Amazing Tequila (Part I)

May 8, 2017 11:48 PM


For most of my life, tequila was something I gagged on at 4am, because some asshole thought it would be “fun to do shots.” Yet, throughout my many recent trips to Mexico, I experienced faint hints of what quality tequila tasted like. I quickly learned to avoid the mass produced commercial product out there and instead sampled small batch brands—often led forward by those who claimed to be experts in the craft. I liked what I tried, but I knew that nothing would do justice except a proper education in Tequila itself. As I was already organizing a Mexican road-trip with friends, I figured, we all might as well go 500km out of the way and explore both tequilas—the city and the libation. Besides, with overall US tequila consumption growing 10% a year and premium consumption growing nearly 50% a year, maybe there was an angle for a bunch of drunken portfolio managers to explore.

Tequila itself is unique, as it is one of the very few alcohols to take the name of the city it is produced in, instead of a region. After many a fraternity night essentially doused in the stuff, I assumed that the city would be set up for drunken tourism—a Bourbon street in the highlands of Mexico. Let’s just say it wasn’t what I was expecting. There are some tourist accoutrements, but in reality, this is a sleepy sixteenth century village of about 25,000 people—most of whom are in some way or another, tied to the tequila industry. Then again, given how remote the city is, it shouldn’t be a surprise that the tourists making the journey are true tequila aficionados—not the rowdy fraternity boys I expected to find.

downtown tequila

The leisurely town square in Tequila

 

After a leisurely lunch, we made our way to La Cata, Tequila’s best (and only) tasting room to get educated by a true expert, Clayton Szczech. While I can describe the dozens of varieties we sampled, that won’t do justice to the unique flavors—besides, by glass number 5, I sort of lost track of what I was drinking. What I do remember is our talk about the tequila industry itself.

Tequila comes from blue agave plants, primarily from the state of Jalisco and a handful of surrounding areas (the appellation). Production from other regions is considered mezcal. This limited growing region has created unique problems for producers. To start with, the plant takes 7-10 years to mature and will rot if not harvested at maturity. Since only the inner stem is used, it must be replanted after harvest and the wait until harvest begins again. With demand growing rapidly, this has led to perpetual cycles of boom and bust—just imagine how hard it is to predict demand for a product a decade into the future. Meanwhile, the cycles can last for many years due to the time it takes for a crop to mature. When we arrived in Tequila, the price, at 13 pesos per kilo was on the upswing—having been at half a peso per kilo just a few years earlier. Then again, that bust was epic and caused by a peak price of nearly 40 pesos per kilo (adjusted for exchange rates) back in 2000.

tequila truck

Truck full of agave waiting to unload

 

In all commodities, the cure for high prices is high prices. In the early 2000’s, farmers raced to plant agave, dreaming of heady profits, only to have most of their agave rot on their fields around 2010 since the glut was so extreme that it didn’t even pay to harvest it. That experience even led farmers to tear up their young plants and now there is a growing shortage again. The magnitude of this boom and bust cycle is unique for an agricultural commodity. If wheat doubles, that’s a huge move. Agave is up nearly 25-fold in 3 years and no one expects the price to pull back until larger crops can be harvested around 2020. Agave has had an epic move. Who needs futures or leverage, if you can capture those sorts of moves with physical offtake agreements? In a country with high interest rates and a lack of access to capital, I’m sure there is a business here. As everyone attested, the big guys are calling the shots and screwing the farmers who need access to capital.

The big distillers have the luxury to use grower loans to lock in supply when it’s cheap. Alternatively, they can store semi-processed product for years in order to smooth out these cycles when the price is high—buying agave when it’s cheap and storing it by the millions of gallons for when the price appreciates. Of course, that’s why most of the tequila you drink tastes like diesel—it wasn’t meant to be stored semi-processed. To a bunch of hedgies, this sounds like a system that is ripe to be disrupted—fortunately, we all scheme best when inebriated…

la cata

La Cata Tequila Wall

 

As we went through La Cata's wall of tequila, another recurring question was; how do these brands intend to differentiate themselves in the market? Unlike the whiskey bars now popping up everywhere, there aren’t a lot of tequila bars in the US for sampling all the brands out there. Americans often have to buy a full bottle to try it—hence the tequila sales effort is focused on the bottle design—unlike with whiskey. We saw some real works of art—much of it hand-blown. Interestingly, while a lot of well-known global brands will tell you that they’re “super-premium,” once you try the good stuff, you realize that there is still plenty of room globally for a super-premium brand of tequila—the true high ground hasn’t yet been claimed. Unfortunately, grubstaking a young brand is too much like venture capital. While established liquor brands have insane returns on capital, most start-ups fail to be noticed and ultimately go bust. This was a business that we would leave to someone else.

