PGW - PGG Wrightson

[Mick100]

quote:Originally posted by Snoopy

quote:Originally posted by Mick100


I tend to agree with you about the exchange rate with the USD Snoopy
I think the USD may fall as fast of faster than the NZD meaning the NZD could appreciate against the USD. I'll add that I expect the USD to fall against all other major currencies over the next yr or so.
The effect of this depreciating USD should be higher commodity prices in US dollars which means that NZ farmer should still be better off.

I hope you are right Mick. Did you see the figures quoted on page 1 of the 'Dairy Equity Anyone?' thread though? I'm referring to the milk solid payout per kilogram over the last 5 years. I'll quote the figures from 2002 to 2006 inclusive:

$5.33, $3.63, $4.85, $4.59, $4.10

Not a very encouraging trend there....

quote:
I don't see land values going down in the medium term although they could stop increasing in value for a few yrs.

From the same Rod Oram article, dairy farm profitability is $1,000 per hectare. Cost of land is $20,000 per hectare. I make that a return of 5%, *before* you start paying tax.

Now I know that dairy farming isn't the only game in 'farmland'. However, I do notice that farms still seem to be being converted from 'something else' to dairy. Unless you as a farmer can boost your earnings to more than a 5% return on your land, surely land prices must fall? And if Rod Oram is right about milk solid production costs being about half of what it costs here in Chile and Argentina, what hope is there of boosting dairy earnings long term?

If you believe Big Bear's figures (operating costs of a dairy farm at $4.10, which more or less matches the payout) then even Rod Oram's 5% return figure is wildly optimistic!

quote:
So far, Ag commodities have not taken part in the commodities bull market. The base metals and energy always lead a new commodities bull market while ag commodities usually have their turn in the second half of the bull market.

Ag commodities 'usually' have their turn in the second half of the bull market? Again I hope you are right Mick. But how many commodity bull markets have you studied? I'm trying to figure out if you have an exit strategy!

SNOOPY

being an ex dairy farmer I still have a couple of "tea ladies" on the job. An example from a very well managed operation:
-Running costs (everything except the mortage including manager and labour) were 43% of income.
-Bought another farm with 100% borrowed money and put a 50/50 sharemilker on - income covers costs and interests payments

these figures are from 2001 but would still make rod oram and big bear's assertions look as if they are taken from a "worst case senario"- and that's putting it mildly.
,

[Mick100]

quote:Originally posted by Snoopy
[

Ag commodities 'usually' have their turn in the second half of the bull market? Again I hope you are right Mick. But how many commodity bull markets have you studied? I'm trying to figure out if you have an exit strategy!

SNOOPY

I'v looked at the commodities bull markets from the past 200 yrs Snoopy. They last an average of 18 yrs from bottom to top so this one has another 10-15 yrs to go. I may have moved into ag commodities too soon - I don't know when they are going to fire, it may be another 5 yrs or it could be 6 months from now.
.

[nelehdine]

I invested $400k in a dairy farm equity partnership in Sept 03. 700 cows , 160ha ... some shares recently changed hands, values my stake at $568k . A good solid return, not fantastic but no complaints. Will hold for foreseeable future.

[KJ]

Snoppy
Just a point re your calculation for ongoing profit-the projected profit for 2006 of $27m probably needs to be adjusted for the fact that the first half results include 6 mths for PGG but under 3 mths for Wrightson and Williams & Kettle.

I would have thought that ongoing profit would be closer to $40m as merger synergies are expected to exceed $25m annually and the full impact will flow through to the 2007 yr.

[nelehdine]

Tiny number gone thru at 180 to show a rather spectacular rebound. Decent bids down in the low 170's , possibly may have seen near term low yesterday.

[KJ]

Quoting further from the PGW management outlook:

"Prospects for the coming year will be affected by the impact of the lower exchange rate on farm gate returns, the volume of farm output and trading activity. Indications, at this stage, are that the influence of these factors is expected to be more positive in the coming year when compared to the year just ended. While recognising the impact adverse climatic conditions can have in general terms the outlook for the coming year is encouraging with evidence of confidence returning to the farming sector."

I don't agree with much of that myself. I predict a higher exchange rate, relative to the $US, and an associated slump in farm values once reality hits home. Then we will see a slump in farmer confidence due to the 'negative wealth effect'. The cold weather should mean a delayed start for farm production as well, which will further depress the immediate outlook. To offset that, there are probably some merger benefits still to flow through. And my prediction is that farmers will stop spending on those luxury items first, before they stop spending on their farms.

Despite my overall negative outlook for farming in general, and PGW in particular, I've topped up on a few shares today. I always buy in gloom, when the outlook is bad, as you well know Macdunk.

SNOOPY

discl: hold PGW

Snoopy-re-reading this I find it hard to follow.You are very negative about PGW,you expect the share price to fall much further still,but you have just bought more shares.Does not make sensr.








