For those interested in these things, the polarised positions of Dawid Konotey Ahulu and Con Keating represent the best articulated statements of the pension deficit funding debate. Dawid’s latest contribution can be read here. This review has not been solicited – anyone (including Dawid) wishing to  re-post their blogs on henrytapper.com can needs to email me on henry.tapper@pensionplaypen.com.

Cow Driven Investing

Writing this, I feel much as I imagine a theatre critic might feel when reviewing the opening night of an intended comedy written by a good friend that has simply bombed completely. Dawid Konotey Ahulu has published another of his blogs; this one is entitled: Cow-driven Investing, A Cow Parable about delivering cows in full and on time.

I can understand that Dawid should wish to use the device of a parable; that has a long record of success in religious ideological application. In memory of Chris Golden, as on my last meeting with him, we spent four hours, over four pints of Guinness, discussing Neo-Liberalism and its offspring Market-Consistency, I am preparing a note on just this subject. Harvey Cox’s new book The Market as God is interesting, if not easy reading in that regard. I will offer some advice to Dawid: to be effective a parable needs to be short and simple, but this blog is long, over-long, as well as convoluted, tortuously so. The allegorical nature of the parable is hammered home by the end-piece dramatis personae, but allegories usually have moral purpose and the market is characterised by its amorality, and financial markets by the immorality of many of their participants.

I am left wondering why Dawid should have written this blog, and I am drawn to Gertrude “The Lady doth protest too much, methinks.”, and there I do understand the contemporary meaning of ‘protest’ as affirmation, including assertion as a stratagem to reinvigorate the faith of adherents. Of course, it may just be the surface similarities: Hamlet is long, and a tragedy of deceit and deception.

The figures in this blog are fictive as indeed are those of the distorted creed of market-consistency; remember this is “mark to dopamine”. However, to be effective a parable also needs to be grounded in common experience, and less than 2% of the UK population are farm-workers. If you ask a child where they think that food comes from, you are more likely to hear “the supermarket” as a response than “the farm”. The farm in this blog is the stuff of nursery tales, and fantasies beyond.

To an aspiring author, any decent literary agent will offer the advice to do your research thoroughly before putting fingers to a keyboard, and this blog fails badly in that regard. As a former Governor of the Combined Scottish Agricultural Colleges, I feel qualified to offer Dawid the further advice that agribusiness appears most unlikely to prove fruitful for him. Unlike financial markets, it is grounded in actual realities.

Having recently shown how far from reality market-consistent pension liability valuations may be, and that is enormous, let’s look at how far from reality, this fiction is. Dawid has a single farmer succeeding, by the sweat of his brow, in growing to have 100 employees after five years. If this farmer has the UK average worker holding of land, he has slightly under 50 acres. He is farming just arable crops and that would give him less than a subsistence income, but perhaps as high as £10,000 pa. He could hardly put food in his mouth let alone pay the maintenance costs of farm machinery, which would have to be sourced in judicious purchases of used equipment in farm sales. Where then does the financing come from for this expansion of land holding to employ 100 farmworkers? As this is an arable operation, and allowing a month each year for holidays, what do these employees do during the ten months of the year when they are not occupied by farming tasks? Management of productive efficiency is key to financially successful agribusiness. Labour costs are not that significant a variable input in arable agribusiness even if one includes within that classification specialist contractors -perhaps 5-8 % of variable costs. The family office that I advise has extensive agricultural interests with total landholdings exceeding 400,000 acres. It manages this with less than 700 employees; that is over 550 acres per employee. It would be a gross mistake to think of these employees as straw-chewing yokels, with trousers tied up by baler twine; they include managers, veterinary surgeons, doctors, nurses, electrical and mechanical engineers, geneticists, ecologists, electrical and mechanical engineers, and helicopter pilots, and this is an incomplete list of the professionals employed.

