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Brazilian Farmland – Is the Risk Worth the Reward?

Brazilian Farmland – Is the Risk Worth the Reward?

By Michael DeSa, Founder of AGD Consulting, and Monica Ganley, Principal at Quarterra

Click here to view the article on Global AgInvesting’s website

In recent years, Brazil has solidified its role as a global agricultural powerhouse. It has become the world’s largest exporter of soybeans, coffee, and sugar, as well as the second largest overall food producer on the planet. Over the past 15 years, Brazil has increased agricultural production by 156 percent with overall Gross Domestic Product (GDP) from agriculture reaching an all-time high in the first quarter of 2017.1 The agricultural sector as a whole accounts for nearly 6 percent of Brazil’s total GDP and employs nearly 16 percent of their total labor force.2 It is also the only sector that has continued to grow despite the current recession.3

Brazilian GDP from Agriculture

Is this enough, however, to draw investors into a country and an economy in the midst of economic and political discourse? The economic crisis, which began in early 2015, coupled with the ongoing political turmoil, have forced Brazil into difficult times. In 2015 and 2016 Brazil’s GDP declined – the first time since 1931 that the country’s GDP has fallen for two consecutive years.

Brazil's Struggling Economy

Figure 1: Brazil’s GDP (2010 – 2016)

However, the World Bank expects Brazil to slowly emerge from the recession by the end of 2017; restoring investor confidence and recovering lost ground could take much longer.

Brazilian Farmland – Is it Still for Sale?

While Brazil has begun in earnest to develop its frontier farming regions, there still remains millions of hectares left to be developed. Brazil’s total arable land area nears 600 million acres with only 170 million acres presently cultivated. One side of this coin seems to indicate that there is more than ample room for the development of viable agricultural land to meet a growing demand. With the world’s population expected to reach nearly 10 billion people by 2050, Brazil’s millions of hectares of undeveloped land could become the southern hemisphere’s next bread basket.

Farmland prices are also an attractive part of this equation, and is the primary reason for foreign investment by groups such as the Brazil Farmland Development Fund. According to Matthew Kruse, President of the fund, their land appreciated at nearly 3x within a ten-year timeframe in their previous investment.  According to Kruse, “we can purchase land at less than U$1,000 per acre.  That is a fraction of comparable land costs in parts of the Midwestern United States.  We are confident that we are purchasing land with the same productivity potential but at one-tenth the cost.” Given that the average price for an acre of U.S. farmland is US$7,183, according to the 2016 Iowa Land Value Survey Results, farmland in Brazil is presently some of the most affordable in the world.

World Farmland Prices Per Acre

The other side of the coin begs the question – if land is so plentiful and affordable, and it’s the only sector in Brazil’s economy that is presently growing, why hasn’t this development happened yet?

Financing in Brazil is neither common nor readily available, thereby limiting the average Brazilian’s ability to purchase and develop raw land. There are no government subsidies for agriculture in Brazil either. Land development can be very expensive, requiring either independent wealth, foreign investment, or debt financing to accomplish, the latter of which is largely not an option. Wealthy Brazilians do not account for a sizable enough population to make a substantial impact in development statistics.

These factors have resulted in a much smaller pool of available capital capable of developing Brazilian farmland, leaving foreign investment as a significant source of land development capital in Brazil. This pool of capital has been growing during the last couple of years, making Brazil the world’s eighth largest destination for Foreign Direct Investment (FDI) in 2015,4 and could indicate that investors are again ready to take the plunge.

In spite of a growing agricultural sector, attractive farmland prices and increasing foreign investment flowing into the sector, the decision to invest in Brazilian farmland is still very much a risk versus reward consideration.

Understanding the Risks

While Brazil offers a compelling opportunity for agricultural investors, operating within the country carries unique challenges. To be successful, investors must be cognizant of these risks and become either comfortable with the potential impacts, or confident that they have a robust mitigation strategy in place. Although agricultural investments worldwide are subject to volatility stemming from a variety of sources, including weather and fickle commodity markets, investments in Brazil are subject to unique idiosyncratic risk as well, particularly due to the political environment, foreign exchange fluctuations, and liquidity issues.

Brazil’s chaotic political machine has been thrust into the international spotlight repeatedly in recent years as widespread corruption scandals have led to the indictment of one former president, the impeachment of another, and have left the current president with dismal approval ratings. Just a decade ago, Brazil was the darling of Latin America, posting GDP growth that frequently topped 5 percent. However, the prevailing concern, given the country’s poor economic performance during the last couple of years, is that these ongoing political scandals will inhibit the country’s recovery, thus impacting investment performance.5

In addition to impeding overall economic performance, an unstable political system can introduce additional risks that must be considered with any potential investment in Brazil. One poignant example is the regulation of foreign land ownership – an issue that carries particular socioeconomic sensitivities throughout resource-rich Latin America. In 2010, over concerns that land purchases by international investors were leading to disproportionate foreign control of Brazil’s agricultural resources, then President Luiz Ignacio Lula da Silva restricted purchases of farmland by foreigners. This move resulted in the area of agricultural land bought or leased by foreigners not being able to account for more than 25 percent of the overall land area in a given municipal district, according to the National Land Reform and Settlement Institute (INCRA). Additionally, no more than 10 percent of agricultural land in any given district may be owned or leased by foreign nationals from the same country.6

While the rules still allowed access after clearing a number of bureaucratic hurdles, this greatly increased transaction costs associated with these investments. Although these rules have since been adjusted, smart investment managers have developed ways to overcome these hurdles, such as the Brazil Farmland Development Fund (www.brazilfarmlandfund.com), who have developed a strategy to allow for foreign investment into Brazilian farmland. However, the political risk here still goes to the heart of the viability of these investments. If the political winds shift, it could affect a factor as fundamental as an investor’s legal claim to their asset.