After a week on a bus full of hedgies, the conversation naturally turned back to the usual talk of which industries are due to be disrupted, which companies we should target for activist campaigns and which of our friends has had a big score lately. We sipped a few more glasses of tequila and continued to think out an angle on the rapidly growing tequila industry.

Unfortunately, all that drinking got us hungry and we weren’t going to bed without some quality street tacos.

 

taco guy

If you are ever in Tequila, seek this hombre out. He's mastered the taco craft.

sacha with dog

RBC Portfolio Manager Sacha Imbert devouring tacos. Even the local dogs were amazed.

 

To be continued….

 

 

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Real de Catorce and Onto 2017...

January 4, 2017 5:45 PM


While I was in Mexico, December the 12th was the Feast of the Virgin of Guadalupe. If you want to learn more about the holiday, go to Wikipedia, but the key takeaway for me, was that Mexico effectively shuts down for a few days. That’s all fine and good, because despite multiple trips to Mexico, there was one thing that I’d never been able to do—visit Real de Catorce. Furthermore, I knew that I’d need a few days—as it’s not exactly close to anything else.

At one time, Real de Catorce was one of Mexico’s richest silver producing cities, with some veins producing ore that was nearly half silver—for comparison, a few ounces per ton is considered pretty good today. Of course this led to an epic mining boom and over two centuries, they built a lot of mining infrastructure, some opulent homes, a mint and two large churches (as this is Mexico). However, you cannot really appreciate the city and how lucrative it must have been to get the silver out, until you realize that it’s situated in a valley at almost 9,000 feet, surrounded by desert and hundreds of kilometers from other large cities. Just to get supplies into the town, they had to dig a two kilometer tunnel after winding dozens of terrifying miles on a cobblestone road from the desert floor. Before the tunnel was built, you took your chances on one of many roads leading up over the mountains towering above Real de Catorce before descending into town. Let’s just say that I was terrified to ride a horse on one of these roads as one false step would send us both tumbling thousands of feet below. Imagine doing this with a wagon full of supplies.

Real de Catorce 1

1 lane tunnel that alternates between entry and exit all day long to get in or out

 

In any case, its remoteness preserved it when political instability shuttered the mines around 1910. The city's population dropped from over 15,000 people to a few dozen hardcore residents. While time and vandalism have done their damage, much of the original city remains—if in a degraded form. Recently, its picturesque setting and unique history have led to something of a recovery as the backpacker set has “discovered” Real de Catorce. Once tourists start spending money, you can be sure that they’ll “restore” the old buildings, start selling kitschy nick-knacks and "Disney" the place up to the point where I wouldn’t want anything to do with it. Places like Real de Catorce are rapidly being commercialized and I knew that I either went now, or missed the chance forever. Despite a day of driving in each direction, it was well worth it and I highly recommend going—for that matter, I recommend doing all the things that you want to before you can’t.

As we enter 2017, my New Year’s resolution once again is to do all that I want to do, see all that I want to see and find ways to insert myself into lucrative investment situations based on my willingness to go anywhere, think differently and figure things out before the masses.

For that matter, if you’re looking for a good investment, you should buy property on the main street of Real de Catorce, because...

Real de catorce 2

...is becoming....

real de catorce 3

 

May 2017 bring continued opportunity and adventure to all of us,

Kuppy

real 4

Real de Catorce main street

 

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The Woodstock Of Crony Capitalism

April 28, 2016 9:01 PM


It’s been a while since I've attended the Berkshire Hathaway (BRK:NYSE) annual meeting. Between the tedium of little kids asking questions about how to live life, to the feel-good nature of the thing, I simply got repulsed. Why do a bunch of hard-nosed capitalists choose to act like Ned Flanders for a weekend—in Omaha of all places? It’s illogical and completely artificial.

BH

Then, a few weeks back, as friends asked if I was attending this year, I had a certain realization—all this play-acting is simply Buffett, the puppet-master at his most brilliant. As he plows capital into highly regulated industries, he has the upper hand because he has skillfully crafted the image of the Mid-Western grandfather that can do no wrong. He can cozy up to regulators and politicians and get what he wants—without the added costs and distractions of lobbyists and consultants. Who wouldn’t want to get their permits in half the time and with a fraction of the cost? Want to block a Canadian pipe-line that would compete with your cherished rail-road? Become the President’s “economic advisor.” Want to abuse tax loopholes? Bemoan that your secretary pays a higher tax rate than you. You want to obstruct solar energy in Nevada? Elon Musk is a foreigner, Omaha is as American as it gets. Your railroad has an atrocious safety record? Well, at least we don’t have to worry about global warming from that pipeline...