[/quote]

[Snoopy]

quote:Originally posted by KJ


PGW management outlook:
"Prospects for the coming year will be affected by the impact of the lower exchange rate on farm gate returns, the volume of farm output and trading activity. Indications, at this stage, are that the influence of these factors is expected to be more positive in the coming year when compared to the year just ended. While recognising the impact adverse climatic conditions can have in general terms the outlook for the coming year is encouraging with evidence of confidence returning to the farming sector."

Snoopy wrote
I don't agree with much of that myself. I predict a higher exchange rate, relative to the $US, and an associated slump in farm values once reality hits home. Then we will see a slump in farmer confidence due to the 'negative wealth effect'. The cold weather should mean a delayed start for farm production as well, which will further depress the immediate outlook. To offset that, there are probably some merger benefits still to flow through. And my prediction is that farmers will stop spending on those luxury items first, before they stop spending on their farms.

Despite my overall negative outlook for farming in general, and PGW in particular, I've topped up on a few shares today. I always buy in gloom, when the outlook is bad.


Snoopy-re-reading this I find it hard to follow. You are very negative about PGW, you expect the share price to fall much further still, but you have just bought more shares. Does not make sense.

'Very negative about PGW'? I did list some positive aspects of the PGW position as well, so I don't think that 'very negative' is a fair summary of my position. Perhaps 'overall negative' would be a fair summary. Now as to the particular negatives I have brought up....

Cold weather depressing farm output is a result of short term climatic fluctuations. Such things may distract the reef fish investor. That is good for me, as I might be able to buy some shares cheaply. But long term I expect any particular 'weather bomb' to have no effect on the long term performance of PGW. Furthermore if there is a farm lead slowdown in the economy, I expect farm supply companies to be amongst the last to feel the chill. Farmers invest too much of their soul in their land to allow productivity to plummet by ceasing to buy fertilizer and gumboots. Finally despite my belief that our exchange rate will appreciate against the $US, I don't claim to be a great macroeconomic student. I could very easily be dead wrong. My main reason for stating my exchange rate belief was to counter PGW's management's belief that the exchange rate will go the other way. I don't believe that they are great exchange rate predictors either!

The PGW share price has fallen significantly. Although I do expect the share price to fall a bit further I don't expect it to fall by much - perhaps 10% at the most. Also, my conviction that the PGW share price will fall I would guess is around 70%. Consequently that means I see about a 30% chance that the share price will rise. With Mr Norgate's penchant for doing deals, and the weather's sudden propensity to change for the better (in NZ) and worse (where the competition is in Australia) The PGW share price could rise significantly- perhaps by up to 25%.

Now we have enough information to calculate what will happen to the share price if either my 'negative scenario' or the implied 'positive scenario' comes to pass:

0.7 x (1.76-[0.9 x 1.76])= 12.3cps (expected loss, negative scenario)
0.3 x ([1.25x1.76]-1.76)= 13.2cps (expected gain, positive scenario)

Notice that my expected gain in the positive scenario is greater than
my expected loss in the negative scenario. Therefore it makes sense to invest in PGW, *even though I think there is a 70% chance that the share

[winner69]

quote:Originally posted by Snoopy
Now we have enough information to calculate what will happen to the share price if either my 'negative scenario' or the implied 'positive scenario' comes to pass:

0.7 x (1.76-[0.9 x 1.76])= 12.3cps (expected loss, negative scenario)
0.3 x ([1.25x1.76]-1.76)= 13.2cps (expected gain, positive scenario)

Notice that my expected gain in the positive scenario is greater than
my expected loss in the negative scenario. Therefore it makes sense to invest in PGW, *even though I think there is a 70% chance that the share price will go down*!
SNOOPY

... but isn't the 'expected outcome' of this scenario less than 1 cent .... so why do it if these are what you think the probabalities are.

Mr Taleb wouldn't approve of your logic

.... but then I forgot it is a portfolio rebalancing exercise.

Cheers

[KJ]

Snoopy-I follow the rebalancing part.However you say "it makes sense to invest in PGW even though I think there is a 70% chance that the share price will go down"
Does not seem to follow logic to me.

[Snoopy]

quote:Originally posted by KJ

Snoopy-I follow the rebalancing part.However you say "it makes sense to invest in PGW even though I think there is a 70% chance that the share price will go down"
Does not seem to follow logic to me.

KJ, it doesn't make sense because you haven't considered the payoff of the alternative outcomes. It can make perfect sense to have more losing than winning bets, provided the amount you make on the winners more than wipes out your losses.

Or, another way to look at the same logic. There is no point if having more winners than losers if all of your all of your winnings can be wiped out by one unexpected precipitous loss. As Nassim Nicholas Taleb would put it, a 'black swan' event. (This is rather an unfortunate metaphor in this part of the world as almost all wild swans are black. But in most parts of the world, black swans do not exist.)

Winner, I don't know if in his trading days Taleb traded individual shares. From what I have read, he was more into trading indicies. I agree that buying into PGW at $1.76 last week is probably not going to go down as one of *my* great investment decisions. And perhaps my 1c margin on the deal being a good one is thin. Nevertheless I think it is exactly the kind of deal that Taleb would approve of, even if the return is not likely to be as good as buying into Telecom .

SNOOPY