Blessed by the Potato

I do all of my scanning at night, largely because patients with an actual medical need get priority on the MRI, and nights are the only slack times they have. I lean a little towards the nocturnal to begin with, but now I don’t get home until 4 am (or 8 am if I manage to fill all my slots), so I’m completely nocturnal. I wasn’t minding too much through the summer, because when I’d finally wake up around 3 or 4 in the afternoon, I’d still have a nice amount of daylight left. But now I wake up and it’s dark. I get like half an hour of daylight, and it’s a dreary rainy cloudy sort of daylight at that. I routinely sleep through so much of the day, and stay inside for the majority of the remainder, so I never thought I’d say this: but I miss the sun.

Things are not helped by the fact that everyone online is going to bed so early these days. 5 years ago I could pretty reliably find someone online to chat or play WarCraft III with until at least 1 am, but now my contact list clears out by 10. Stupid grown-up life and real jobs… I need to make some Japanese friends.

I thought I’d take a moment to reflect and praise small victories. Often we take our small victories for granted, and only celebrate the big ones… but when things go poorly for a while, it’s important to step back and look at what is working.

I placed a small bet on the recent federal election in the UBC election market (it wasn’t gambling — it was supporting important social science research!) and I won 53 cents! The cheque arrived today! I bet on a liberal minority (d’oh!) with an even larger hedge on a minority of some sort (woo-hoo!) and a small bet against the Greens (sorry Liz… but it’s not like betting against the Greens had any decent odds anyway). So, hey, 53 cents. That’s outperforming my stock portfolio! I could buy 62% of a donut…

…but I won’t because I’m losing weight! I haven’t met my weight-loss goal for any month except May and June, but at least it’s going down, and I’m getting in much better shape even if I’m not actually any smaller.

So it’s NaNoWriMo — National Novel Writing Month — also known as “November”. I am not attempting to write a novel this year, just like I haven’t any other year, because that is just crazy balls. I am working on a pair of short stories that I’ve had outlines on for a while now, but I’m still not what one might call “done”. In fact, I’ve run right back into a fierce wall of writer’s block. However, in my procrastinating I’ve written over 4000 words for the blog in the two days I took off to write, so I’m easily meeting my self-imposed word count quota for the day. At least my typing skills are intact. I’ve also been catching up on my correspondence, writing to all kinds of people I haven’t talked to in a far too long, and finished my ethics revision (which is long overdue now, but I’m still counting it in the win column, at least until/if it gets rejected).

I got my camera back from Black’s, and they only charged me $15 to fix it, thanks to the extended warranty that came free with it when my parents bought it (they never knowingly purchase extended warranties). It was full of pictures of the pretty cat (what else?):

One advantage to all the night scans is that the cat is very happy to see me awake at 5am every day. While it has been very difficult to find volunteers for the late nights, things are chugging along: I hit the halfway point today! Yes, I’m 3/4 of the way through my MRI time availability, so I should be 3/4 done… but let’s not focus on that. Small victories, and halfway is halfway!

“You made me smile!…you really made my day.”

Yes, mission accomplished: making the world a happier place one small smile at a time, one day at a time (which is generally how days come, unless you’re on the night shift when they come in two half days at a time — you have no idea how confusing it is to talk to people about what happened “last night” when that’s still “today” to me). Now some linkage to what made me laugh my ass off today:

The Onion Video on whether Halloween has become too commercialized, and what happens when a cat spends too much time watching a hen lay eggs from Cute Overload. Oh, and the trailer for the Star Trek movie is up. It doesn’t really fit with the other two links, but… Byah! It looks pretty good, except for the part where li’l Kirk is driving a car off a cliff. I hope they make that make sense in the movie, I really do. Of course, one day George Lucas will die, and Star Wars can be relaunched…

Well, like Yahtzee, I got Force Unleashed on the Wii. There are some issues to be sure, the graphics aren’t as smooth as on the Xbox (and not just a hi-def vs std-def issue, either), and the physics are more cardboard-box-like (a lot of objects will start flying around if you run into them, the same way they do when you force push them).