Political risk also can manifest at a more granular level. Many of Brazil’s institutions are weak by Western standards and it is no secret corruption exists in many corners of the country. For a reminder, one needs to look no further than the ‘Weak Flesh’ sting that devastated the country’s meat packing industry in March 2017. This police investigation into the industry found widespread food safety offenses and bribery, resulting in the indictment of 60 individuals and the loss of an estimated $1.5 billion USD in export revenue for the beef and poultry sectors.7 Understanding that these risks are pervasive and having the ability to build operational mechanisms to prevent them where possible, and implement strategies to identify and address them where not, will be critical for investor success in Brazil.

Closely tied to political and economic evolution, and a critical factor in calculating investor returns, is the value of the Brazilian real. The real, as we know it today, was introduced in the mid 1990s and since then has fluctuated with the fiscal and monetary policies of the government.

Real Value (1997 - 2016)

While the currency had been experiencing a period of relative strength in late 2016, the resurgent corruption issues led to its rapid devaluation in June 2017.

Currency movements can impact investments in a number of ways, which can be either favorable or unfavorable to investors. Most obviously is that the relationship between the real and an investor’s base currency can influence the value of an investment. Currency risk comes into play when its change affects the underlying price of the asset in the period between the initiation and the retirement of the investment.

Currency risk plays another role, especially with respect to agricultural investments. In many cases agricultural investments are attractive, not only for the underlying asset, but also for the operating income that the asset creates. For example, in the case of a farm that produces soybeans, not only is the value of underlying farmland important, but also the value of the annual soybean crop. In this case, the value of the Brazilian real has an important impact on the value of the annual soybean crop. Since many agricultural goods are traded on global markets, they are denominated in U.S. dollars. As a result, a weak Brazilian real will encourage additional export demand as the crop will be artificially inexpensive in global terms. A strong real will have the opposite effect. Depending on the nature of their investment, investors may be able to manage some currency risk using financial tools such as those available through futures markets.

While many investors who choose agricultural investments are looking for long-term opportunities, sooner or later they may want to exit the investment. At this point, liquidity concerns with farmland assets can come into play. An asset is only worth as much as someone is willing to pay for it, and particularly in the case of larger farms, the pool of potential investors may be limited. To limit the impact of this risk, investors will be wise to maintain the value of their investment by performing necessary maintenance and making improvements to protect the operation. In addition, for an investor with flexibility of timing, staying close to the market can help identify the ideal moment to sell.

Is Now the Time?

The decision to invest in Brazil’s agricultural sector requires investors to strike a balance between opportunity and risk. While Brazilian farmland prices are more attractive now than they’ve been in years, owning land as a foreign investor in Brazil is still difficult and highly regulated. The agricultural sector as a whole has seen continued growth in spite of an economic downturn, but a continued slide toward slower growth or further political turmoil will inevitably begin to affect the sector. There are currency factors at play that can be either a hindrance or a help, depending on your base currency and the type of investment. For every positive, there is a direct counter-point that must be considered.

The rewards are promising for bold, first movers, but every investor must carefully weigh each risk before jumping into the murky agricultural investment waters of Brazil.

ABOUT THE AUTHORS:

Michael DeSa is the founder and CEO of AGD Consulting, a U.S.-based, veteran-owned firm offering strategic advisory services and customized due diligence trips for investors seeking exposure to Latin American agriculture. DeSa is an experienced LatAm land owner, former Marine Corps Officer, and family farmer. He has years of technical management experience with the Marine Corps from his assignments in Djibouti, Jordan, Afghanistan, and throughout Latin America. DeSa can be reached at michael@desaconsultingllc.com.

Monica Ganley is the principal at Quarterra, a boutique consulting firm offering international strategic planning, research and business development services to organizations and individuals in the agriculture and food space. Ganley is passionate about the food and agricultural industries and has pursued a dynamic career with experiences ranging from agricultural production to consumer products spanning many geographies. She holds an MBA from the University of Chicago Booth School of Business and currently resides in Buenos Aires. Ganley can be reached at monica.ganley@quarterra.com.

 

SOURCES:

1Yara International. “Agriculture in Brazil – Vast Resources.” YouTube. 13 June 2014. 28 August 2017. https://www.youtube.com/watch?v=KlI2JwhI1JU.

2World Bank. “Global Economic Prospects – A Fragile Recovery.” World Bank. June 2017. 28 August 2017.

3“Brazil Farmland Development Fund Pitchbook, (www.brazilfarmlandfund.com) 01 August 2017.

4Export.gov. “Brazil – 1- Openness to and Restriction on Foreign Investment.” State Department’s Office of Investment Affairs’ Investment Climate Statement. 31 July 2017. https://www.export.gov/article?id=Brazil-openness-to-foreign-investment. 28 August 2017.

