One of the Most Successful Investments of All Time

Week 11 of the Quarantine

SAN MARTIN, ARGENTINA – We are still in Argentina. Still cut off from the rest of the world (the airports are closed).

We are making the best of it by learning as much as we can from a failed economy.

As you will see… not everything failed…

What follows is a brief history of one of the most successful investments of all time.

It was daring… bold… difficult, but ultimately, very profitable… creating one of South America’s biggest fortunes… and nourishing the political career of the man who might have kept Argentina from going broke.

We’re talking about “Tabacal” – an enormous sugar cane operation in Northwest Argentina.

New Industry

We only bring it up because it is a dazzling story. And it tells us something about the world as it was in the early 20th century… and the world as it is 100 years later.

Then, a group of Argentine businessmen and investors could create an immense new industry, drawing on thousands of people… millions of dollars’ worth of real capital (real money, earned – and saved – by real people)… and all of the latest technology in agriculture, mechanical engineering, hydraulic engineering, botany, chemistry, and many other disciplines. They could create what would today be billions and billions of dollars’ worth of new wealth.

Again, this was real wealth – sugar – not just new apps, or phony gains from a stock market juiced up by the Federal Reserve’s phony money.

Unlikely Project

The story begins in 1916. It was then that Robustiano Patrón Costas got off the train in Orán, Argentina, and became convinced that the area was suitable for a modern sugar mill.

It seemed very unlikely at the time. The surrounding countryside was a wilderness, with very few people and none of the support infrastructure that a large plant would need. No towns. No skilled laborers. No roads. No electricity.

Nevertheless, he got together a group of investors and began a breathtaking project… which, today, seems almost impossible.

They had to clear thousands of acres, with much of the work done with shovels and pickaxes. An extensive irrigation system had to be built, with a river partially diverted into canals, gates, dikes, and hundreds of miles of ditches.

The land had to be plowed and planted… experimenting with different strains of sugar cane from all over the world. Pests and plant diseases had to be identified and defeated. A railroad had to be built to transport the sugar cane to the mill – eventually furnished with 16 engines and 1,500 freight wagons.

New Town

And that was just the beginning. In cutting season, 8,000 laborers were needed. Where would they live? What would they eat?

And what about the thousands of permanent employees? Where would their children go to school? Where would they pray? Where would they eat? And what if they were sick?

Patrón Costas and his associates had to build a whole town. Houses – clean, neat, modern, laid out on tree-lined streets – churches, schools (for 1,200 students), bakeries, sawmills, two barber shops (one for men, the other for women), woodshops, metal shops… a theater, tennis courts, polo fields… and a hospital, where they could not only provide nursing care, but use the latest medical technology – such as X-rays – and perform surgery, too.

A dairy provided milk. A farm provided fruit and vegetables. The bakery processed 80 sacks of flour, at 150 pounds each, every day.

And the mill itself was similarly immense, powered by its own electric plant. In 1945, it produced 51 million kilos of sugar and 4 million liters of alcohol. By the 1980s, it was the largest sugar mill in the world.

The investors got rich. And workers prospered, too. The mill brought in thousands of local people with no skills and no money – many of them from the indigenous tribes of the area – and turned them into carpenters, cooks, machinists, bakers, drivers, and even chemical engineers.

Robustiano Patrón Costas gained such a reputation that he ran for president of Argentina in the 1940s. Alas, the appeal of risk-taking, hard work, and real growth was already waning. People like capitalism on the way up; they prefer socialism on the way down. Patrón Costas lost to the socialist Juan Perón. The country has been sliding ever since.

How to Succeed Today

The remarkable thing is that, even with 100 more years of technology… and an abundance of capital… it would be almost impossible to build Tabacal today.

It took 17 years of struggle for the project to prove itself. Who would risk his money for such a long-term payout today? Nobody. Instead, the ambitious young man of 2020 becomes a hedge fund manager… or develops a new app and plans to go to IPO within 36 months.

A young man with a project as big and bold as Tabacal would be almost doomed to failure. The “indigenous peoples” would stop him. The “environmentalists” would stop him. The tax men, the labor unions, the banks, the lobbyists, the politicians, the bureaucrats, and the “community” – all would prevent him from ever putting a stake in the ground.

And if, by some miracle, he were able to overcome such powerful opposition, he would be regulated and controlled… his margins would evaporate in the heat of inflation… and his profits would be taxed away…

He would quickly realize that in order to survive, he’d have to become a crony. He would say he was combating climate change with “green” technology… that he was putting women and minorities on his board… that he was creating a safe environment for his employees…

And then, instead of making money by providing sugar at a competitive price in a free market, he’d ask the government for low-cost loans, tariff protection, and emergency subsidies.

Update

Today, Tabacal is owned by Seaboard, a private American company. The magnificent town built by Robustiano Patrón Costas is said to be a “dirty, derelict slum.”

But on its website, Seaboard wisely advertises that its operations are “sustainable agriculture,” and that it “absorbs 10 times more CO2 than it emits.”

And what happened to the Patrón Costas family?

We asked the fourth generation for an update…

“The project was so successful that the next three generations lived off of the wealth. They had big houses in Buenos Aires and apartments in Paris. They had servants… and most of them didn’t work at all.

“The big problems came in the late 1980s. Then, we had inflation of 20,000%. It was almost impossible to keep up. Or to plan ahead. Wages… the cost of fuel… transportation… everything went up.

“Then, the Raúl Alfonsín government imposed price controls… on sugar, of course.

“That, and weak management – there is no guarantee that every generation is going to be as dynamic as the first – caused everything to fall apart.

“By the late 1980s, all we could do was sell out. We got enough to pay our debts. That was about it.”

Sic transit gloria capitalista.

Regards,

Bill