Dawid has his farmer offering these employees cows as pensions. This prospect would be greeted not with his supposed delight, but abject horror. Not only on the part of the professionals but also by the labourers, who would be consumed with such questions as: where do I keep them, how do I feed them, and do I really want to rise every morning at five in the morning in all weathers to milk them even at the age of 85, and then be back again every afternoon, and to be doing this without break every day of the year? With a mediocre cow producing 8,000 litres a year, they are most likely to get sick of dairy products and literally, from them, to develop chronic diarrhoea.

This farm is undiversified; it produces only corn and barley. This farmer is dumb as his holdings are now large, at least 5,000 and perhaps as much as 55,000; crop diversification would not only provide income stability but also higher income when that diversification exploits the natural resources and biodiversity of his holdings.

The level of pension offered, 12 cows a year, is not outrageous, at recent prices about £15,000, but hardly generous. The lack of diversity means that the farmer has to buy these cows at market. Dawid has the farmer promising to buy these annually on New Year’s Day, when there is not a cattle market in the country open; hardly a credible promise to a farm-worker. On New Year’s Day, those with control of the cheque-books are all dressed in pantomime pink riding to hounds and many of their labourers are following them. This farmer really is a fool; going to a closed market, when this tradition is about bonding with his peers and developing the trusting and co-operative relations which are more important in farming than most industries. There is also the question of seasonal supply, these would be newly calved cows and farmers plan and do avoid calving in the Christmas period.

Dawid did miss a trick in his parable here. In the post-war period, global food prices have fallen dramatically and consistently; this is reminiscent of the recent behaviour of interest rates though longer and more severe in magnitude. But that trend stopped about five years ago, and the prospect of trends reversing is not convenient for his interest rate hedging sales pitch.

The farmer expands further to the point of employing 3000 farm-workers. This is a big farm, a very big farm. If it were to operate to the efficiency of the family office, at this scale there is no reason why not, it would be managing some 1.65 million acres, almost 7.5% of all farmland in the UK, and of course much of that is entirely unsuitable for arable production. To put it in context, that is more than twice the size of the National Trust, which has around 600,000 acres, mainly tenanted. Dawid introduces a competitor for his principal character who employs 100,000 people – that is several United Kingdoms that he is farming.

Dawid feigns outrage at the cost of buying cows, when this is £1.62 million. That is less than £1 per acre. He has the price of a cow multiplying two hundred-fold over a few years. This might be possible in a financial market, perhaps when speculators are cornering a market, and the Hunt Brothers come to mind, though even they failed to achieve those dizzying heights. However, it is simply not possible in a market for cows. In the first year the supply would increase in response to those prices; farmers would breed more. In the second year they would breed even more. In order to achieve a sustained rise in the price of cows, it would be necessary to see a sustained increase in the demand, consumption and price of milk and dairy products.

Dawid introduces both drought and pestilence (or at least fungal disease), always a must-have in religious epistles. The failure to apply fungicides confirms the stupidity of Dawid’s farmer, but that we already know from his lack of diversification. Moreover, insurance against flood and drought is an absolutely standard farm management practice, and at the scale of the farmer’s operations geographic diversification is also obvious.

Dawid then introduces derivatives, Royal Cow Transactions, in a fanciful and bizarre fantasy. Remember your audience, Dawid, these are farmers. We invented futures and options markets for agricultural commodities, and we organised them in manners that eliminate the credit risk that so troubles your dyadic transactions. The financial contracts that Dawid’s religion so espouses are copied from these markets, but often then omitted even the most basic of systemic safeguards, as we saw during the great financial crisis. You will go a long way before you find a farmer of any substance who does not follow closely the cash and futures markets; they and we use them from time to time to hedge and to speculate.

I am left wondering if Dawid has ever thought about the relation between the prices of cattle-feed and cattle prices; that is rather an important consideration when deciding the important questions surrounding this farm’s grain production and finances.

The bathetic ending of the blog-play merely serves to consign this unamusing tragi-comedy, with ever greater probability, to oblivion. Hamlet is long and gripping, but this had me wishing it to end, far too long before it did. It will, of course, play to the unthinking already converted but as a piece of proselytising propaganda, an aid for recruitment to the use of market-consistency in pension valuation and management, it is destined to fail abysmally.