Category: Agricultural Investing

The Value Down Under – Investing In New Zealand & Australian Ag

Post author By Michael DeSa
Post date October 10, 2018
No Comments on The Value Down Under – Investing In New Zealand & Australian Ag

Our more recent article published by Global AgInvesting. Read below or click here to review on their site. We’re especially excited about this article because it was featured along with other articles addressing investment opportunities in Australasian agriculture in Volume 5, Issue 3 of the GAI Gazette, distributed in conjunction with Global AgInvesting Asia 2018, held in Tokyo on 2-3 October 2018.

The Value Down Under – Investing in New Zealand and Australian Ag

Limited government intervention, an ability to produce exportable surpluses, and low production costs have helped create goldilocks-like agricultural opportunities in Australia and New Zealand. Little to no uptick in political risk relative to other OECD countries and limited access to domestic capital creating arbitrage opportunities have helped form the pillars of a sound investment foundation. New Zealand is a transformative opportunity in the niche, high-yield specialty permanent crop space where value is extracted from new IP-protected varietals. Australia is an evergreen prospect in the farmland and animal protein sectors deriving its value from scalability and efficient operational and water management practices. Further priming the region for future efficiencies are advantages in logistics, compared to LatAm, the U.S., and Europe, as well as an ag culture focused on improving productivity through an active precision ag effort.

While challenges do exist, such as limited scalability in New Zealand, an over-dependency on a major regional trade partner, and water security in Australia, these risks can be managed through selective strategies and diversity within the sector. Barriers to foreign investment remain directed primarily against China and are relatively simple to overcome compared to other geographies. This article evaluates both countries’ relative value to other markets, investment opportunities, risk factors, and future outlook.

Strong Relative Value

The establishment of a National Council of Real Estate Investment Fiduciaries (NCREIF) Farmland Index in Australia indicates a favorable long-term outlook for Australian farmland. The index was established in 2015, and while data points are still limited (12 quarterly data points and only 48 farms in the index), total annual returns for the last three years appear strong.

A direct comparison to the U.S. NCREIF index is difficult because of the difference in the quantity of data sets, differing asset appraisal timelines, and a lack of longevity in the Australian index. A re-index of the Australian and U.S. NCREIF Indices shows Australian farmland outperforming U.S. farmland with 10.5 percent higher cumulative total returns over a two-year period.¹

A direct comparison of farmland prices in Australia/New Zealand to other OECD countries on a cost per hectare basis is not conclusive due to wide differences in farmland productivity and land price valuations, and therefore, land cost per unit of production is a more meaningful comparison metric. The utilization of a production-based benchmark allows investors to compare land values using different production characteristics. Using the long-term average for wheat yield as an example, the graph below illustrates relatively low land cost per unit of production for Australia when compared to other developed/OECD countries. Investing in farmland with low land cost per unit of production can allow an investor to realize greater capital gains through the application of more efficient management, farming practices, new technology, and higher operating returns. It’s important to note, however, that this metric does not take into account the logistical costs of getting the product from the farm gate to the market.

Agricultural government subsidies from a variety of developed and OECD countries were also compared against those in Australia/New Zealand. Lower, or non-existent subsidies, can force producers to be more efficient and yield-oriented if they know there is no government-supported safety net. This also prevents the unexpected removal of subsidies from disrupting an entire sector. The Producer Support Estimate (PSE) shows the lowest percentage of government subsidy funds provided to New Zealand and Australian farmers (0.9 percent and 2.0 percent, respectively) when compared to 11 other OECD countries.²

The ability of a country to produce a surplus of an exportable product is another important metric for evaluating competitiveness in the global market place. A large exportable surplus, often generated through higher yields and larger market share, indicates a country’s ability to supply a lower cost product to the global market. From 2005 to 2015, New Zealand went from accounting for 39 percent of the total global kiwifruit export market to accounting for over 50 percent in 2015. The nearest competitors, Italy and Chile, have remained relatively flat during the same period. Italy began at 24.4 percent and ended at 23.6 percent, while Chile began at 9.4 percent and ended at 11.6 percent over the same time period.³ The graph below highlights New Zealand’s total kiwifruit and apple yields compared to other global producers; illustrating their ability to create exportable surpluses.