5“How to Cope with Brazil’s Political Crisis.” The Economist. 25 May 2017.

6Ibid.
7Welshans, Krissa. “JBS SA Resuming Operations as 60 Indicted in Brazilian Meat Scandal.” Feedstuffs. 21 Apr 2017.

 

 

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Agricultural Investing asset class crops Investing market research potash

Is Potash Rising from the Investment Ashes?

Our most recent article for Global AgInvesting. Enjoy an abbreviated version of the article below. You can find the full article here

As always, don’t hesitate to contact us if you can help.

Best Wishes,

Michael

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Potash — it’s a key component to feeding the world’s growing population, yet many don’t even understand what it is or why it is important. In the broadest sense, potash refers to a variety of mined and manufactured salts that contain potassium in water-soluble form. Before the industrial era, ash burners (workers who collected or produced wood ash) would soak wood ash in water, then evaporate the water from the mixture in large iron pots leaving behind a concentrated, white residue called pot ash. The name pot ash literally means plant ashes soaked in water in a pot.

Today, potash is more widely associated with naturally occurring potassium salts. Coincidentally, the name potassium comes from the word potash. Global potash production capacity was approximately 51 million metric tons in 2016, with the majority of it used in fertilizers. These fertilizer applications constitute the single largest industrial use of the potassium element in the world, making it an invaluable and irreplaceable part of feeding the world’s growing population, which grows by 80 million people every year – a number equal to the population of Turkey, according to the UN.

The potassium in potash fertilizer is used to encourage water retention in plants, increase yields, improve taste, and even help plants fight disease. Potassium is also an important mineral for keeping humans healthy and must be regularly replaced in our bodies by consuming potassium-rich foods. Since potassium doesn’t exist in elemental form in nature (it reacts violently with water), it has to be combined with other elements, either naturally or mechanically, before it can be used by plants. The naturally occurring union happens as a result of a very long geological process, so, in order to be applied as a fertilizer on our rapidly expanding fields, it has to be mined and processed.

Economic and middle class growth in places like Asia and Latin America have contributed greatly to the increased use of potash-based fertilizer. With increased cash in the pockets of middle class families, the more they’re willing to spend on more and higher quality meat and dairy products. This new and more expensive diet will require more acres to be planted, more fertilizer to be applied, and more animals to be fed – all good news for potash.

The industrial applications for potassium span a variety of necessary human functions. Potassium chloride is used in aluminum recycling, oil-well drilling fluids, snow and ice melting applications, and even in water softening. Potassium carbonate is used to produce animal feed supplements, cement, fire extinguishers, and is an integral component in beer brewing. These non-fertilizer uses historically account for about 15 percent of the annual potash consumption in the United States.

They Don’t Always See Eye to Eye

Most of the world’s potassium reserves were deposited as sea water in ancient inland oceans. After the water evaporated, the potassium salts crystallized into beds of potash ore. These crystallized beds formed thousands of feet below the surface area where most of the world’s potash is being mined today.

Canada possesses the world’s largest potash reserve and is also its largest producer, mining nearly 11.2 million metric tons in 2015. Following closely behind are Russia, Belarus, and Germany to round out the top four.

It should come as no surprise that these countries don’t always see eye to eye when it comes to potash production. In 2013, a trade pact between Russian and Belarusian producers collapsed when Russia pulled out of the agreement, claiming Belarus had been selling potash outside of their pact. Russian producers then quickly announced a policy of heavier production, sending the potash market into a slump from which it has yet to fully recover.

Recent talks between the two governments could signal that the cartel is ready to rise from the ashes once again. Belarusian president Alexander Lukashenko has been suggesting that an agreement between Belaruskali (Belarus’s main producer) and Russia-based Uralkali could allow them to divide up the markets again and agree on production limits. While this could be positive for the overall potash price and the market’s largest producers, the competition is not very happy.

With the state of the former cartel uncertain, competition was allowed to soar along with unregulated production. Many new producers from around the world began to build new mines and ramp up production. The German company, K+S AG, officially opened a new mine in May 2017 while Sirius Minerals is nearing a final plan to begin building the second deepest mine in Europe beneath a national park in Britain.

If cooperation is ultimately restored between Russia and Belarus, it could spell trouble for smaller potash producers. This could, however, be good news for the potash price, which is already up over 20 percent since last July, mostly on the rumor.

Meanwhile, Canada’s potash producers were off to an uncertain start to 2016 as well, with negotiations between key Chinese buyers and Canadian producers dragging on well past their usual wrap-up window of January-March. With market prices sitting around US$230/metric ton in July 2016, the Chinese continued to play hardball, asking for prices below US$200/metric ton. Low potash prices have instead placed the bargaining chips squarely in the hands of the world’s largest potash buyers (China and India included), forcing negotiation at every turn.

Are Low Prices a Cure of Low Potash Prices?

The potash market has had a strong dose of low prices over the last several years, but has this forced the supply and demand equation back into alignment? Is the market poised for a bull run or will the recent price uptick be just another dead cat bounce?

