. So, GM gave 'em what they wanted. This is the old sin of Chrysler and GM in the past, rebadging vehicles and selling them through different dealers at different prices, alienating the customer. As GM announces today the appointment of a "new" (or rebadged board member) CEO, let's hope that this diluting of brands stops before it becomes a disease again.
Going back to the Web reviews, the Terrain is in fact, just a rebadged Equinox, with a new skin. This is very disappointing, because it goes against all the hype about the new GM, namely a company with a focused portfolio of distinct brands, each bringing their own distinct combinations of innovation, performance and value to their customers.
Apparently, according to one car reviewer, the Terrain was a sop to those GMC dealers who cried for a "new" crossover SUV. So, GM gave 'em what they wanted. This is the old sin of Chrysler and GM in the past, rebadging vehicles and selling them through different dealers at different prices, alienating the customer. As GM announces today the appointment of a "new" (or rebadged board member) CEO, let's hope that this diluting of brands stops before it becomes a disease again.
Saturday, January 23, 2010
Cutting Off Your Nose
Failing to renominate Ben Bernanke as Fed Chairman is akin to cutting off your nose to spite your face. Until the global financial meltdown, the primary role of the Federal Reserve Chairman had been to oversee monetary policy, interact with other global central bankers, and to testify before Congress with sober, wise, and inscrutable remarks that kept the Fed Watcher industry at full employment. In this role, given that he understands economics is more complex than Ayn Rand, he is far superior to his predecessor, Alan Greenspan.
Unfortunately, the global financial meltdown required, perhaps for the first time since the 1981-82 recession, a different role and a different skill set. Getting a handle on the lax underwriting standards at banks required a Chairman who understood how the Fed's army of bank examiners worked and how they could have become a real asset in taking control of the culprit banks. Emerging problems in the securitization market from 2005 required a deep understanding of the manifold conflicts of interest among the players in the markets from the investment banks to the rating agencies. Bernanke failed miserably, notwithstanding any revisionist history about low interest rates having no impact in fomenting the crisis.
However, it would have been reasonable to assume that a Secretary of the Treasury would have been able to supply the capital markets expertise. Secretary Geithner, having come from the New York Fed was part of the problem. He was the CEO who fiddled while the credit crisis simmered among the New York money center banks. Recent documents and e-mails show that he appears to be deeply conflicted in his relationships with some of the key players in the crisis. As much as I hate to say it, this is all water under the bridge.
Talk of circumscribing the powers of the Fed, creating another institution to oversee monetary policy, and nominating Paul Krugman for Fed Chairman are all absurd notions, and they should be dismissed on their face. These measures would cause consternation among global central bankers and send the dollar down (except there's the question of what currency to hold, surely not the Euro?) These are all nothing more than political grandstanding by both parties. Bereft of ideas, and lacking in both insight and the ability to work across the aisle, they choose to appeal to the basest political instincts of some of their vocal constitutents.
Paul Volcker can still effectively fill the vacuum and help us out of this dilemma. As an outsider, he can speak freely and serve as a "heat shield" for Bernanke and Obama. About a year ago, he wrote a paper that decried the ability of money center banks to engage in proprietary trading, while shifting ultimate risks to the taxpayer. At the same time, they can compete for insured deposits. His ideas fell on deaf ears.
Reconstituting Glass-Steagall, the Cassandras said, would render our markets uncompetitive and trading would move elsewhere. Just where might that be? Wall Street traders wouldn't like the coffee in Beijing, the bars in Dubai, or the comedy clubs in Berlin. These are empty threats and posturing that are aimed at paralyzing meaningful reform.
Renominate Ben Bernanke--it's the only realistic and pragmatic choice and move away from looking in the rear view mirror.
Give Paul Volcker a real portfolio to get something done. Tell the chairman of both parties to call off their dogs. Let Volcker, Bernanke, Geithner and a few key leaders of both parties get in a room to agree on key principles for meaningful financial reform of the capital markets, securities regulation, investor protection, and corporate governance. As John Lennon said, "Imagine."
