Great article. Do you have any concerns about the impact of the 'tax summit' being held next week by the government? In particular the impact of the proposed 5% cashflow tax.
The reality is if SHV revenues tick over $1B (the proposed threshold), this would be the least of our problems and the thesis would have already well and truly played out.
Otherwise, the proposal would see SHV's corporate tax rate drop from 30% to 20% plus a 5% annual 'cashflow tax' - meaning a lower effective rate than current (granted there are differences with treatment of CAPEX that will be fully deductible and interest which wouldn't).
- What 2-3 concrete facts in the next 1-2 years would disprove your structural bull case (e.g., SGMA carve-outs, carry-in collapsing, plantings inflecting)?
- Beyond SHV, who are the next best two vehicles (by torque vs risk) and why not own those instead?
An inflection in new plantings is the primary metric to watch for any signs of thesis break in my view. Carry-in expanding wouldn't disprove the stuctural bull case over the next 1-2 years and would likely instead serve to depress prices in the short-term whilst reinforcing the long-term bull case as outlined in the write-up.
Other players like Olam Group and JBSS have broader exposure to this theme but the bottom line is they do not provide pure-play almond exposure and are exposed to downturns in unrelated commodities. SHV is the only publicly listed company in the world which offers this pure play exposure to almonds and that is what I am looking to isolate for.
Another great post, thank you! I guess in a way it is the delta of the water dynamics in both locations that this hinges on. Is the SGMA regulation/situation entrenched enough and deemed immovable as such? Not an expert in this area as you can tell from my comment, but I wonder if regulation can be reversed/delayed if farmers make loud enough noise specially with Trump in office, as far as precedents is concerned? The 2nd question is do you think demand holds up even if price jumps? For example consumers/producers bring in pistachios or cashews into their products as substitutes of sort?
The State of California's stance is unlikely to be moveable in my view given they have already spent close to $1B in SGMA-related activities. In the Western SJV, reductions in system capacity to move water due to land subsidence is already at 46%. The potential cost for re-establishing this system capacity due to land subsidence (as a result of over-draft) is likely to span Billions of dollars over the next 20 years as is. Delays in enforcement are more of a risk in my view and something to continue monitoring.
Re Demand: multiple studies have been conducted on the elasticity of demand with a wide range b/w 0.47-0.83. The average is 0.646 and consensus for all studies points to demand being inelastic. So if price gets to a point where we see meaningful demand destruction then I believe the thesis would have already well and truly played out.
Great write up! originally looked into SHV as a niche tariff play that the Indian and Chinese market would choose to purchase AU stock in response, unsure if the run-up from 3.70 to 5 was Trump driven or not. Interesting again now that the price has come back below where it was November last year.
Very interesting read and prompted me to do some digging of my own. I see the play in the regional disparities, but I’d be concerned that management would hedge away exactly what you are trying to capture. Were you able to get any comfort around their hedging strategy?
Thanks for your question. The thesis does not hinge upon regional disparities in price. Australia gets very similar prices to the U.S. (in fact a slight premium at the moment). The company hedges are in place because the majority of their revenues are generated in USD. The company enters into currency Forward Exchange Contracts (FECs) with the objective to control for the value of these future revenues by protecting against unfavourable exchange rate movements/volatility in the AUD/USD fx rate for highly probable contracts that they've entered into.
For example in the 1H25 results, the company announced they had hedged coverage over 86% of the FY25 crop at an average AUD/USD rate of 0.648, reducing any possibility of exchange rate volatility between the time period from when this was contracted and when the exchange of goods actually takes place (granted they obviously still have counterparty credit risk).
I am comfortable with managements hedging strategy. They don't take on any long duration hedging risk but seem to be somewhat strategic around locking in contracts. For the FY25 crop, the company took advantage of a strong USD to hedge at a forward rate which is now more attractive than today's spot rate (meaning you couldn't lock in a forward price of 0.648 today for the FY25 crop). They also seemed to take advantage of USD strength in Oct 2023 locking in an FEC for just under 2 years. All in all, I don't have any issues with it.
Clearly, there is LT exposure to a weakening USD but given how far prices need to move to incentivize new supply, I believe this should be more than offset by the absolute % change in the underlying commodity price.
Thanks for answer and sorry I could have been more specific in the question - I meant hedging in terms of selling price if they are selling forward the crop before harvest. The way I am framing it myself kind of from an event perspective, is that Select may benefit disproportionately should there be a shock to the California supply, but if the crop is sold forward, the benefit won’t be realised in year 1. This issue, plus carry in supply will dilute the benefit of a supply shock driven increase in price.
Firstly, this works both ways. For example, Select had the majority of their crop already covered at much higher prices for FY25 prior to the objective estimate release which lowered the almond price. On the other hand, Californian farmers are faced with the prospect of selling the majority of their crop into these lower prices.