From the supply side, sustained low potash prices have forced many companies to trim excess fat, closing high cost operations and delaying new ones. Shutting down or delaying these operations has had a slight impact on the overall supply, but these production cuts are unlikely to result in a net shortage. Global potash production capacity is forecasted to reach 64.5 million metric tons by 2020, a 22 percent increase compared to 2016’s production capacity of 50.8 million metric tons. How does this stack up against global demand and consumption?

World potash consumption was approximately 35.4 million metric tons in 2016. A comparison with 2016’s production capacity highlights a 15.4 million metric ton supply surplus that isn’t likely to shrink significantly in the next five years. Global consumption is expected to rise (39.0 million metric tons by 2020), but if production capacity hits expectations, the supply surplus will nearly double during that time period.

Between 2015 and 2020, global potash supply is expected to grow by 17 percent with demand increasing by only 11 percent. Barring some major black swan event that could drastically affect global potash supply, this will be a hard gap to close. As the world’s largest potash producer, a look at Canada’s supply/demand forecasts says it all.

Foreign currency exchange rates also will play a role in the potash price of the future. The U.S. imports the majority of its potash from Canada and Russia in U.S. dollars, so a strong Canadian dollar and Russian ruble could support higher potash prices as outside producers attempt to maintain their margins. The Canadian dollar is up more than 10 percent since the start of the year while the Russian ruble has held steady.

However, the U.S. is not the only consumer of potash, and being forced to purchase this necessary component in U.S. dollars is severely affecting some agricultural powerhouses. Brazilian farmers, for example, have been the recipients of the wrong end of the currency exchange stick for years, being forced to convert their reals into dollars to purchase potash at nearly a three to one premium.

The combined effect of long-term low prices and strong demand may not be enough to overcome an increasing supply surplus and mixed buyer currency exchange rates. If the Russians and Belarusians never work collaboratively with potash production again – bringing production back under control – smaller producers will continue to drive new growth, only widening the gap between supply and demand. Meanwhile, China, India, and other major buyers will continue to play coy with their bottom line price, making is easier to negotiate a lower price and harder for markets to predict annual prices. While this is certainly an area to watch going forward, I wouldn’t bet the farm on it.

SOURCES:

  1. Heffer, Patrick and Prud’Homme, Michael. “Fertilizer Outlook 2016 – 2020.”  International Fertilizer Industry Association.  84th Annual IFA Annual Conference. 30 May 2016. Web. 20 August 2017. http://www.fertilizer.org/imis20/images/Library_Downloads/2016_IFa_Moscow_Summary.pdf?WebsiteKey=411e9724-4bda-422f-abfc-8152ed74f306&=404%3bhttp%3a%2f%2fwww.fertilizer.org%3a80%2fen%2fimages%2fLibrary_Downloads%2f2016_IFa_Moscow_Summary.pdf
  2. Ibid.
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Agricultural Investing asset class Avocado Investing Panama South American Agriculture

Agriculture in Panama – The Investment Landscape and Opportunities

Panama is one of the fastest growing economies in Latin America. Foreign investments in Panama amount to nearly 9 percent of the country’s GDP, which is the largest share in the Americas and speaks to the country’s investor friendliness.(1) Foreign direct investment into Panama is up 6 percent since 2013 and accounted for 11.3 percent of the country’s GDP in 2014.

2014 Foreign Direct Investment - Panama

 

With Panama boasting the second largest Free Trade Zone in the world, it’s easy to see why a thriving expat community (3,000 foreigners from 30 different countries) has stimulated the growth of new businesses owned by foreigners and locals alike. Investing in Panama is straightforward as the currency is in USD, there are no restrictions on foreign ownership, nor any exchange controls. The U.S.-Panama Trade Promotion Agreement from October 2012 granted U.S. exporters immediate duty free treatment accounting for more than half of current trade.(2) The country’s tropical climate is favorable to agricultural practices, and can permit up to two growing cycles per year with the proper farming techniques. Couple that with cool, mountain climate retreats, and Panama emerges as an ideal agricultural investment location with the added benefit of being a sought after retirement destination.

Panama’s particularly fertile soil and favorable growing climate afford the country many unique agricultural opportunities. The avocado, particularly the Panamanian Hass variety, is ideally suited for cultivation in Panama. In 2016, the United States purchased nearly 2.2 billion pounds of avocados, a 16 percent increase from the quantity sold in 2014. The U.S. organic avocado market grew by over 30 percent in volume in 2014 while still leaving plenty of room for growth in the market, both in the U.S. and abroad, as presently many smaller producers are unable to meet the growing demand and required consistency of destination markets. Given these conditions, an investment with a Panamanian organic avocado producer could yield an investor a 16-plus percent IRR over a 30-year period through a fully managed, turnkey investment of US$45,000 for 2.5 acres.

Forestry is also another potentially profitable opportunity in Panama, with over 50 percent of the country’s land being forested. As an example, teak has been valued for more than 2,000 years as a durable construction material and is now a worldwide coveted commodity. With the right management and timing, it’s possible to realize a yield of 10 percent IRR over a 20-plus year timeframe when investing in Panamanian teak. There are also reforestation visas available through the Panamanian government where investors can apply for a temporary Panamanian visa or permanent residency, depending on the type and amount of investment in addition to receiving a tax break on their Panamanian taxes. (3)

Potential Yields at Key Stages of Teak Rotation

 

Mango cultivation in Panama also can be explored as a viable investment opportunity. With an average producing lifespan of 60-80 years depending on the variety, the mango is one of the more lucrative and dependable crops in the world. While the mango tree is native to Southeast Asia, the climate is quite similar in Panama and very conducive to mango production.