Unfortunately, the global financial meltdown required, perhaps for the first time since the 1981-82 recession, a different role and a different skill set. Getting a handle on the lax underwriting standards at banks required a Chairman who understood how the Fed's army of bank examiners worked and how they could have become a real asset in taking control of the culprit banks. Emerging problems in the securitization market from 2005 required a deep understanding of the manifold conflicts of interest among the players in the markets from the investment banks to the rating agencies. Bernanke failed miserably, notwithstanding any revisionist history about low interest rates having no impact in fomenting the crisis.
However, it would have been reasonable to assume that a Secretary of the Treasury would have been able to supply the capital markets expertise. Secretary Geithner, having come from the New York Fed was part of the problem. He was the CEO who fiddled while the credit crisis simmered among the New York money center banks. Recent documents and e-mails show that he appears to be deeply conflicted in his relationships with some of the key players in the crisis. As much as I hate to say it, this is all water under the bridge.
Talk of circumscribing the powers of the Fed, creating another institution to oversee monetary policy, and nominating Paul Krugman for Fed Chairman are all absurd notions, and they should be dismissed on their face. These measures would cause consternation among global central bankers and send the dollar down (except there's the question of what currency to hold, surely not the Euro?) These are all nothing more than political grandstanding by both parties. Bereft of ideas, and lacking in both insight and the ability to work across the aisle, they choose to appeal to the basest political instincts of some of their vocal constitutents.
Paul Volcker can still effectively fill the vacuum and help us out of this dilemma. As an outsider, he can speak freely and serve as a "heat shield" for Bernanke and Obama. About a year ago, he wrote a paper that decried the ability of money center banks to engage in proprietary trading, while shifting ultimate risks to the taxpayer. At the same time, they can compete for insured deposits. His ideas fell on deaf ears.
Reconstituting Glass-Steagall, the Cassandras said, would render our markets uncompetitive and trading would move elsewhere. Just where might that be? Wall Street traders wouldn't like the coffee in Beijing, the bars in Dubai, or the comedy clubs in Berlin. These are empty threats and posturing that are aimed at paralyzing meaningful reform.
Renominate Ben Bernanke--it's the only realistic and pragmatic choice and move away from looking in the rear view mirror.
Give Paul Volcker a real portfolio to get something done. Tell the chairman of both parties to call off their dogs. Let Volcker, Bernanke, Geithner and a few key leaders of both parties get in a room to agree on key principles for meaningful financial reform of the capital markets, securities regulation, investor protection, and corporate governance. As John Lennon said, "Imagine."
Tuesday, January 12, 2010
More Ethanol Follies
Stanford University's Woods Institute researchers, Diana Ginnebaugh and Mark Jacobson presented a paper at the December 15, 2009 meeting of the American Geophysical Union in which they find that combustion of E85 produces different byproducts than does the burning of gasoline, including higher amounts of aldehydes, which are precursors to ozone. The additional aldehyde concentration compared to gasoline is smaller at higher temperatures, like in Los Angeles, but it is markedly higher in colder temperatures like here in Minnesota.
Cornell Professor David Pimentel was one of the earliest and most prolific critics of ethanol, both from the energy balance side as well as from the ecology and biodiversity side, which is his specialty.
In 2006, then Cargill CEO Warren Staley came at it from a totally different angle:"If it's ethanol and biodiesel, we have to look at the hierarchy of value for agriculture land use: food first, then feed and last fuel," he said. Using scarce land for transportation fuels was not good stewardship when world food production would have to double in the next twenty years in order to feed growing and more affluent populations.
What kind of dollars have we thrown at this folly? A recent study by Rice University's Baker Energy Center finds that the U.S. government spent $4 billion on biofuel subsidies in 2008 in order to replace about 2% of the domestic gasoline supply. The average cost to the taxpayer was about $82 a barrel, or $1.95 a gallon.
Cornell Professor David Pimentel was one of the earliest and most prolific critics of ethanol, both from the energy balance side as well as from the ecology and biodiversity side, which is his specialty.
In 2006, then Cargill CEO Warren Staley came at it from a totally different angle:"If it's ethanol and biodiesel, we have to look at the hierarchy of value for agriculture land use: food first, then feed and last fuel," he said. Using scarce land for transportation fuels was not good stewardship when world food production would have to double in the next twenty years in order to feed growing and more affluent populations.
