Apr 30, 2020

Axios Capital

If you're feeling powerless to help right now, join the club. The best way you can help others is to stay home, but there's also Giving Tuesday Now on May 5.

  • I've been giving as much money as I can to World Central Kitchen, the magnificent charity started by chef José Andrés. Check out his Twitter thread from yesterday here.
  • Also happening on May 5: The great Erica Pandy is launching her Axios @Work newsletter, exploring the economic and social shifts upending the workplace. Subscribe here.
  • In this week's newsletter: A lot of food, with a hefty side-helping of state debt. Also: a new twist on fractional art ownership, and more. All in 2,101 words, an 8-minute read.
1 big thing: The day the good food died

Illustration: Sarah Grillo/Axios

Regional food is a kind of language. It lives through hard-earned knowledge and practice, shared among a sufficiently large group of people, passed on through generations.

  • Why it matters: It can die of neglect. Or, it turns out, of COVID-19.

Chef and author Dan Barber, of Blue Hill in Manhattan and Blue Hill at Stone Barns Westchester, has been at the center of the vital American farm-to-table movement for 15 years. He recently did a formal survey of local farmers in New York's Hudson Valley, where he works.

  • The early results are terrifying: 90% of the farmers anticipate they will go out of business if restaurants are forced to operate at 50% capacity during the height of harvest season this summer.
  • If that happens, decades of work and effort could be lost. "The neural connections to this movement, once shattered, do not return," Barber tells "Axios on HBO."

The bottom line, per Barber: "It is the tsunami. It's coming."

Context: Small farmers aren't the people sending pork and soy to China, or turning wheat into ethanol. Rather, they are the people who provided the basis for what, until last month, was a thriving ecosystem of delicious and inventive regional cuisines, based around farmers' markets and ambitious local restaurants.

  • Restaurants acted as food processing plants, taking large quantities of raw agricultural material and turning it into something ordinary folks were happy to pay a lot of money to eat.

The big picture: Only the government can save small farmers in the short term. But in the longer term, Barber now sees a need for robust regional supply chains — a group of middlemen, milling and curing and packaging raw ingredients and selling them via local supermarkets to consumers. Such a chain would reduce farmers' reliance on restaurants to process their food.

  • Craft beer is a great example of a regional agricultural industry that is doing much better than the national and international brands.
  • "In a regional food system, the value of what's grown on the farm is extended through the process," says Barber. "You actually value the food and the farming all the way through the chain."

How it works: A regional food system, based on regional supply chains and regional food processors, would be more expensive and less efficient than the current system. But it would also be more robust to pandemics and natural disasters: A single point of failure could not knock out the entire network.

  • Better yet, the food produced in such a system would be significantly more delicious and characterful.

The bottom line: There is hope for small farmers — if they can get through the current crisis. But that's a very big if.

Go deeper: I hosted Barber on my podcast earlier this month for a fascinating conversation about the future of locavorism.

2. Restaurants' plight

Illustration: Sarah Grillo/Axios

Good restaurants are by their nature small businesses — and they're bearing the brunt of the shutdown. Other locked-down retail and service-sector businesses can shut down and reopen much more easily than restaurants can.

Why it matters: The CARES Act has earmarked hundreds of billions of dollars to help small businesses through this crisis, but it has largely failed small restaurants.

The big picture: Chefs who open up multiple "concepts" in cities around the world can become rich and famous, but they always lose something along the way. The best cities are those with hundreds or thousands of fantastic unique restaurants, all of them sourcing top-quality local produce.

  • By the numbers: The list of good chain restaurants, by contrast, is exactly one name long. (Din Tai Fung, don't @ me.)

Restaurants are eligible for Paycheck Protection Program funds — but those funds do them little good.

  • How it works: Closing down a restaurant costs a lot of money in terms of wasted food. Restarting a restaurant costs much, much more.
  • It's not just that food needs to be bought. Menus need to be rebuilt, and cooks and servers need to be trained, especially if many of the old staff have moved away or found other jobs. None of that can happen before the shutdown is lifted.

What we're reading: Gabrielle Hamilton, the chef-owner of Prune, in New York's East Village, explains small restaurants' financial predicament in a gripping NYT essay.