The United States is the greatest importer of mangos globally, accounting for a nearly 45 percent consumption rate of the world’s mango exports. Meanwhile, imports to European markets more than doubled between 1999 and 2008. Given Panama’s geographical proximity to both foreign markets and their strong business practices and incentives, exposure to the Panamanian mango export market could be a nice fit for a variety of investor classes. For example, an organic mango producer in Panama is projecting a nearly 17 percent IRR over a 30-year period for an initial investment of US$38,500.

The business and tax incentives in Panama are attractive to foreign investors. Panamanian income taxes (only 7 percent after the first US$9,000 and capped out at 27 percent) apply only to Panamanian-generated income. Capital gains taxes can be as low as 10 percent and all inheritance taxes have been completely abolished. The Foreign Investor Protection law grants foreign investors the same rights and freedoms as Panamanian citizens to own land.(4) There is also a law targeting reforestation investments that provides a 25-year income tax exemption to those who purchase farmland for the purpose of reforestation. Panama also boasts an all-around stable economy, where inflation is maintained at 2 percent with a Value Added Tax (VAT – similar to a U.S. sales tax) of zero. Property taxes are extremely affordable in Panama, with properties having a registered value of less than US$30,000 paying nothing and only 2.1 percent on properties more than US$75,000.(5) Investors in agricultural activities are exempt from paying Panamanian income taxes on their agriculturally-earned income if the annual income is under US$350,000 as well as taxes on income earned from exports. Agricultural investors are also exempt from Panamanian property taxes if their agricultural land is used exclusively for farming and the registered value of the property is less than $150,000. Exporters of non-traditional agricultural products (melons, watermelons, pumpkins, pineapples, etc.) enjoy the benefits of exemption from taxes for income earned from exports, duty-free importation of materials and equipment, and negotiable tax credits for amounts exported.(6) These foreign-friendly business practices, agricultural tax benefits, and extremely affordable tax rates make Panama an attractive agricultural investment opportunity worthy of further exploration.

 

 

[1] Alex, “Panama Farmland – A Guide to Agricultural Investment in Panama”, panama equity REAL ESTATE, September 2013, https://www.panamaequity.com/panama-farmland-a-guide-to-agriculture-investment-in-panama/, May 23, 2016.

[2] United States Department of Agriculture (USDA), “Panama”, USDA – Foreign Agricultural Services, n.d., http://www.fas.usda.gov/regions/panama, May 23, 2016.

[3] Jeff, “Panamanian residency visa investment through sustainable, environmentally friendly reforestation projects”, Panama Forestry, n.d., http://www.panamaforestry.com/, May 23, 2016.

[4] Michelle Martínellí and Rubén Irígoyen, “International tax – Panama Highlights 2015”, Deloitte Touche Tohmatsu Limited, 2015, https://www2.deloitte.com/content/dam/Deloitte/pa/Documents/tax/2015_PA_Tax-panamahighlights.pdf, May 24, 2016.

[5] International Living, “Taxes in Panama”, International Living Magazine, Agora Inc., 2013, https://internationalliving.com/countries/panama/taxes/, May 24, 2016.

[6] Alvaro Aguilar, “Panamanian Tax Exemptions”, International Law Office, January 28, 2005, http://www.internationallawoffice.com/Newsletters/Corporate-Tax/Panama/Fabrega-Molino-y-Mulino/Panamanian-Tax-Exemptions, May 24, 2016.

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Agricultural Investing Articles asset class Investing South American Agriculture

Agriculture as an Asset Class

Agriculture is one of the oldest asset classes in the world, time tested and proven to weather economic uncertainty.  Within agriculture, farmland has historically proven itself as a tangible, stable storage of wealth, appreciating approximately 3.5 percent annually over the last 30 years.

 

A Global Farmland Index recently developed by Savills World Research, an index based on data from 15 key farmland markets across the globe, recorded an annualized growth since 2002 of 14.8 percent. The strong, steady growth highlighted by the index also illustrates a reduced volatility, characteristic of the asset class. A direct comparison between farmland and other global commodities shows farmland values were less volatile than other commodities and were significantly less affected by the credit crunch in 2008.

 

Historical Commodity Price Index

 

When compared to other selected asset classes within the U.S. markets and global commodities, farmland and timberland have upheld their reputation as high-returning, low-risk asset classes.

 

Historical Risk and Return

 

A further assessment between farmland and the S&P 500, the market index that represents roughly 70 percent of all stocks publicly traded, shows that farmland investments dramatically outperformed the S&P 500 Index over a 15-year span. As the graph below also illustrates, the 2008-2009 financial crisis had virtually no impact on the NCREIF Farmland Index’ investment value, further highlighting agriculture as a secure, stable alternative uncorrelated with the equities market.

 

NCREIF Farmland Index

The fundamentals of agriculture are some of the most promising characteristics of this asset class. With the global population expected to reach 9.7 billion people by the year 2050, the development of a robust food system will be crucial to ensuring a sustainable and prosperous future. This increase in global population will require a 60 percent increase in the demand for food production. Where will this growth in food production come from? While U.S. agricultural markets may be an investor’s first solution, they may not be the most lucrative market for an agricultural investment.