But I did get into the controls and the experience, and it was fun (though so was the Xbox, and it was fun and pretty). What I found interesting is that the storylines were somewhat different between the two games, and the levels and force puzzles were much simplified on the Wii. The Wiimote is, as usual, pretty spazzy, but it’s a much better sabre experience than Zelda was (which really turned me off). The camera tracking is also pretty terrible (a problem that Zelda also had), and not as good as the Xbox.

The game is fun, though that might be because I just am hard-wired to love Star Wars and lightsabers, and is a great way to pass about 6 hours hacking and slashing and force lightning your way across the galaxy. However, it was short. I was left at the end wanting more, much more. There is the duel mode for the Wii, but the characters get very small since it’s not a split-screen experience, but rather a fixed central camera, and that makes it less satisfying. Also, with a touch of min-maxer in me, I saw the four stat bars and immediately wanted to know what they do for me… but I couldn’t find anywhere what they meant (I even read the manual!).

I would have liked a random level generator, or more “instant play” missions where you could play as the other characters (Obi Wan, Vader, etc.) to stretch it out a bit more, and offer more getting-my-force-on replay value — and I do see a lot of stress relief potential in a game like this.

It also wasn’t particularly deep. Pretty much every mission involves going in and killing everything. There are I think two where civilians or nominal allies appear, but there is zero consequence for throwing them off ledges along with the bad guys. Also, the flying stormtroopers were seriously broken. I know that there wasn’t too much that was terribly challenging in the game, but these guys were just obscenely powerful (both tough and with attacks that you couldn’t deflect).

And as Yahtzee mentioned in his video review, the force powers are a touch ridiculous in this one, while the lightsaber is underpowered. There’s no limb detachment/decapitation! When the kitty decided she wanted me to pay attention to her and not my game, I continued to play with just the nunchuck — no lightsaber, just movement, force push, and force lighting. And I didn’t actually do all that bad!

Other than that, I haven’t been gaming much lately. I got MarioKart for the Wii as well, but haven’t actually taken it out of the box yet. There are a few guys at work that play, and I figure I’ll take it out when we’re all less busy and can do some multiplayer. For the most part, I’ve been trying to finish off Yoshi’s Island for the DS. It’s my sister’s game, which I borrowed for the flight to Chicago, but it’s surprisingly fun. It’s like a juvenile version of Mario, where dying is a lot harder, and there’s a wailing baby now and then (ugh). There are 5 worlds, and the first 3 are really really easy. But the 5th I’m finding is actually quite challenging. I came into it with nearly 200 lives, and that’s just what I got along the way in the first few worlds, no life farming or anything, and I’ve burned through about a hundred of them so far trying to get through world 5. I also installed Strange Attractors 2, which is a fun little game, especially if you only want a distraction of a few minutes and don’t want to have to close all your document windows to launch it :)

World of Warcraft has come out with two expansions now, and I briefly thought about returning. Blizzard did send me a 10-day free trial pass to try to suck me back in, and I might actually give it a whirl after the MRI goes down in December (hey, I’ve got to see how these new fangled weather effects look on my new video card, don’t I?). Of course, I’m going to have to freeze my credit cards when I do, because 10 days is all I can afford to give that game!

So I was holding my hand up to a really bright light, and noticed that the light went right through my hand as though the bone wasn’t there. That diffuse red glow is nothing new, but what I noticed is that the blood vessels were blocking the light. “No way,” I thought, “blood can’t be more opaque than bone!”