There was a relief bill before Congress that we were all urgently asked to support, but it puzzlingly left out small, independent restaurants even as it came through pretty nicely for huge chains and franchises. The other option, the Paycheck Protection Program, would grant you a loan with forgiveness, I learned, but only if you rehire your laid-off staff before the end of June. With no lifting of the mandatory shuttering and the Covid-19 death tolls still mounting, how could we rehire our staff? I couldn’t really use the loan for what I needed: rent for the foreseeable future and the stack of invoices still haunting me in the office.

Some restaurants applied for PPP funds and are now "highly likely" to simply return them, just because they can't be used to support the business.

  • The PPP money could be used to pay workers, but most workers are making more money from unemployment insurance than they would be at the restaurant. Simply offering laid-off workers their jobs back — to do nothing, while the restaurant is closed — makes them ineligible for unemployment. So using PPP funds for that purpose makes no sense for either employer or employee.

The bottom line: Local farmers aren't just going to be facing the devastation of restaurants at 50% capacity once the shutdown is lifted. A huge number of those restaurants aren't going to reopen at all.

Bonus: Supermarket sweep
Expand chart
Data: Census Bureau via YCharts; Chart: Axios Visuals

U.S. bars and restaurants overtook grocery stores in April 2015, in terms of total retail sales. Their lead only grew from that point — until last month.

3. Big Food lives on

Illustration: Aïda Amer/Axios

Large farms, food processors and restaurant operators have much brighter prospects than their smaller counterparts.

  • They have access to capital markets, including the trillions of dollars being injected into the fixed-income markets by the Federal Reserve.
  • The top three meat processors — Tyson Foods, JBS and Cargill — account for about ⅔ of the market and therefore count as being too big to fail. Hence President Trump's decision to invoke the Defense Production Act to keep their facilities running.
  • Big farms have a bright future selling to China, which has promised to buy more than $40 billion of U.S. agricultural goods and which is facing a severe domestic pork shortage.

The bottom line: The total amount that we eat isn't going down. If the food we're eating isn't coming from small farmers, it's coming from large ones.

4. States' cash crunch

Illustration: Sarah Grillo/Axios

States are facing their biggest fiscal crisis since the Great Depression, with revenues plunging as obligations soar, I write with Axios' Dan Primack.

  • The big problem: Nearly all of them have balanced-budget rules.

Why it matters: The country can't afford major budget cuts at the state level. That would only exacerbate the economic contraction.

Driving the news: Senate Majority Leader Mitch McConnell suggested that state bankruptcy filings should be considered as an alternative to further federal bailouts.

  • Reality check: States cannot currently file for bankruptcy, unlike cities like Detroit and territories like Puerto Rico.
  • McConnell said last week he's "in favor of allowing states to use the bankruptcy route," but he hasn't proposed legislation to enable it.

Between the lines: Historically, Republicans have tended to like the idea of state bankruptcy because it's a way to get a federal judge to forcibly renegotiate contracts and pension agreements entered into with public-sector unions. But, even if this were made legal, bankruptcy would have to be voluntarily entered into by the states, which are sovereign entities under the U.S. Constitution.

Debt default is not a viable alternative for states.

  • Interest payments tend to account for only about 5% of a state's total budget. That's not enough to make up for the loss of access to the municipal bond market.
  • Flashback: When Arkansas defaulted on its bonds in 1933 — the only time that a state has defaulted in the past century — debt service payments were more than half its total budget.

The big picture: States' enormous budget shortfalls (up to 34%, in the case of Louisiana) are going to have to be addressed somehow. There are broadly four main ways it will be done, Yale law professor David Schleicher tells Axios:

  1. The balanced-budget rules require a pro-cyclical combination of tax hikes and spending cuts. At some point, property owners just aren't going to be able to pay increased taxes, especially if their rental income is plunging.
  2. Most states also have a way around their balanced-budget rules. A slew of borrowing vehicles have been set up, ostensibly for capital investment, that allow states to run a deficit. So expect much higher state borrowing, especially now that the Federal Reserve has allocated up to $500 billion for buying state and municipal bonds.
  3. Underfunding pensions. States have enormous future pension liabilities, which means they need to pay billions of dollars into their pension plans every year. Sometimes, however, they just don't.
  4. Federal aid. Republicans hate the idea that they'll effectively be pouring money into generous pensions for public-sector unions. But in a crisis, they might not have any choice.