Australian and New Zealand agriculture present a strong relative value compared to other developed agricultural markets. Appreciating farmland returns, low costs per unit of production, low government subsidies, and the ability to create large export surpluses are all positive indicators of the region’s agricultural investment potential.

Opportunities

A structural shift in ownership of farmland in Australia and New Zealand is creating a new demand for capital. Consolidation of smaller farms by larger operations is permitting older farmers to retire. This changing of hands is creating an increasing demand for capital in order to achieve critical mass and operational efficiencies.⁴ This section will highlight specific opportunities and trends in the agricultural markets as a result of these shifting conditions.

Australia

Agriculture has been one of the pillars supporting Australia’s economy, accounting for 12 percent of the nation’s GDP⁵, with the majority of all agricultural commodities produced in Australia sold to international markets. Due to the availability of arable land, investments in farmland assets and large-scale livestock operations are ideally suited.

Strong export markets and limited growth in global lamb production is expected to continue to drive strong prices for Australia’s lamb industry for the next several years. From 2009 to 2016, the value of Australia’s overall sheep meat export market grew by nearly 50 percent (in real terms), from US$1.5 billion to US$2.3 billion⁶, with lamb meat exports accounting for almost three-quarters of total sheep meat exports from Australia. Demand is expected to remain high, driven primarily by income growth in China and a strong market demand from the Middle East and the United States. Lamb export volumes to the U.S. grew by two percent in 2017 following an average annual growth rate for sheep meat of 11 percent over the previous five years.⁷ Exports to China grew 41 percent in 2017 alone. Supply is expected to remain muted as strong lamb prices create incentives for producers to limit flock growth in the short term. Strong demand from diversified markets and muted supply growth will continue to be positive for influencers for Australian lamb prices. These supply and demand conditions, coupled with the availability of scale and expert farm management organizations/practices in Australia, make for an attractive investment opportunity.

The current negative sentiment of Australian farmland by their own superannuation (SUPERS) funds is also creating an opportunity for outside investors to capitalize on rising farmland returns in the region. While Canadian, U.S. and British pension funds have been willing investors in Australian farmland for years, Australian SUPERS historically have been adverse to real assets, viewing farmland as a new asset class with varied returns. AustralianSuper, Australia’s largest non-profit SUPER, plus of number of other industry funds, quit the Sustainable Agriculture Fund (SAF) last year after years as key investors.⁸ The decision to sell by AgCap, the fund’s manager, was unanimous and came more than a year ago, before the fund announced a one-year total return of 10.6 percent (after fees) for the year 2016. AgCap’s investors cited mediocre returns and a lengthy time horizon (seven years). Whether this is just a missed opportunity by SAF investors or an outward sign of a skeptical sentiment towards farmland as an asset class on the part of the Australians, it has created an opportunity for international institutional investors to broaden their exposure to an asset class that is fundamentally strong.

New Zealand

This same structural shift in ownership of farmland is playing out in New Zealand, creating a new demand for capital in the permanent crop space. New kiwifruit, for example, were hit relatively hard by a 2010 Pseudomonas Syringae Actinidiae (PSA) outbreak, destroying a large portion of the countries’ green and gold kiwifruit supply. This forced many commercial growers to reexamine kiwifruit varieties and their resiliency to PSA. Zespri, the number one global exporter and number three global producer of kiwifruit⁹, developed a proprietary SunGold varietal, a G3 PSA bacteria-resistant cultivar, in response to the outbreak.

Zespri owns the license to this new G3 variety and plans to release 3,750 ha of SunGold licenses over the next five years, of which 250 hectares will be organic SunGold. While these licenses are available internationally, it should be noted that given New Zealand’s ideal growing climate, counter-seasonality to NORAM/Europe and overall kiwifruit market share, these G3 premiums will likely be the highest in New Zealand. Since November 2014, specialty farm management company, Craigmore Sustainables, has been transforming nearly 40 hectares of green kiwifruit orchards into the G3 variety with licenses purchased from Zespri. While the holding period for the Craigmore orchards has been short, the IRR achieved to date, Q1 2017 – 2018, has averaged 29.2 percent.