Secondly, I am not viewing this playing out with some temporary price spike that will see imminent recovery with 12 months.
The important question to ask is where incremental supply will come from to bring prices back down?
Look at what happened to the almond price during the last droughts in California (2012-2015 period) which critically only involved a temporary dislocation in water access. (Prices went a lot higher).
SGMA fundamentally creates these starved water conditions but on a permanent basis.
On top of this, it takes 3 years for new plantings to produce even a single nut.
So I'm not too worried if for whatever reason Select don't fully capture the entirety of the price spike in year 1 and believe that when the price spike does come, it will be sustained for some time until prices reach a level that would incentivize new supply - much higher than where we are today as detailed in the write-up.
however, as much as we want to be convinced of the upside potential, I would love to hear your opinion on how SHV got to these low prices, well below the capital raising just last year. I have difficulty having unbridled conviction when the market has such a negative view, despite all the positive factors.
My view is that markets are often short-sighted and irrational. I don't believe there's necessarily a logical answer other than this. I.e. the time horizon in focus is usually only the next 6-12 months and in today's world this time horizon is getting shorter and shorter. The Obj. Estimate clearly didn't help but the price was already somewhat depressed prior to that.
In saying this, a major part of my approach is understanding exactly how I am going to extract value and get paid.
In this spirit, if we reverse-engineer the question and focus on what the market will do in a world where the almond price has materially increased because supply hasn’t grown for 3-5 years (and has in fact very likely shrunk) with steady demand growth; I believe the resultant material earnings and FCF inflection will very quickly flip the markets’ attitude from one of pessimism to raging optimism with the stock responding accordingly.
So I really try to remain focussed on the qualitative inputs, monitoring them consistently to ensure the thesis is still on track and then try to deduce how these qualitative inputs – i.e. the lack of supply due to water shortages in California – will impact the almond price and therefore flow through to future Earnings and Free Cash Flows and how the market will therefore value these.
Very detailed and great reading.
Much appreciated Nick!
Great article. Do you have any concerns about the impact of the 'tax summit' being held next week by the government? In particular the impact of the proposed 5% cashflow tax.
Thank you Craig - much appreciated!
The reality is if SHV revenues tick over $1B (the proposed threshold), this would be the least of our problems and the thesis would have already well and truly played out.
Otherwise, the proposal would see SHV's corporate tax rate drop from 30% to 20% plus a 5% annual 'cashflow tax' - meaning a lower effective rate than current (granted there are differences with treatment of CAPEX that will be fully deductible and interest which wouldn't).
Very interesting. Thank you for your work.
I love the reverse engineering thesis.
"The enemy of my enemy is my friend" playbook.
A few questions:
- What 2-3 concrete facts in the next 1-2 years would disprove your structural bull case (e.g., SGMA carve-outs, carry-in collapsing, plantings inflecting)?
- Beyond SHV, who are the next best two vehicles (by torque vs risk) and why not own those instead?
Appreciate the kind words Silba.
An inflection in new plantings is the primary metric to watch for any signs of thesis break in my view. Carry-in expanding wouldn't disprove the stuctural bull case over the next 1-2 years and would likely instead serve to depress prices in the short-term whilst reinforcing the long-term bull case as outlined in the write-up.
Other players like Olam Group and JBSS have broader exposure to this theme but the bottom line is they do not provide pure-play almond exposure and are exposed to downturns in unrelated commodities. SHV is the only publicly listed company in the world which offers this pure play exposure to almonds and that is what I am looking to isolate for.
Another great post, thank you! I guess in a way it is the delta of the water dynamics in both locations that this hinges on. Is the SGMA regulation/situation entrenched enough and deemed immovable as such? Not an expert in this area as you can tell from my comment, but I wonder if regulation can be reversed/delayed if farmers make loud enough noise specially with Trump in office, as far as precedents is concerned? The 2nd question is do you think demand holds up even if price jumps? For example consumers/producers bring in pistachios or cashews into their products as substitutes of sort?
Thanks for the kind words Adham!
The State of California's stance is unlikely to be moveable in my view given they have already spent close to $1B in SGMA-related activities. In the Western SJV, reductions in system capacity to move water due to land subsidence is already at 46%. The potential cost for re-establishing this system capacity due to land subsidence (as a result of over-draft) is likely to span Billions of dollars over the next 20 years as is. Delays in enforcement are more of a risk in my view and something to continue monitoring.
Re Demand: multiple studies have been conducted on the elasticity of demand with a wide range b/w 0.47-0.83. The average is 0.646 and consensus for all studies points to demand being inelastic. So if price gets to a point where we see meaningful demand destruction then I believe the thesis would have already well and truly played out.
Brilliant, thank you, makes a lot of sense!
Great write up! originally looked into SHV as a niche tariff play that the Indian and Chinese market would choose to purchase AU stock in response, unsure if the run-up from 3.70 to 5 was Trump driven or not. Interesting again now that the price has come back below where it was November last year.