What kind of dollars have we thrown at this folly? A recent study by Rice University's Baker Energy Center finds that the U.S. government spent $4 billion on biofuel subsidies in 2008 in order to replace about 2% of the domestic gasoline supply. The average cost to the taxpayer was about $82 a barrel, or $1.95 a gallon.
Tuesday, January 5, 2010
Doing Nothing Is Sometimes Best
For several years, Jeff Immelt of GE has spoken about GE's appliance division as being a non-core business that was out of sync with the GE Capital juggernaut and with the industrial businesses. Appliances were increasingly becoming commodities, with Whirlpool becoming the closest to a dominant, global marketer. The entry of manufacturers like Samsung and LG into the U.S. market increased the level of innovation and competition. A sale of the entire business to Whirlpool was probably not feasible, due to both economics and to anti-trust issues. A sale to either Samsung or LG was probably not in the cards either, as both those companies had created brand equity quickly and already had efficient manufacturing capacity. There were some concerns about a potential fire sale, but then the consumer meltdown began, and GE took the divestiture off the front burner.
Now, with the passage of time, GE Capital looks like the non-core business. GE recently announced the formation of GE Home and Business Solutions, which will be comprised of GE appliances, lighting and electrical switches, and sensors and factory automation. What gives? It's all the talk about the Smart Grid. In this new vision, which is being driven by the Department of Energy and the electric utilities, an intelligent grid will, among many other things, manage load and offer time-of-day rate savings to consumers by communicating with and controlling "smart" appliances, like refrigerators, air conditioners, washers, dryers and cooking devices. As this vision evolves, there would ultimately have to be a replacement cycle for the major energy hogs, especially refrigerators and air conditioners, but also the laundry products. This cycle would probably be subsidized with rebates, as has the early generation of Energy Star appliances.
So, the commoditization of appliances would be halted temporarily, as manufacturers ride this new cycle and attempt to differentiate their technological solutions for communicating with the Smart Grid and for controlling the compressors and motors in the units. There will likely have to be some modifications to the motors and compressors themselves if they are to be subject to frequent cycle adjustments by the load balancing mechanisms. Lighting is clearly part of this issue as well, which is included in the GE Home and Business Solutions Group.
Combining these with factory automation and sensors gives the company the potential to compete with Johnson Controls and Honeywell in these areas. The new executive in charge of this division is also tasked with developing the new generation of GE leaders, which is quite interesting because this business will need lots of new ideas, including embedded electronics, hardware and software in order to succeed. It sounds like a fertile ground for the next generation of leaders. Although it's not a slam dunk by any means, by not reacting rashly and by waiting, GE Home and Business Solutions may have a meaningful, value-creating opportunity on its hands with appliances as opposed to a fire sale.
Now, with the passage of time, GE Capital looks like the non-core business. GE recently announced the formation of GE Home and Business Solutions, which will be comprised of GE appliances, lighting and electrical switches, and sensors and factory automation. What gives? It's all the talk about the Smart Grid. In this new vision, which is being driven by the Department of Energy and the electric utilities, an intelligent grid will, among many other things, manage load and offer time-of-day rate savings to consumers by communicating with and controlling "smart" appliances, like refrigerators, air conditioners, washers, dryers and cooking devices. As this vision evolves, there would ultimately have to be a replacement cycle for the major energy hogs, especially refrigerators and air conditioners, but also the laundry products. This cycle would probably be subsidized with rebates, as has the early generation of Energy Star appliances.
So, the commoditization of appliances would be halted temporarily, as manufacturers ride this new cycle and attempt to differentiate their technological solutions for communicating with the Smart Grid and for controlling the compressors and motors in the units. There will likely have to be some modifications to the motors and compressors themselves if they are to be subject to frequent cycle adjustments by the load balancing mechanisms. Lighting is clearly part of this issue as well, which is included in the GE Home and Business Solutions Group.
Combining these with factory automation and sensors gives the company the potential to compete with Johnson Controls and Honeywell in these areas. The new executive in charge of this division is also tasked with developing the new generation of GE leaders, which is quite interesting because this business will need lots of new ideas, including embedded electronics, hardware and software in order to succeed. It sounds like a fertile ground for the next generation of leaders. Although it's not a slam dunk by any means, by not reacting rashly and by waiting, GE Home and Business Solutions may have a meaningful, value-creating opportunity on its hands with appliances as opposed to a fire sale.
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