Potentially productive U.S. agricultural land is being developed at a rapid rate and as a result of this shrinking supply, prices for remaining farmland are increasing. From 2007 to 2012, nearly 3.5 million acres of rural land in the United States was converted to non-agricultural uses. During that same time period, according to the USDA’s 2016 Land Value Summary, U.S. farm real estate, cropland, and pasture land rose in price per acre an average of 17 percent.

 

Average Farm Real Estate, Cropland and Pasture Land Values

 

The relative ease of agricultural transactions in the U.S. has more investors chasing the same shrinking pool of opportunities, further reducing supply and continuing to drive up prices. Investors bold enough to diversify with an overseas agricultural investment can find plenty of untapped opportunities, strong upside potential, and an industry poised to not only support, but profit from the rise in global population and corresponding demand for increased food production.

Opportunities and Risks in Latin American Agriculture

The multi-faceted investment opportunities in Latin American agriculture provide an assortment of alternatives for a variety of investors – private, institutional, family offices, and High Net Worth Individuals (HNWIs). Ideal climate, quantifiable soil productivity, and an immature agribusiness market creates opportunities that the U.S., as a fully developed market, can hardly present. These conditions present a growth potential offered by Latin American agriculture that is hard to match in other parts of the world.

 

A critical consideration when researching agricultural land as an investment is the availability of arable land and sufficient water resources in that region to support sustained agriculture.  The Latin American region is home to the world’s greatest agricultural land and water availability per capita. Comprising only 15 percent of the world’s land area, Latin America receives nearly 30 percent of the world’s precipitation and is home to almost 35 percent of globally available renewable resources[i]. As you can see from the image below, much of Latin America has a water stress level (ratio between withdrawal and availability) between 0 and 0.3.  Essentially, there is very little competition or stress between the amount of water being consumed by the population and its availability in the environment. The same cannot be said for the United States.

Water Stress Level Map

 

One very compelling point of differentiation between U.S. and Latin American farmland is price. A 2016 Iowa Land Value Survey found the average price of Iowa farmland, some of the most productive and sought-after farmland in the U.S., was approximately $7,183 per acre[ii].  Compare that, for example, to the average price per acre for top quality, fertile farmland in Uruguay at $4,850 per acre or productive cropland in Argentina for $3,600 per acre and these price points become hard to ignore. As the graph below shows, the average price of varying types of agricultural land in several different Latin American countries is extremely competitive against current U.S. agricultural land prices.

 

Approximate Dollars Per Acre of Agricultural Land

 

It’s important to note here that Panamanian land prices are influenced by the country’s excellent foreign investor and business practices, their longstanding and proven track record of excellent agricultural practices, their proximity to the U.S. and ease of export, and their use of the USD as a primary currency. Uruguay, Argentina, and Ecuador, on average, offer more affordable land prices than their North American counterpart.

 

When considering U.S. versus emerging market investments, one of the key differences is the risk profile an investor is willing to assume. An investment in Latin American agriculture, for example, may present a higher risk profile, but these risks are becoming increasingly easier to understand and mitigate. To minimize these risks, as with any investment, investors need to first parse emerging market risk at a country-level first, then isolate specific, often localized risks that may not be readily apparent at the country-level assessment phase. This is particularly true in the resource/agricultural sectors. Some of the greatest risks revolve around politics, macroeconomics, and rule of law. While there is little that can be done to manage political and macroeconomic risks, investors need to fully assess these environments, understand all possible scenarios, and make the right trade-off for themselves between potential risks and reward.

 

Understanding a country’s legal framework is crucial to protecting and insulating the investment as much as possible. This is where sound legal assistance is an absolute must. The right representative can provide you with advice concerning titling issues, cultural differences, and connect you with governmental agencies to apply for special investor programs. Potential investors should seek counsel from someone with international investment experience as local advisors may tend to favor loyalty to their local network more than finding the investment that best suits your needs. Finally, a failure to understand the culture of the country you’re investing in is a recipe for a failed investment. Essentially, an absentee investor is asking the surrounding community to watch over their investment while they are away, something that’s not possible without their support.

 

[i] Wendong Zhang, “2016 Farmland Value Survey Iowa State University”, Iowa State University Extension and Outreach, 2016, https://www.extension.iastate.edu/AGDM/wholefarm/html/c2-70.html, January 2nd, 2017.

[ii] Inda Flachsbarth, Barbara Willaarts, Hua Xie, Gauthier Pitois, Nathaniel D. Mueller, Claudia Ringler, and Alberto Garrido.  “The Role of Latin American’s Land and Water Resources for Global Food Security:  Environment Trade-Offs of Future Food Production Pathways”, PLOS One, U.S. National Library of Medicine National Institutes of Health, January 24, 2015, http://www.ncbi.nlm.nih.gov/pmc/articles/PMC4305321/, May 20, 2016.

