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The Global Beef Boom - Good Or Bad?

So where’s the investment? I have two. The first is a big, fast-growing Russian dairy company, Wimm Bill Dann Foods (WBD). It brought in over $2 billion in revenues last year selling milk, cream cheese, yogurt, butter, kefir, cottage cheese, juice, water, baby food and dairy desserts. It’s growing revenues at a rate of about 40% per year. It’s expected to grow earnings by 35% in 2007 and 40% in 2008. Its current PE ratio is 33. And the stock is trending up!

I took my wife to a classy old Boston restaurant last Saturday night for her birthday. She ordered the tenderloin, and I - deviating from my usual practice of ordering a healthy fish dish - ordered the buffalo au poivre. At which the waiter commented, “It’s really bison, of course. There are no buffalo left in North America.”

I thought a second, then let it go. I was there to enjoy dinner, not to teach the waiter about the history of the bison, or to clarify the difference between bison and buffalo.

But the next day I did some research, and I present the basics here, in part to prevent future waiters from making the same mistake … in part because acquiring knowledge is fun. … and good for your brain.

The truth is that there have never been buffalo in North America. The major species of true buffalo are the domestic Asian water buffalo (also found in South American and Australia), the endangered wild Asian water buffalo, and the African buffalo (or Cape Buffalo).

What we have in North America (though they’ve been called buffalo since Europeans arrived) are actually American bison. Their ancestors crossed over the land bridge that connected Asia and North America and they eventually blanketed the continent, numbering between 30 and 75 million.

The bison that remained behind are now called European bison, or wisent. Somewhat smaller than the American bison, they covered Europe and northern Asia 2000 years ago, ranging from Britain to Siberia, from Norway to Spain. But as Homo sapiens evolved their hunting techniques, the wisent population shrank dramatically. By the 11th century, they were nearly extinct in the wild.

Populations were preserved over the centuries in the private forests of Polish kings, Lithuanian grand dukes and Russian czars. Poachers were killed … a punishment that is often an effective deterrent. And in 1951 the wisent were re-introduced successfully to the wild. The wisent population today numbers over 3,000.

The American bison, meanwhile, proved an essential part of Native American life for centuries. But the arrival of Europeans, and the subsequent westward expansion, quickly took its toll. Contributing to the decline was the knowledge that killing the animals hastened the starvation of Native American populations. By 1896, there were about 300 American bison left. Eventually, preservation efforts kicked in. Today the population is growing rapidly, and is estimated at 350,000.

Bison meat is high in protein and iron, and relatively low in fat and cholesterol. But bison are more expensive to raise than cows, so the meat is more expensive.

My bison steak, incidentally, was excellent.

And now, some interesting facts about cattle … which include cows, bison and buffalo.

Today there are about 1.5 billion cattle in the world; they exist mainly to feed people. If current trends continue, global meat consumption will double by 2050, both because of growing populations and growing wealth, which enables western-style consumption.

Yet according to a 400-page report issued by the United Nations’ Food and Agriculture Organization (FAO) last year, cattle are “responsible for 18% of greenhouse gases, more than cars, planes and all other forms of transport put together.”

(Cattle are also blamed for acid rain, the introduction of alien species, producing deserts, poisoning rivers and drinking water and destroying coral reefs, but we won’t get into that here.)

A related study at the University of Chicago suggests that if you eliminate meat and dairy from your diet you can save 1.5 tons of greenhouse gas emissions each year. If you drive a Prius, contrarily, you only reduce the emissions of greenhouse gases by 1 ton.

So where - in this climate where activists readily demonize the creators of global warming - are the protesters against farmers, against meat processors, and against beef-eaters? Where are the students advocating punitive legislation for the beef industry and special taxes on red meat products?

They’re non-existent.

The biggest producer of beef in the U.S. is Tyson foods. Second is Cargill, and third is Swift, which was just bought by South American JBS-Friboi. Swift, remember, had its plants raided in December 2006 by U.S. immigration agents, who found more than 1280 “undocumented workers.”