The bottom line: States urgently need cash. The federal government is best placed to provide it.

Go deeper: Schleicher explains in Slate why "the states are toast."

5. The cost of Arkansas' bond default, in one picture

The federal courthouse and post office in Texarkana is half in Texas and half in Arkansas. The same is true of State Line Avenue, the road in front of it.

  • The northbound lanes, on the right of this photo, are in Arkansas, which defaulted on its bonds in 1933.
  • As part of the debt restructuring, Arkansas was prohibited from building new roads until all the bonds were paid off, which could have been as late as 1977. (In the end, the bonds were retired before then.)

Why it matters: Arkansas' forced underinvestment in the years after the Depression, due largely to its inability to tap capital markets, is a big part of the reason it's one of the poorest states in the Union today.

Driving the news: Harvard economics professor Melissa Dell has won this year's John Bates Clark medal for her work on the persistent impact of economic shocks.

  • In her most famous paper, looking at the areas around very old silver and mercury mines, she shows that the negative economic consequences of forced labor in Peru and Bolivia have lasted more than 300 years.
6. Severed spots

Illustration via MSCHF

Here's how to make money in the art world:

  1. Buy a Damien Hirst print (“L-Isoleucine T-Butyl Ester” 2018, woodcut on paper, edition of 55) for $30,485.
  2. Cut out each of its 88 spots, and sell them for $480 each, more than covering your upfront costs.
  3. Auction off the residual piece of paper (with 88 holes in it where the spots used to be). Current high bid: $126,500.

The art world has a long history of valuable pranks, from Robert Rauschenberg's
Erased de Kooning Drawing, 1953 (now in SFMOMA) to Banksy's self-destructing painting (now worth significantly more than the $1.4 million it sold for before it was destroyed).

  • Hirst himself loves pranks. He teamed up with Banksy for Keep it Spotless (sold for $1.9 million) and went to elaborate lengths to convince the FT that his latest sculptures were actually found in an undersea shipwreck.

The cherry on top of this one: It's orchestrated by MSCHF, a for-profit collective backed by $11.5 million in venture capital. MSCHF is currently valued at more than $40 million, or about 2 times Damien Hirst's auction record.

7. Coming up: Texas mulls oil production cap

Illustration: Sarah Grillo/Axios

Texas energy regulators will decide on Tuesday whether to mandate oil production cuts in the state, writes Axios' Courtenay Brown.

Why it matters: Demand for oil has crashed as the pandemic-hit world locks down. That dynamic is already forcing some U.S. producers to cut back. The Texas measure, if passed, would force any stragglers to do likewise.

By the numbers: Texas is the largest oil-producing state in the U.S. It pumps out 5.3 million barrels of oil per day.

  • The proposal calls for a 20% cut, or about 1 million fewer barrels. Companies that produce fewer than 1,000 barrels per day would be exempt.

Where it stands: Two of three Texas Railroad Commission members need to vote in favor of the rule for it to pass.

  • The commissioner who proposed the measure will vote for it. Another, who prefers a free-market approach and says the proposal wouldn't make a dent in global oil supply anyway, will vote against it.
  • The third commissioner hasn't weighed in but has raised legal questions about the measure.
  • Big oil companies mostly hate the proposal. Independent players like Pioneer Natural Resources have called on the state to curb production.
8. Building of the week: IBM Studios, Milan

Photo: Emanuele Cremaschi/Getty Images

The IBM Studios building in Porta Nuova, Milan, was built for UniCredit in 2015 by architect Michele de Lucchi.

  • A modular structure, it has no foundation: It's simply placed on a concrete slab.
  • The building is used as a venue where the general public can be introduced to IBM products and thinking.
  • The outer layers of laminated timber are currently mostly closed rather than open, as northern Italy remains shut down until at least May 4. It's as though the whole building has turtled into itself for the duration of the crisis.