Thank you! Agreed - the tariff related set-up is highly attractive for SHV relative to Californian competition.
Great post!
Appreciate it Dan!
Very interesting read and prompted me to do some digging of my own. I see the play in the regional disparities, but I’d be concerned that management would hedge away exactly what you are trying to capture. Were you able to get any comfort around their hedging strategy?
Hi Stephen,
Thanks for your question. The thesis does not hinge upon regional disparities in price. Australia gets very similar prices to the U.S. (in fact a slight premium at the moment). The company hedges are in place because the majority of their revenues are generated in USD. The company enters into currency Forward Exchange Contracts (FECs) with the objective to control for the value of these future revenues by protecting against unfavourable exchange rate movements/volatility in the AUD/USD fx rate for highly probable contracts that they've entered into.
For example in the 1H25 results, the company announced they had hedged coverage over 86% of the FY25 crop at an average AUD/USD rate of 0.648, reducing any possibility of exchange rate volatility between the time period from when this was contracted and when the exchange of goods actually takes place (granted they obviously still have counterparty credit risk).
I am comfortable with managements hedging strategy. They don't take on any long duration hedging risk but seem to be somewhat strategic around locking in contracts. For the FY25 crop, the company took advantage of a strong USD to hedge at a forward rate which is now more attractive than today's spot rate (meaning you couldn't lock in a forward price of 0.648 today for the FY25 crop). They also seemed to take advantage of USD strength in Oct 2023 locking in an FEC for just under 2 years. All in all, I don't have any issues with it.
Clearly, there is LT exposure to a weakening USD but given how far prices need to move to incentivize new supply, I believe this should be more than offset by the absolute % change in the underlying commodity price.
Thanks for answer and sorry I could have been more specific in the question - I meant hedging in terms of selling price if they are selling forward the crop before harvest. The way I am framing it myself kind of from an event perspective, is that Select may benefit disproportionately should there be a shock to the California supply, but if the crop is sold forward, the benefit won’t be realised in year 1. This issue, plus carry in supply will dilute the benefit of a supply shock driven increase in price.
No problem - appreciate the clarification!
Firstly, this works both ways. For example, Select had the majority of their crop already covered at much higher prices for FY25 prior to the objective estimate release which lowered the almond price. On the other hand, Californian farmers are faced with the prospect of selling the majority of their crop into these lower prices.
Secondly, I am not viewing this playing out with some temporary price spike that will see imminent recovery with 12 months.
The important question to ask is where incremental supply will come from to bring prices back down?
Look at what happened to the almond price during the last droughts in California (2012-2015 period) which critically only involved a temporary dislocation in water access. (Prices went a lot higher).
SGMA fundamentally creates these starved water conditions but on a permanent basis.
On top of this, it takes 3 years for new plantings to produce even a single nut.
So I'm not too worried if for whatever reason Select don't fully capture the entirety of the price spike in year 1 and believe that when the price spike does come, it will be sustained for some time until prices reach a level that would incentivize new supply - much higher than where we are today as detailed in the write-up.
Brilliant. Appreciate all the work you put in!
Thank you!
Super interesting and well written, thank you very much!
Much appreciated Niklas! No problem!
Loved the additional angle on SHV.
https://substack.com/@tenvacapital/note/c-143911692?r=ry6dl&utm_medium=ios&utm_source=notes-share-action
you provided.
Just another supportive and compelling argument.
however, as much as we want to be convinced of the upside potential, I would love to hear your opinion on how SHV got to these low prices, well below the capital raising just last year. I have difficulty having unbridled conviction when the market has such a negative view, despite all the positive factors.
Thanks very much Gabriel!
My view is that markets are often short-sighted and irrational. I don't believe there's necessarily a logical answer other than this. I.e. the time horizon in focus is usually only the next 6-12 months and in today's world this time horizon is getting shorter and shorter. The Obj. Estimate clearly didn't help but the price was already somewhat depressed prior to that.
In saying this, a major part of my approach is understanding exactly how I am going to extract value and get paid.
In this spirit, if we reverse-engineer the question and focus on what the market will do in a world where the almond price has materially increased because supply hasn’t grown for 3-5 years (and has in fact very likely shrunk) with steady demand growth; I believe the resultant material earnings and FCF inflection will very quickly flip the markets’ attitude from one of pessimism to raging optimism with the stock responding accordingly.
So I really try to remain focussed on the qualitative inputs, monitoring them consistently to ensure the thesis is still on track and then try to deduce how these qualitative inputs – i.e. the lack of supply due to water shortages in California – will impact the almond price and therefore flow through to future Earnings and Free Cash Flows and how the market will therefore value these.
I hope that helps.
Lots of detail and thought put into this. Nice work.
Thanks for kind words AJ!