Last Thursday afternoon, I rushed into that print shop on West Pender for an important pick-up. As fate would have it, the line-up was long. And there was something vaguely familiar about the guy in front of me...
Mark Depp (of Marketdepth): Shoeshine! What are you doing here?
Shoeshine: Hello, Mr. Mark. I was just running off some documents for the bankers. Next week I am going to be making an unsolicited bid to buy BC Place stadium.
MD: Buy BC Place stadium? Are you going to run a sports team out of there?
Shoeshine: Not at all. This is a profit-seeking venture. I am going to use the stadium to store wheat.
Figure 1: BC Place Stadium – 75 Million Bushel Capacity
MD: Store wheat? Have you been drinking your shoe polish again?
Shoeshine: Au contraire, Mr. Mark. As you well know, grains are amongst the most undervalued assets an investor can own these days. Try comparing wheat prices against equities, bonds or other commodities over the past 30 years and you will see it clearly. Moreover demand is growing sharply in the emerging markets while the global supply picture is rather uncertain.
MD: OK, I see why you might want to store some wheat. But, why BC Place stadium?
Shoeshine: Filled to capacity, I reckon I could store 75 million bushels there, worth about half a billion dollars at current prices. The most recent comparable stadium transaction was last November's sale of the Detroit Silverdome for $583,000. Even if I paid ten times that amount, the stadium purchase only be 1% of the total wheat plus stadium investment.
MD: The Detroit Silverdome? But this is Vancouver!
Shoeshine: I know, buying a Vancouver stadium is different than buying the Silverdome. Detroit has very bad summer humidity. If I bought BC Place, I would save considerably on climate control. That's all worked into my offer price.
MD: But, Shoeshine, why don't you just buy exchange-traded funds like the Dow Jones-UBS Grains ETN (NYSE: JJG)?
Shoeshine: With notes like those an investor runs into difficulty when the commodity is in contango.
MD: Contango? Is that some kind of dance?
Shoeshine: No, it just means that the forward price curve of a commodity is upward-sloping. If you own a fund like JJG that rolls over commodity futures, every time a contract expires the fund takes a hit by re-buying the same volume at a higher price.
MD: Is there any other reason to own the physical commodity instead of contracts?
Shoeshine: Well, it also reduces counterparty risk. That's why precious metals investors typically pay a premium to net asset value to own a physical holder like Central Fund of Canada (TSX: CEF-A).
MD: I certainly see the logic. But with all due respect, Shoeshine, what you are doing isn't investing. Investing is owning businesses or real estate. What you are proposing is better characterized as hoarding.
Shoeshine: Some people think that way, Mr. Mark. But from my point of view, investing is merely the act of owning assets. I care not whether I own capital assets or consumable assets. I am just on the lookout for undervaluation.
MD: Yes, that makes sense to me, too. Come to think of it, I have come across a scheme like this before. Have you ever read a story about a fellow named Joseph? The book was on the best seller lists for quite a while.
Shoeshine: Ah, Joseph. A misunderstood character if ever one existed. Some people call him a dream interpreter or a prophet. In reality, he was just a very early hedge fund manager. He was lucky to have such a deep pocketed backer in that pharaoh. So, Mr. Mark, can I count on you to put up some money?
MD: I don't know. If someone was going to sell me BC Place for a few million, I might want to consider turning it into a hotel/condo development.
Shoeshine: Mr. Mark, I am afraid you are hopelessly behind the times. Now is the moment to turn your timeshares into ploughshares. Join me and ride the great bull market in agricultural commodities.
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