I can go on and on, but I went from disgusted to awestruck. In this horribly overregulated world of ours, Buffett has evolved into the apex predator. Why wouldn’t he? Over his career, he’s consistently gone where the opportunities were. He’s gone from investing in “cigar-butts” when few other investors knew how to look for companies trading for less than cash, to branded products with pricing power that could thrive during the increasing inflation of the 70’s and early 80’s to a diversified book of high return on capital businesses during the great bull market that began in 1982. Over this time, he realized that he could leverage his bets with an insurance business that not only gave him access to cheap capital, but removed the headaches associated with bond maturities and margin calls.

Over the past fifteen years, the US has undergone a massive increase in pernicious regulation. Therefore, it seems only natural that opportunities would exist in the most regulated sectors of the economy. If you can get your permits and deny those permits to others, if you can avoid environmentalists and NIMBYs, if you can dodge taxes, if you can charm the cliques in Washington, you have an opportunity to earn outsized profits—especially if you have an endless fire-hose of cheap insurance float to deploy.

crony 2

Crony capitalism is highly lucrative and as a Berkshire shareholder, I’ve reaped the rewards. Now, I once again want to sit at the feet of the master. How do you make people like you to the point that they give you a free pass on whatever you want? When you call up a regulator, do you even talk about the issues? Or do you talk about your Ukulele skills and Omaha little league? You have to admire what he’s accomplished and I will be there to watch him amuse the petite bourgeoisie. I see a world that continues to become more regulated—where a cloistered elite uses special interest groups to crush opponents and destroy businesses. Either you’re calling the shots, or you’re getting abused like a peasant.

The Koch Brothers spend hundreds of millions on elections. Soros spends similarly on fringe groups that break windows and overturn cars. Neither really accomplishes his goals. Buffett gets what he wants. In Davos, they chug bottles of Chateau Lafite Rothschild and plot how to pillage small nations. At Berkshire, we will eat Dilly bars and plot how to pillage the middle class. Capitalism is beautiful and crony capitalism is the end product of politicians who prostitute the laws. I don’t have the power to change the current rules, but I can certainly learn to thrive within them.

This is a long-winded way of saying that after a few years of sitting out the meeting, I’ll be there. If you want to grab a drink, email me and I’ll tell you where I am. Beer with friends is fun—free beer at someone else’s party is the true definition of value investing.

 

Disclosure: Long Berkshire Hathaway

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Colombia Not Columbia...

September 3, 2015 3:23 PM


So, I was sitting in the Plaza De Los Coches in Cartagena, Colombia. It was past midnight, but still 95 degrees with an asphyxiating humidity that I have yet to experience in Miami. Fortunately, I had a cold beer in hand and was surrounded by good friends. In any case, I was transfixed by the parade of drunken tourists, prostitutes and the awkwardly comical pollination of the two. Yes, for over four centuries, despite revolutions, plagues, endemic crime, pirate induced destruction and a whole host of other calamities, Cartagena has carried on in much the same way—pure spectacle—travelers and prostitutes, money and drugs, all passing through its prized port. Hong Kong is the gateway to China and before the Panama Canal; Cartagena was the gateway to most of South America with its gold, silver and other riches. There is indeed a reason why the Spanish built the largest fort in the Americas overlooking Cartagena.

Cartagena 1

Historic Cartagena

As always, my focus was on the opportunity here. While Pablo Escobar’s ghost lingers over all of Colombia, my friends and I continually spoke about the peace dividend and the re-birth of Colombia—but what did that really mean? Sure there was opportunity. All around us, we saw signs of construction and rebuilding, but this was still Latin America—the spirit of mañana encompasses everything—including my ability to get served another beer.

“So Kuppy, name me one product pioneered in South America—one South American company that dominates its field globally?”

I took a deep sip of my beer and realized I needed a whole lot more time. Sure, the boys at 3G Capital have created huge conglomerates, but that’s just cost cutting and financial engineering. There are massive banks and retailers, but they mostly copy US models. There are plenty of commodity exporters, but that’s not exactly innovative. Was there not one company that I admired, from a continent of nearly 400 million people? It was late at night, but even with the help of the internet, I remained stumped. Why were there so few innovators on this continent?

