“Just because you do not take an interest in politics doesn’t mean politics won’t take an interest in you” Pericles - Agcapita is Canada's only RRSP and TFSA eligible farmland fund and is part of a family of funds with over $100 million in assets under management. Agcapita believes farmland is a safe investment, that supply is shrinking and that unprecedented demand for "food, feed and fuel" will continue to move crop prices higher over the long-term. Agcapita created the Farmland Investment Partnership to allow investors to add professionally managed farmland to their portfolios.

1. Agcapita Update
June 2011

2. Agcapita Update
“Just because you do not take an interest in politics
doesn’t mean politics won’t take an interest in you”
Pericles
Summer is here and the inevitable Keynesian endgame
seems to be arriving for Greece. Shall we feign
surprise that massive governments deficits to pay for
unsustainable entitlement programs funded by insolvent
banks and money printing central banks are not a recipe
for a successful economy?
When you are bankrupt more debt doesn’t remedy your
problem - at best it may serve to maintain your liquidity
which is not the same as your solvency. None of the
participants in the unfolding Greek tragedy are willing
to take losses. Everyone wants to be bailed out by
the other guy, something akin to trying to lift a bucket
while standing in it as Winston Churchill once quipped.
How will the Greek story end? Let’s assume that some
combination of the following must occur:
– Government needs to shrink
– Banks must take losses
– Central banks must stop printing money
– Taxpayers must accept reduced entitlements
Judging by this list my conclusion would be “not well”.
The banks want the taxpayers to shoulder the losses,
the state wants the taxpayers to shoulder the losses, the
taxpayers want the banks to shoulder the losses. This
is a fantasy that cannot continue indefinitely. Before we
get too smug about the mess in Greece let us not forget
most G8 sovereign balance sheets don’t look much
better.
Why? Its simple math. Whether you are Greek,
Canadian or Zimbabwean you cannot indefinitely
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3. Agcapita Update (continued)
receive $5 of government services for less than $5 of Why is this being done? A cynic might be inclined to
payments, if you are a bank you cannot keep lending answer that there are many more compelling reasons
to insolvent borrowers without incurring losses, and over and above Libya:
if you are a central bank you cannot keep printing
money without reducing its value. When a country – Sweet versus Sour: Incremental Saudi production
arrives at the point where its debt is two times the is too sour and heavy to bring down global prices
size of its economy and its unfunded liabilities are because refineries that lost Libyan sweet crude
even greater, if the end is not near it must certainly be cannot handle sour crude.
visible on the horizon. – Spare Production: It appears that despite the
verbal posturing to the contrary, Saudi can only
In the ongoing battle to postpone the day of pump modest amounts of additional oil and then
reckoning, at least until after the next election cycle, only for short periods of time. Just the loss of 1.6
the less scrupulous members of the political class are million barrels a day revealed that the emperor
now willing to pull out all the stops and intervene in was not wearing any clothes.
ways and in markets that would have been unheard – Demand Growth: With any kind of reasonable
of just a few years ago. Sadly, we are now dealing economic growth, the demand for oil will
to a large degree with political investment markets continue to increase. China aims to be middle
not economic ones - the question then becomes how class and even after 2 decades of impressive
long before economic gravity re-asserts itself? development is still at the very early stage of that
transformation.
Economic gravity in the form of escalating nominal – Hidden Stimulus - QE2.5: Every dollar drop in
prices certainly seems to be re-asserting itself in the the price of oil acts as a $7 billion annualized tax
energy markets over the last 24 months. So much break for US consumers.
so that the International Energy Agency (IEA) recently – Nominal Price Pressures: Rapid money supply
announced that the US and its partners will release increases are driving nominal energy prices and
60 million barrels of oil - ostensibly to offset the loss monetary authorities are eager to disguise this
of Libyan output even though Libya only amounts fact - even if only temporarily. With commodity
to around 2% of daily supply. The US will release a prices at nominal highs there will be stiff
million barrels a day from the Strategic Petroleum grass roots resistance to even the hint of QE3
Reserve (SPR) - an emergency action it has only emanating from central bankers.
taken 3 times in the SPR’s history:
Perversely, by reducing prices even temporarily the
– 1990/91 - Desert Storm sale - 21 million barrels IEA will make marginal supply uneconomic which will
– 2005 - Hurricane Katrina sale - 11 million barrels curtail future development plans - another example
– 2011 - Arab Spring sale - 30 million barrels of the short-sighted “kicking the can down the road”
behavior of our governments.
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4. Agcapita Update (continued)
I believe we are seeing the unraveling of some very The benign investing world of the last two decades
powerful long-term trends particularly the long-term appears to be passing rapidly and the one replacing it
bull market in sovereign debt. This is certainly an is more volatile at all levels.
ominous development but is does not mean we
should give up all hope to generate returns. Changes Kind Regards
of the magnitude that we are witnessing should
provide commensurately big opportunities. The Stephen Johnston
key is to be ready and position yourself accordingly.
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projections and other materials contained herein have been obtained from
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