Of course, that’s not really the case. Instead, it has to do with scatter: inside the tissue, the light isn’t going straight through like with something that’s actually transparent. Rather, the light is being scattered: bounced off molecules many times before making it out the other side. When something is highly scattered, then the light coming out often has very little relationship to the direction it came in, and it can even scatter around obstructions, such as bone. To get that uniform red glow, you need a fair bit of tissue, enough so that the average scatter length (how far the light can penetrate in the tissue before it finds something to scatter off of) is within the tissue.

With the blood vessels, they’re close to the surface, so when they block the light there isn’t enough tissue for the light to scatter around them (like there is for the bones), which makes them look opaque!

I know that the stock market posts have gotten out of control here lately, and I think it’s wearing on my regular readers (all three of them), since the comment rate has dropped off a cliff. For the first two years of BbtP, there were on average two comments per post (granted, one of those was probably me responding to the first comment), but lately it’s averaged four posts per comment, so to help get things back in balance, I declare this an open comment thread! Comment about anything you want, post any questions or requests you have, whine about whatever’s on your mind, or pimp your own blog (not that it’s going to help you, to be honest, but go ahead).

I’ve been fascinated by the fertilizer story almost as much as I have been with the energy and banking sectors. I even managed to lose myself some money with Migao earlier in the year. Now that the markets are down and the fertilizer bubble looks to have popped, I’d like to take another look at things.

The Story

People like to eat. I like to eat. Most of our food is grown with the help of fertilizers, especially in the Western world. In order to grow more food on less land, you basically need fertilizers to get the yield up. Adding to this are two factors, the first of which is biofuels (predominantly ethanol from corn in the US and Canada, and from sugar cane in Brazil, and biodiesel from soy and palm oil), and the rising standard of living in China and India.

One of the neat things about becoming a “developed” nation instead of “developing” one is that you can keep more of your population from starving. In fact, it goes well beyond that: in addition to not starving, the people’s quality of life improves, and one of the first improvements they want to make is to their diet. No more fish and rice, they want a variety of food, including more meat. On top of that, more people move out of the countryside and into the cities and factories.

All that adds up to a whole lot of fertilizer demand, which makes investing in fertilizer companies an attractive option.

What Happened

Of course, a lot of people had the same idea, especially when there were rice shortages and food riots. The price of fertilizer and fertilizer companies shot up. Potash (TSE:POT) quadrupled from June of ’07 to June of ’08. It was only in November of ’07 that I started to get interested in the fertilizer story, and at that time I figured that at over $100, Potash (the stock) was too rich for my blood. While the underlying commodity had posted impressive, almost scary increases in price, I didn’t think that it would do that again, and at $100, the stock had already priced in another doubling or so in potash (the fertilizer) prices, which didn’t leave enough of a safety margin for my tastes. I wrote a note to look at it again if it had a pull-back to $80 or so (which is around where it’s at today, hence this article).

Potash (the fertilizer) did end up tripling, and there were indications that it would have another tripling on top of that on the strength of Chinese demand. POT shot up to $240, where at least another doubling in potash prices (according to my back-of-the-envelope figures) would be needed just to keep the stock there, let alone for it to hit some of the ridiculous targets being set. Analysts at the time seemed to fall over themselves bumping up the price.

And then…

And then the credit crunch really hit. Spot prices for potash (and other fertilizers) stabilized and even pulled back. Crop futures dropped, indicating that farmers wouldn’t be able to sell their crops for as much, which means that they wouldn’t be as aggressive in their planting and fertilizing, particularly if fertilizer was expensive. Compound that with a difficulty in getting loans to buy fertilizer, and a hit from high energy prices, and things suddenly weren’t looking so rosy for the fertilizer industry. POT and AGU have given up pretty much all of their gains from the last year.

However, I don’t think the basic story has really changed all that much. I still think fertilizer demand should be strong for years to come. I think that once this credit crisis and recession pass in a year or two that fertilizer demand will pick up again, that people (especially the large populations of India and China) will want to eat better foods, and more of them. There are numerous articles around explaining that fertilizer prices are a very minor input costs to farmers, so even when they go up ten-fold, it’s not really destroying demand.