Categories
Agricultural Investing Investing South American Agriculture

The Case for Ag Investment in South America

Insight from International Entrepreneurs in Agriculture

The Case for Ag In South America

 

 

 

 

 

 

Written by Michael DeSa, Wilfred Morren, and Monica Ganley

In the context of recent political turmoil and today’s uncertain economic times, many investors and entrepreneurs are seeking alternative investment options outside the U.S. as a way to add diversity and uncorrelated assets to their portfolios. Agriculture is one of the oldest asset classes in the world, time tested and proven to withstand economic uncertainty and volatility.  In particular, multi-faceted and diverse agricultural investment opportunities in South America provide an assortment of alternative opportunities for a variety of investors.

To help shed light on this topic, Jacob Warwick, founder of ThinkWarwick Communications, recently interviewed three investment entrepreneurs and founders that specialize in South American agricultural markets. Michael DeSa, Monica Ganley, and Wilfred Morren, discuss how South American agriculture markets differ from the U.S. and where you should focus your efforts this year.

Agriculture as a Growing Asset Class

These experts believe agriculture in South America is a more stable, tangible alternative compared to low yielding bonds or overvalued, risky, and extremely volatile equity markets within the US.

Wilfred Morren, a Dutch native who has lived and worked in Uruguay for ten years, is the director of an investment brokerage firm called, Farmland Uruguay. He points out, “Farmland has historically proven itself as a tangible storage of wealth. In fact, the appreciation of farmland worldwide over the last 30 years is approximately 3.5 percent annually.”

Monica Ganley is the founder of Quarterra, a boutique strategy consultancy dedicated to providing clients insight into the Latin American food and agriculture industries—and the tools needed to unlock business opportunities in the region.

For Ganley, the fundamentals of agriculture as an asset class are the exciting aspect. She authenticates her belief in agriculture with facts. “With the global population expanding rapidly, the U.N. estimates a world population of almost 10 billion by 2050, enabling the development of a robust food system will be crucial to ensuring both a peaceful and prosperous global future.” She further solidifies this point by saying, “If there are any doubts about the relationship between food availability and geopolitical stability, look no further than the role hunger played in the Arab Spring.”

While it’s a near given that population will continue to compound over the foreseeable future, this doesn’t necessarily mean agriculture in the United States is a bad investment option; only that it may not prove the most lucrative investment opportunity.

Ganley adds, “There’s nothing wrong with agriculture in the United States, but I think because of the relative ‘ease’ of these transactions, there are a lot more people chasing the same opportunities.”

Michael DeSa is the founder of AGD Consulting, a US-based, veteran-owned advisory company offering consulting services and customized investment research trips to private and institutional investors. DeSa shares insight into the US market, “Research shows that from 2007 to 2012, nearly 3.5 million acres of rural land in the U.S. was converted to non-agricultural uses. During that same period, the average price per acre of U.S. farmland rose nearly 22 percent.”

It appears that while there are agricultural investment opportunities within the United States, their availability is shrinking and prices are increasing. Investors bold enough to diversify with an overseas investment can find plenty of untapped opportunities.

Opportunities in South American Agriculture

Both DeSa and Morren agree that South American agriculture has grown more attractive over the past several years. “It’s one of the few regions of the world that still has underdeveloped and underutilized farmland. The region is home to nearly 30 percent of the globe’s arable land and one third of its freshwater supply, speaking to its sustainability over time.”

Morren adds that for the past three decades, countries such as Uruguay have concentrated on establishing foreign investor-friendly business practices to draw more outside investment dollars. This means that securing a long-term investment partner is more obtainable for United States citizens that is has been in the past.

Ganley, a resident of Buenos Aires, agrees that investment opportunities are becoming increasingly accessible. “We have seen an important shift in Argentina’s attitude toward foreign investment. Since taking office in December 2015, president Macri has eliminated the parallel exchange rate and taken other measures to facilitate investment flowing into the country.”

With its sustainable water supply and untapped arable land, South American agriculture may be poised to support the world’s growing need for food; however, with the tremendous size and scope of the continent, these three experts believe the most value and upside potential is concentrated in the southern cone, primarily Argentina, Uruguay, and Paraguay.

DeSa acknowledges that while opportunities abound throughout the continent, “The south and central region has the most potential for future upside. In this region, you’ll find a stronger physical and legal infrastructure, a longer track record of strong foreign investor sentiment, and examples of a more stable geopolitical climate.”

DeSa’s sentiment on the region closely aligns with what Ganley has been seeing in Argentina, particularly within governance around the agriculture industry.

“The elimination of effective export taxes on corn and wheat have increased potential returns while the soy industry is benefitting from recent tariff reductions. In the Northern provinces, the government is aiding soy farmers by offering subsidies and transport initiatives.”

Argentina’s beef industry is also poised for growth as a result of the government removing export taxes imposed by the former administration.

Morren is seeing farmers in Uruguay play towards trends in the United States to increase investor interest.

“The climate and physical landscape (in Uruguay) are ideal for extensive cattle breeding and uniquely qualified to meet the increasing demand for grass-fed beef. Premium quality beef production is business as usual in Uruguay, with many of the animals bound for the U.S. having a rating of Never Ever III, which indicates that the animal has never received antibiotics, growth hormones, or proteins of animal origin.”

Morren adds that forestry in Uruguay has also been a strong sector, “Forestry started growing nearly 30 years ago when the government was able to attract large multinational investors such as Shell and UPM from Finland.” These major investments primed the Uruguayan economy with established pulp mills and processes that are designed for large scale operations.

