Well, we were able to change our dinner time on the big boat from 8:30pm to 6:00pm. What a relief! What AARP card carrying member eats dinner at 8:30pm at night? Holy moly…
So, with the change, came new dinner mates. We gave up our late night entertainment with Chucky and Melinda, the Sicilian couple from Pennsylvania who own bowling centers and have eight kids (we made sure we were very nice to them and said lots of good things about the Catholic church) and replaced them with Tom and Laurie, evangelical farmers who have caught the cruise bug (seven cruises in six years). Tom and Laurie are good folk from the heartland. They make milk cows for a living on their 650-acre spread in Ohio. Yep, they make milk cows. They buy little milk cow babies (i.e., calves) and raise them to become big girls who produce milk (a process I won’t go into), and then sell them to dairy farmers.
So, you might wonder, what kind of conversation a finance professor and a milk cow maker are going to have? You might know that on the other side of the pasture there are these male cows they call bulls. And these bulls eat lots of grass and then excrete it into piles which are commonly called pies. In case you haven’t figured this out yet, I have been gifted with the uncanny ability to covert those pies into conversation…I think there is a word for that...hmmm….
So, I started out with a few comments on the embedded real options in farmland – Tom’s eyes glazed over. At this point, I think he was wishing he was a scotch drinker. I changed the conversation quickly to the more practical elements of running a milk cow making business, and Tom, God bless him, noted that his biggest gripe with the business was the volatility of pricing and government subsidies. Oh Lord, here comes the value creation sermon…
Dear Tom, value is created by not only increasing the numerator cash flows but also by reducing the volatility of those cash flows (the denominator): Value = Income/Volatility or Risk. The poor man is worn out by price and subsidy volatility; he freely admits it. At no charge, I told Tom that he could create tremendous value in his business if he could just figure out how to stabilize his business’s operating cash flows – don’t worry about growing it (i.e., the numerator); just focus on creating stability in the numerator (which impacts the denominator in the right direction).
Here’s a hint, Tom: hedge against the government. The more stupid the government is or becomes, the greater the potential for creating value by hedging against its stupidity and thereby creating value in your milk cow making business. Why? …because you have stabilized it. Would you rather own a ski resort or a utility company? There is money in stability!!!
I know, Tom, all you see is the big pile of crap they have dumped on your farm business. But, remember, lemonade from lemons…where does the President sign all of that ludicrous legislation that is making your life miserable? …in the Rose Garden. What do roses eat? Crap. Bag it, label it government produced, and sell it back to the Washington D.C. morons for mega bucks…
…oops! I may have stepped in a pile.
Posted on Sat, February 25, 2012
by Tim Moffit filed under