The Italian Cheese Wheel Bailout

The Wall Street Journal reports there is a bull market in at least one commodity: bailouts.  I, for one, thought the NASCAR bailout would be impossible to top, but I stand corrected.

The world is bailing out banks and car companies. Italy is coming to the rescue of parmigiano cheese.

In an effort to help producers of the cheese commonly grated over spaghetti, fettuccine and other pastas, the Italian government is buying 100,000 wheels of Parmigiano Reggiano and donating them to charity.

Though demand for parmigiano is strong in Italy and abroad, producers have been struggling for years to make money, putting the future of Italy’s favorite cheese at risk.

Marco Iemmi, cheese rotator

“It’s a tragic situation,” said Marco Iemmi, who has been making parmigiano for 30 years in Salsomaggiore Terme, a small town in Italy’s fertile northern Emilia-Romagna region. “I’ll have to close up shop unless things improve.”

Last year, Mr. Iemmi sold 15,000 parmigiano wheels — the cheese is produced in rounds of about 35 kilograms (77 pounds) each — for a total of €4 million ($5.2 million), or about €7.4 a kilogram. It costs Mr. Iemmi €8 a kilo to produce the cheese, he says, so he is losing money.

Italian consumers seem to support the cheese bailout, which also includes a purchase of 100,000 wheels of another grating variety, Grana Padano. The operation will cost €50 million.

But this is not sitting well with rival mozzarella producers.

Now that the government has stepped in to help parmigiano makers, however, others are making a stink. “We’ve never received a single dime in state aid,” complains Vincenzo Oliviero, who heads the association of buffalo mozzarella producers.

Mr. Oliviero says makers of the juicy white cheese eaten alone or on pizza have been suffering since Naples faced a trash crisis last year. Because most buffalo mozzarella is made near there, consumers stopped buying the cheese for fear that mounds of garbage in the area might have infected the water used to irrigate farms. Sales of buffalo mozzarella have fallen 18% over the past year. “We’ve asked for help, too,” says Mr. Oliviero. Italy so far hasn’t said no.

Trash crisis, economic crisis — they’re not so different.  And “Italy so far hasn’t said no” might just be the funniest line in the whole article, packing deep commentary on Italian economic policy into just six words. 

“If you spend money on parmigiano, then on cabbage, then on Alitalia…, you’re using state resources to help those that are inefficient,” says Carlo Stagnaro, head of research at Italian think tank Istituto Bruno Leoni.

The government dismisses the criticism. “There was a need for market intervention [for parmigiano], just as there was for banks,” Luca Zaia, minister of agriculture in the center-right Berlusconi government, said.

Cheese evidently is some kind of a gateway bailout, potentially leading to other, more pernicious bailouts, like cabbage (I’ve asked our crack research staff to investigate any cabbage bailouts, which would absolutely make the rapidly expanding Platformonomics list of cheesiestfunniest bailouts).

This is either a Pulitzer Prize-winning piece of journalism or an elaborate satirical concoction by the Wall Street Journal editorial page to illustrate bailouts gone wild, but either way read the whole article and don’t miss accompanying the slide show.  This kind of quality content must be why the Journal has maintained its revenues while its newspaper peers have been imploding left and right.

Toto, We’re Not in Mediocristan Any More

More on the poor applicability of financial models to the real world from the Economist:

Goldman Sachs admitted as much when it said that its funds had been hit by moves that its models suggested were 25 standard deviations away from normal. In terms of probability (where 1 is a certainty and 0 an impossibility), that translates into a likelihood of 0.000…0006, where there are 138 zeros before the six. That is silly.

Or Maybe Your Model Leaves Something to be Desired…

From last week’s WSJ (requires a paid subscription for now, pending Rupert’s next move):

“Wednesday is the type of day people will remember in quant-land for a very long time,” said Mr. Rothman, a University of Chicago Ph.D. who ran a quantitative fund before joining Lehman Brothers. “Events that models only predicted would happen once in 10,000 years happened every day for three days.”

The Black Swan has been on bestseller lists for a couple months and we’ve seen multiple 1 in 10,000 year events over the last decade, but some people still seem to believe in their models…

Reverence for models does seem to be breaking down on other fronts.

The IBM LBO Continues…

[From last week’s IBM earnings announcement]

Revenue up $1.8 billion for the quarter.  Hard to tell what organic growth was but probably very low single digits.

Repurchased $14.6 billion in stock  and the number of outstanding shares down over 6% in the quarter.

Debt to fund the buyback up $12 billion in the last six months (up 53%).

Most of the earnings release is adjustments and caveats about various acquisitions and divestitures.  Lots of churn that muddies the view of the underlying business.

I won’t pretend to know whether this is prudent financial engineering or not, but no doubt they are leveraging up.

Put IBM on the list of companies to watch when the private equity frenzy starts to unwind.  That may have started in earnest today…