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A Sound Investment


October 2, 2009
By Jim Knisley


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Recently, I wrote that quota values were looking a little pricey and were becoming increasingly hard to justify on the basis of the cost versus the expected return from production.

Recently, I wrote that quota values were looking a little pricey and were becoming increasingly hard to justify on the basis of the cost versus the expected return from production.

But just as there is more than one way to skin a cat there is more than one way to evaluate the value of quota.

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For example, what would you or perhaps even Warren Buffet say if I told you there was an investment out there whose value had increased an average of 7.3 per cent every year for the last 25 years. You might be intrigued.

If I added that there were only two years in the last 25 when the value of that investment fell and the drops were so small that they could easily be a rounding error, you would likely be more than intrigued. You might well ask: “Where can I find this investment?”

The good news is you already have. The investment is in quota.

The value of quota in supply-managed industries (including dairy) has risen from about $4.4 billion in 1981 to almost $30 billion in 2007 (the last year I could find data for). Since then information indicates that it has continued to rise.

Meanwhile, the Toronto Stock Exchange 300 index, which is the value of the 300 largest companies on the Toronto Stock Exchange (TSE) rose an average of 7.6 per cent per year. But the TSE figure doesn’t include what happened last year and in the first six months of this year. If you include the 25 per cent drop in the stock market, quota is a far better performer.

Quota values also have the great benefit of allowing you to sleep at night. Anyone owning stocks didn’t get much sleep last year because the value of their investments, even investments, which were supposed to be safe and sound, weren’t. Every morning they would wake to news that their nest egg had shrunk – again.

For a while it looked as if quota values were under threat from a proposed deal at the World Trade Organization. That deal would have cut into Canada’s border protections, resulted in more imports and reduced the value of quota. A deal of that sort is looking less and less likely.

The troubled world economy has forced a lot of countries to look inward and do more to protect their own industries.

While the WTO is down, but not necessarily out, it does look like quota values are again on the rise.

But there are limits. Capital appreciation in quota is a nice thing to have, but the only way to realize on it is to sell or borrow against it.

In that respect, it is similar to land. There is also the old farm belt slogan “buy land, they aren’t making any more of it.” Farmland hasn’t been a loser as an investment, but it is very volatile and average increases pale when compared with quota.

When you look at quota as a percentage of total farm assets (which is mostly land), quota has risen from 3.37 per cent of capital assets in 1981 to almost 10 per cent today.

Quota values today are seven times what they were in 1981 while total farm assets (mostly land) have doubled.

The only investment that was comparable to quota was housing. Average house prices rose for decades. There would be local volatility depending upon the state of a local economy, but overall, housing was a good investment. In some locations it still is. But the housing market is now following the overall economy and is, in communities not fortunate enough to be in Saskatchewan, weakening.

The jump in housing prices became a particular problem in the U.S. A lot of people became very excited because of the escalation in the value of their home. Some went out and borrowed against that inflated value. The lenders were more than happy to provide the money because their economic models indicated that housing prices always rise.

That was until last year. When house prices fell, a lot of people got trapped. They owed more than the house was worth.

In Canada, we didn’t have nearly as much of a bubble. There is stricter regulation up here, which tends to restrain our irrational exuberance.

Our bubble was more like a soap bubble while the U.S. bubble was the size of a hot air balloon.

But the trouble with financial bubbles (or balloons that become over inflated) is that they are usually unrecognized until they pop. There is no indication that quota values here have any resemblance to a bubble – just the opposite. More than 25 years worth of steady, solid growth isn’t bubble-like. It may be more like a balloon with room to expand.

But if you do happen to hear a popping sound – duck.


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