These are big companies, and they could easily be targeted as major contributor to global warming. But they’re not, and I’m guessing that part of the reason is that food is rather sacred to Americans. No country on earth is better at growing it and eating it, and to agitate against that tradition would be, well, un-American.

But looking at the big picture, and keeping in mind the principles of ultimate utility and greatest good, a decent case can be made that curtailing our beef consumption is a smarter move than curtailing our driving habits.

The facts about greenhouse gases certainly favor cutting beef consumption. So, too, do the facts about health. Cholesterol is a major killer in our society, and cutting back on the hamburgers and steaks would make us all healthier in the long run. And what would be the cost? Financially, most Americans would see a cost savings, as alternative foods are cheaper. Cattle farmers would suffer, of course, but it appears that the only real cost to society at large would be the loss of the pleasures of eating red meat steak. It’s immeasurable, but it’s real.

Reducing the amount of fuel burned by driving can certainly reduce emissions, whether you do it by buying a Prius, downsizing from an Escalade to an Escort, or from a Suburban to a Subaru, or using public transportation. Ideally, you do this voluntarily, and you save money while maintaining your utility.

But driving a smaller lighter vehicle increases your risk of injury in an accident. And if the government steps in and imposes a heavy-handed solution (like raising corporate average fuel economy [CAFE] rates) that typically imposes costs on the group with the least lobbying power. Furthermore - and this tends to be the least appreciated part of the calculus - it can negatively impact productivity, and I don’t believe the U.S. can afford any more impacts to productivity.

Admittedly, this cursory analysis ignores the geo-political forces that affect our energy policy. It ignores the fact that ever-improving alternative technologies promise reduced dependence on oil in the years and decades ahead.

Nevertheless, it appears that reducing our beef consumption could do more for both our personal health and our planetary health than reducing our fuel consumption.

It’s worth thinking about.

In the meantime, however, it’s fairly clear that the global cattle industry will continue to grow. All you need do is look at the trends of consumption in both China and India. At the same time, the corn industry is booming, spurred by growing demand for ethanol. And the fertilizer business is just giddy, as demand from all corners of the globe has increased.

So where’s the investment?

I have two.

The first is a big, fast-growing Russian dairy company, Wimm Bill Dann Foods (WBD). It brought in over $2 billion in revenues last year selling milk, cream cheese, yogurt, butter, kefir, cottage cheese, juice, water, baby food and dairy desserts. It’s growing revenues at a rate of about 40% per year. It’s expected to grow earnings by 35% in 2007 and 40% in 2008. Its current PE ratio is 33. And the stock is trending up!

The second is Potash Corp (POT). Now, it’s hard to think of a less exciting business than this one. Potash, based in Saskatchewan, Canada, makes fertilizer, which is in high demand today by farmers attempting to increase crop yields. Its production is evenly divided between nitrogen, potash and phosphate. Half of its output goes to the U.S.; a third stays in Canada, and a third goes offshore.

Years ago, this was a typical low-margin commodity business, and growth stock investors wouldn’t give it the time of day. But the global increase in demand for commodities has allowed the company to boost prices repeatedly, and now its profit margin exceeds 20%! How long this state of affairs will continue, no one knows. But I don’t recommend that you argue with it.

POT first appeared in Cabot Top Ten Report back in May, when it was trading at 69 (split-adjusted). It appeared there again this past Monday, having vaulted from 90 to 100 last week. And now it’s digesting that gain, working to stay on top of the psychologically important 100 level. The longer it does, the more attractive it will look.


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Yours in pursuit of wisdom and wealth,

Timothy Lutts
Cabot Wealth Advisory


Timothy Lutts is Chairman Emeritus of Cabot Wealth Network, leading a dedicated team of professionals who serve individual investors with high-quality investment advice based on time-tested Cabot systems.