Among my work and research, somehow summer crept in without me noticing. The cool winds of winter replaced by the fiery sun is a nice change of pace. Although this year, summer arrived a little too quickly (even by Australian standards). I recall merely a week or two back when people were complaining about the harsh wind and rain and pretty much sacrificing their first-born just to get some sun. I’m pretty sure it went above 40 C (104 F) yesterday. The immense heat struck me as I was lazing about thinking about what to write, which in turn made me want to write about the heat. (It’s worth noting that I don’t necessarily write all of this in one sitting so the day I publish it, in this case today, can be a completely miserable day)

Irregularities in temperature has been all the crazy for a while now. A notable changing point, for me at least, is when I saw Al Gore’s An Inconvenient Truth. How does this affect trading? You ask as you lower your sunglasses ever so slightly while enjoying the last of the Mediterranean sunset (once again… I don’t always have the best grasp on what my reader demographic is like) . Well, that’s a fair question. If you actually read till the end of my title, you’d know that it’s about icecream (which everybody loves… apart from those with allergies, but even then). If you happened to be eating an icecream while reading my title, apologies if the length made it melt away…

Before I am accused of unsound research, let’s grab some figures first ( I am going to go by my favourite icecreams because they’re delicious). June 1996, a Golden Gaytime (fuck you if you laugh at the name, it’s one of the best icecream I’ve ever had) cost $1 AUD in just about any supermarket you go to if you just buy one block (Sydney prices). A Golden Gaytime today in a similar store would cost $2.70 (if you’re lucky enough to find it. For a while, these things were impossible to find). That’s a 170% increase in the span of 20 years! If you annualize it compounded, some simple math would yield you the sweet sweet 8.5% return per annum not adjusting for inflation. If we calculate the returns on the S&P500 index between June 1996 and September 2015, we get an annualized return of 7.67% (this is with reinvested dividends. Without is only 5.77%). So basically, the icecream is outgrowing the benchmark by almost 1%! Scoops of icecreams at the same time in Australia were $1 AUD, today, you can easily expect $3 AUD. When you consider the inflation in Australia over the past decade has never gone above 4% on an annualized basis, the price is crazy!

Now, you’d question my argument and say that the S&P index is well diversified while icecream holds a lot of idiosyncratic risk. You can also argue that my research is incomplete as I only used one icecream in my sample. That is correct. Feel free to complete my research in your own time (if you can bothered digging through the internet for prices of icecream two decades ago). Regardless, what I want to discuss next is my main purpose.

In case you didn’t know, basic ingredients of icecream are milk, butter, sugar, and probably a huge freezer. The freezer aside, milk, butter, and sugar are all available to trade on the futures market (I don’t know what you call a basket of the three but I’m going to call it the icecream basket… or as a friend calls it, the ‘icecream tub’ because who really stores icecream in baskets). Let’s just leave the world of trading for a minute and come into the real world where the graphics are good but the game play and story sucks. Who eats icecream? Mainly children, and parents who steals a bite or two and end up eating everything anyway while their child watches leaving them traumatized and not knowing how to feel because they’re only 5 and can hardly pull together a coherent sentence to express their thoughts. What about when? Well, I know that summer is a big season for icecream (citation required). And I’m also fairly sure that they’d sell in spring and autumn (the name of the season that comes after summer for those who uses ‘fall’ as if the season is purely based on falling leaves. By that logic, falling rain, falling snow, everything is going to be fall!). Heck, when I went to Europe with friends in December, I ate gelato almost everyday while in Italy (I ate other stuff too, not just gelato). Geography? Well, anywhere that has electricity would store icecream right after beer is stored to an acceptable level. Basically my point is the demand will be there. It almost always will be there since it is somewhat a ‘luxury’ good. And cheap luxury goods will always be in demand (look at the Daniel Wellington watches. Tasteless? Yes. Overpriced? Yes? But it takes advantage of human weakness in that it creates an illusion of elegance, and via clever marketing fools its audience into buying it because hey, paying $200 for a piece of shit that is luxury is worth it! Mainly because you can afford it. Which is also why you don’t see everyone just go around in that sweet Vacheron Constantin. All just my opinion… if you like DW watches, good for you… and please stay away from me). The demand in affordable luxury will not wane because of human psyche. Hence icecream will always be around. That or because it’s delicious…

Looking as the icecream tub, climate change does have its subtle effects. The price for processing butter, cream, milk, sugar, flavouring etc. has far exceeded inflation (citation required). After a bit of digging through the archives of the International Trade Centre (ITC) website,  when developed countries such as the US and Germany (I’ll just group the rest of the EU under Germany for simplicity), it causes problems. Both the US and the EU has tariffs and subsidies protecting its agricultural sectors. Hence, the sensitivity to policy changes can only be described as substantial. Given the current financial situation in the EU (the US’s contributions towards milk exports is fairly small next to the EU’s, with the EU contributing around 1/3 of the total production with their top 3 countries alone and the US making up around $4 billion of the $60 billion market). Any negative externalities to the environment becomes a global problem and hence key ingredient prices will be driven upwards because damn it, icecream demand isn’t gonna go down. That’s not how icecream price elasticity works, or as I mentioned, it’s not how the price elasticity for low-end luxury item works. As for the diversification risk? Well, if you want safe money, diversify by all means. If you want to make some money, concentrate your investments (citation required).

TLTR? Well, allow me to sum it up, mainly because I’m actually tired of writing.

Make less pollution, eat more icecream.