Risks and Opportunities in South America Versus United States

DeSa, while not against investing in the United States, advises his clients about one very compelling differentiation between the two—farmland prices.

“A 2016 Iowa Land Value Survey found the average value of Iowa farmland was approximately $7,183 per acre. Compare that to the average price per acre of top quality, fertile land in Uruguay at $3,500 and these price points become hard to ignore.”

Morren agrees, “The strong growth potential offered by South American agriculture is hard to match in other parts of the world. Ideal climate, quantifiable soil productivity, and an immature agribusiness market creates opportunities that the U.S., as a fully developed market, can hardly present.”

While Ganley, a proponent of investing in South America, understands these opportunities, she also empathizes with North American investors. “When thinking about U.S. versus foreign farmland investments, the key difference is the risk profile an investor is willing to assume” she comments.

“An investment in South American agriculture could come with more risk, but in my opinion, these risks are becoming increasingly easy to understand and mitigate. Many investors are watching the region, especially in Argentina, and its shifting political climate with piqued interest. Investment opportunities here offer compelling fundamentals, but they won’t last forever.”

To minimize this risks, as with other investments, you need to be extremely thorough when researching opportunities in South America. DeSa, who has personally invested in the region twice, argues for due diligence and boots-on-the-ground experience.

“A picture is not worth a thousand words. In my experience, online photos or reports can over or undersell an asset’s potential. Find a company or expert to help you walk the ground, experience the local financial and agricultural culture, and build trustworthy relationships with managers and communities before investing.”

Ganley adds that the greatest risks revolve around politics, macroeconomics, and rule of law. “While there is little that can be done to manage political and macroeconomic risks, the wise investor fully assesses these environments, understands all possible scenarios, and makes the right tradeoff for themselves between potential risks and reward. It’s critical to understand a country’s legal framework in order to protect and insulate the investment as much as possible.”

Sound legal assistance is an absolute must.

“The right representative can provide you with advice concerning titling issues, cultural differences, and connect you with governmental agencies to apply for special investment regimes,” comments Morren.

“Possible investors should seek counsel from someone with international investment experience as local advisors may tend to favor loyalty to their local network more than finding the investment that best suits your needs.”

A failure to embrace the culture of the country you’re investing in is a recipe for a failed investment— potential investors must spend time developing quality relationships.

“You’re asking the surrounding community to watch over your investment while you’re away, something that’s not possible without their trust and support.” adds DeSa.

Conclusion

The vast array of affordable and diverse investment opportunities in South American agriculture are largely unparalleled. As U.S. markets continue to struggle and become increasingly uncertain, many investors will depart traditional asset classes in search of better investment alternatives.

South American agriculture is backed by undeniably strong fundamentals, a high degree of investor freedom to act and create new businesses with local workers, and welcomes the incorporation of experience and technology from developed markets to create high value opportunities with strong growth potential.

Investors should seek to partner with reliable and professional advisors in order to achieve the upside potential of this market.

The future belongs to those who can become comfortable enough with the risks to operate successfully in this high-opportunity environment and while current opportunities exist which are competitive compared to those in more seasoned geographies, fortune will continue to favor the bold, first movers.

Categories
Investing Uruguay

IMF Ups Forecast for Uruguay’s Growth

A quick read about Uruguay’s stronger-than-expected growth projections. In spite of some of the economic difficulties of its neighbors, Uruguay is proving itself, time and time again, as a beacon of stability within the region. As usual, my emphasis is in bold with my comments in italics.

IMF ups forecast for Uruguay’s growth in 2016 to 0.7% – In October it had anticipated 0.1%

Friday, December 9th 2016 – 16:30 UTC
International Monitary FundUruguay was doing better than the October figures were telling, according to IMF.

The International Monetary Fund (IMF) on Thursday raised its forecast for economic growth in Uruguay this year to 0.7%, a substantial increase from the 0.1% estimated in October, (this is a seven-fold increase from the original projection) and underlined the country’s resilience to the problems of its neighbors Argentina and Brazil.

”Uruguay is proving resistance to deep recessions in its large neighbors (Argentina and Brazil),“ said the IMF’s technicians mission after finishing its visit to the country for the annual review of the economy. For the year, the IMF expects Uruguay to grow by 0.7% and a slight rebound in 2017 to 1.1%, as it ”improves the external environment and private consumption“. In October, the IMF had placed calculations for Uruguay in an expansion of 0.1% in 2016 and 1.2% in 2017.

The report by the international financial institution highlights that ”despite the slowdown in activity, inflation persists at levels above the target band set by the central bank,“ ranging from 3% to 7% a year. Following the measures taken by the Central Bank this year, and having hit a year-on-year high in May of 11%, “inflation is forecast to remain below 9% in 2017 and it will be progressively reduced to approximately 6% in the medium term.”

Looking ahead, the IMF stressed that ”a slower than expected recovery in Argentina and Brazil could be a drag on the economy, and the same would happen with weaker growth projected in China.“

In addition, IMF officials stressed the need to move forward in fiscal consolidation ”as debt levels have increased significantly in recent years, and financial markets closely monitor implementation of the adjustment,” with the goal of reducing the budget deficit to 2.5% of GDP by 2019.