That said, I’m not as bullish as a lot of analysts are. It’s hard enough to try to peg a value on a company, and trying to predict commodity prices is worse. However, you can’t really do the former without a guess about the latter in this case — and that also leads to a lot of these investments (in fertilizers and energy) being essentially bets on what the underlying commodity will do (with some wiggle room from improvements in efficiency, etc).

So I have in front of me TD’s reports on Agrium and Potash. In it, they predict that potash, which was around $150/ton in 2005 and 2006, and is currently around $500 a ton (after briefly touching the $1000 range), will continue to increase to $700/ton by the end of 2009, and to $800/ton by 2010. I can’t say whether that’s too optimistic or too conservative. I’ve traditionally felt that TD’s analysts were pretty good at being realistic without being overly conservative (CIBC seems to like to shoot for the fences). However, I want to play it safe if I’m going to invest in this. I figure potash (the fertilizer) was pretty stable for two years there, and the rocketing this year looks out of place. So a more moderate price of $250 (a halving from where we are now, a ~40% increase from 2006 prices) by 2010 might be a more reasonable assumption.

TD and most analysts predict that both stocks have 12-month returns of over 100%, and naturally rate each a buy. I’m a little less optimistic, and think that at these prices they’re probably just at fair value. I’m going to wait for a bit more of a pull-back, and just watch for a while. I figure $33 for AGU or $70 for POT (whichever one hits first) is where I’ll start buying (and even there I’m only expecting a 100% return after ~5-8 years). It seems weird to continue to wait on these, since I do fall for “the story”, and since they’ve had such huge sell-offs lately, and also have seemed to stabilize for the last two months or so. However, despite the fact that the reckless optimism seems to have washed out, no one that I’ve read has yet turned completely pessimistic on them, so I think they might have a bit further to fall.

The Case for Caution

Part of what makes me cautious is that the story isn’t completely adding up. Somehow back in the spring there were crushing food shortages. Yet now, just 6 months later, the largest chicken producer in the US could be facing bankruptcy. What happened? Yes, the credit crunch really bites companies that were highly leveraged on the ass, but does that really explain everything, or is there an underlying problem in the food business story? Is the world not quite as hungry as we thought?

Could people wanting a beefier diet simply wait a decade, or simply not be able to afford it ever? On top of that, we have the little fact that China is a communist nation, and could decide to stop importing fertilizer on a whim. It’s not likely, but that fear is there (likewise with Migao, a specialty potash producer: the government could step in and cut their margins to satisfy farmers). Also, China just announced their own stimulus plan, which indicates that all is not rosy there, and that the growth and improvement in diets and lifestyles might not continue.

The Role of Biofuel

I think that in theory, biofuels make a lot of sense for a lot of reasons: sustainability, greenhouse gasses, and energy independence. While I think that electric cars and mass transit are better solutions for most of our people-moving needs, there are cases where liquid fuels are going to be needed, and for the long-term we should look at biofuels. However, in the short term, they rely on subsidies, and their return on energy is not great (or, according to some, even above 1). Top that off with people suddenly becoming concerned that biofuels are starving people, and that could be bad for the sector.

I mentioned in a previous post that the amount of food stock going to biofuels was actually quite small, so it’s really tough to nail the food crisis on that door. However, in the US at least, biofuel almost exclusively comes from corn, which is a very fertilizer-intensive crop. So while it’s not going to change food supply overall much, cancelling biofuel initiatives might have a decent impact on fertilizer demand. And trouble is brewing, as major ethanol producers run into financial trouble.

So unfortunately I don’t have a firm conclusion here. I like the long-term prospects of the fertilizer companies, but despite the recent pull-backs in price I don’t think there’s enough of a safety factor there, or the promise of outperformance, or the obscurity needed to have a mispricing to bother investing in them beyond the part that’s already in the index.