In the end, we all agreed that the most innovative businesses in South America were involved in the production and export of narcotics to North America. Think about it, South America didn’t invent the iPhone or Amazon—instead; the best and brightest are focused on inventing long-distance submarines using supplies from a Home Depot. Why should they focus on anything else? Throughout history, the most entrepreneurial have focused on what makes the most money. South America was settled by thugs who wanted to steal Inca gold—now their progeny focus on selling plant extracts to Americans.

Cartagena 3

Cartagena 2

It takes some serious theatrics to differentiate your watermellon stand from the dozens that surround you...

So that brings me back to the opportunities in Colombia. Despite flying there to attend a conference on investing in Colombia, my take-away was that Colombia is very much like the rest of South America—in a perpetual sine curve. There are good and bad decades, but minimal progress. The nicest buildings in Cartagena were built centuries ago and you can still see kids playing in raw sewage a mile or two from the tourist district. I’m sure that in a few centuries, not much will change—it hasn’t changed much in the last few centuries.

However, that doesn’t mean that there isn’t opportunity. In particular, it was obvious that a decade-long rush of money entered the country to focus on mining and oil. Now, the economy was hopelessly dependent on high commodity prices. One only needs to look at the Colombian Peso, which dropped a few percent each day I was in Colombia, to realize that something was going horribly wrong.

The joke about Argentina is that they seem to have a crisis every ten years and it lasts about a decade. Despite the clarity elucidated within, there have been some great windows to buy Argentine assets on the cheap and make many times your money when the economy normalizes between crises. The rest of South America isn’t too different. Substitute revolution, socialism, currency crisis, commodity crisis, expropriation of foreign assets, coup, civil war, indigenous rebellion or any combination of the above and you can re-live almost every crisis in South America for the past two centuries. In two centuries, these will remain the facts—only the dates and countries will change. Fortunes can be made by buying the crisis and selling into that rare moment when they can induce foreigners to believe that “this time is truly different.”

On that note, it does seem as though Colombia is a few years past the top and a few years from some sort of bottom. The Colombians are committed to maintaining the peace dividend and tourists will eventually flock to the country. It is beautiful, the food is great, the people are friendly, it’s stunningly cheap and it’s less than 3 hours from Miami. This tourist boom will eventually offset the fall-off in commodity investment and certain commodities are primed to come roaring back in price. Until then, for the adventuresome, it’s time to start exploring for bargains. I’d personally be focused on buying up old buildings in Cartagena as the sustained peace dividend will eventually bring huge numbers of cruise ships with their cargo of American shoppers. Additionally, it doesn’t hurt that property prices just dropped by over 60% with the Peso.

Cartagena 4

cartagena6

The conversion of historic buildings into high end tourist shops is proceeding everywhere. For the brave, this is the opportunity...

Then again, I’d rather focus my energy on countries with real futures. Colombia is nice to visit. Economically, it will rise and fall repeatedly—much like it has over the past few centuries. Those paying close attention will do well there, but it’s unlikely that I’ll do anything investment related unless prices take a much more substantial tumble.

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Colombia

July 12, 2015 10:52 PM


As many of you know, I live in Miami—what you probably don’t know, is that without the cocaine trade, Miami would still be a backwater like Fort Meyers—good weather, some interesting architecture, but not much modern development. Instead, Miami is the capital of Latin America. It got to that pinnacle through the activities of a motley band of Colombians—none more famous than Pablo Escobar.

With the cocaine coming in, the money had to go out or at least get laundered into something. As you look at the skyline from my pool deck, you can see the many towers that were built with cocaine money—along with the many small banks that got their start from laundering this gusher of illicit funds. If cocaine built Miami, Pablo Escobar was inadvertently the creator of Miami’s modern economy.

With this firmly in mind, in late August, I will be joining my friends from Capitalist Exploits in Medellin, Colombia—which was ground zero for Miami’s renaissance. Fast forward a few decades and the Colombian economy has advanced a long way from the days when its principle exports were cocaine and violence, while importing little more than CIA funds to be siphoned off by drug kingpins.

Colombia is now experiencing a resurgence on the back of commodity exports and a relative peace dividend. I intend to take it all in, explore Medellin, see some old friends and figure out where the opportunities in Colombia are. It promises to be a very enlightening experience.

If you would like more information, please click this link Medellin, Colombia Meet Up

Or email Chris directly at chris@seraph.vc

 

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