Industry consolidation, emerging IP-controlled varieties, and strong export market surplus capacity are creating similar opportunities in New Zealand’s apple market. New Zealand apples are the country’s second leading produce export, accounting for 25 percent of total produce exports, and the country is the number three apple exporter in the Southern Hemisphere.¹⁰ New Zealand has a strong record of new variety development – the Gala and Braeburn varieties now account for one-sixth of trees globally (outside China). When compared against key peer countries, New Zealand was the top average apple yielding country in 2014, in front of Chile and Italy with a growing market share percentage. From 2012 to 2015, as New Zealand began to bring new apple varietals online, their market share grew from 4.1 percent to 6.3 percent. China, the leader in global apple export value, lost market share during the same period from 15.5 percent to 15.0 percent.¹¹

The new Dazzle apple variety was launched in December 2016 by Fruitcraft after being licensed the worldwide rights by Prevar Ltd.¹² This was one of the biggest apple variety launches since Royal Gala decades ago. Fruitcraft is forecasting one million cartons will be exported from New Zealand by 2028, which could make it one of the country’s most popular apple varieties.

Investment strategies should be focused on transformative and new varietal opportunities within the New Zealand kiwifruit and apple sectors while prospects are best found in Australian farmland and certain animal protein sectors due to their scalability and expert land-use experience and practices. Further adoption of precision ag technology by both countries will continue to enhance on-farm productivity, leading to higher yields, lower production costs, and increased profitability.

Risk Factors

As with any investment opportunity, the risks need to be carefully measured against potential returns in order to meet specific investment criteria. The prospects for investing in scalability in New Zealand are limited as expansion of area devoted to key commodities is fixed. Therefore, opportunities for increasing scale in New Zealand will likely come in the form of land conversion, while Australia will center on improved efficiencies generated through technology adoption and consolidation. Increased scale in one crop type will likely come at the expense of another, as land is converted to more profitable products. Particularly in New Zealand, limited arable land constraints could lead to a lack of scale outside key export products, particularly in the permanent crop sectors.

The largest export markets for both New Zealand and Australia are predominantly Asian countries, in particular, China. Over 20 percent of New Zealand’s kiwifruit and apples, as well as 20-plus percent of Australia’s overall agricultural products, are destined for China. This heavy reliance on a single trade partner can create an overexposure risk. High levels of Chinese debt continue to add to the uncertainty in the country’s long-term economic strength. With China such a large importer of Australian and New Zealand agricultural commodities, their increasing debt levels¹³, and other economic challenges bring a sense of uncertainty to their long-term growth potential. While diversity within the Australian livestock markets along with a growing demand from the Chinese middle class both serve as counter-balances, investors need to weigh this potential risk against proposed gains.

Many of the opportunities in Australia center on farmland assets, therefore, the regulations of owning Australian farmland as a foreign investor need to be considered. Under the Foreign Acquisitions and Takeover Acts 1975 (FATA), investment in agricultural land by foreign persons requires prior approval by Australia’s Foreign Investment Review Board (FIRB) where: the investor is a foreign government; or with non-government investors (other than Chile, New Zealand, Thailand, and the U.S.), the cumulative value of the foreign investor’s agricultural land holdings in Australia will be greater than AUD$15MM.¹⁴

The FIRB has a significant role in deciding to approve or disapprove a transaction, and with changes to these rules over the past two years and inconsistent determinations, this could lead to an increased sense of uncertainty among foreign investors. In 2016, Australia’s Federal Treasurer granted foreign owners of Cubbie Station (Chinese textile giant Shandong Ruyi) an extra three years to comply with the original conditions of the sale; to sell down its stake from 80 percent to 51 percent.¹⁵ Many Australians felt this decision to give Shandong more time was not in the best interest of the country and fought to stop it. This verdict came on the heels of another decision by the treasurer to stop two previous bids by other Chinese companies to buy Australia’s largest cattle company, S. Kidman and Co, citing it was “contrary to the national interest”. These decisions were seen by many as an inconsistent approach by the Australian government in determining foreign investment approval and could serve to bolster a reluctance by Australians and the international community to invest in farmland assets.

Finally, water rights in Australia don’t guarantee water availability. Australian farms used less water in 2015/16 than in the previous year; partly because there was less water to use.¹⁶ A generally dryer year reduced water allocation as well as water availability in on-farm dams and tanks. The biggest decrease was in New South Wales (NSW), where the number of irrigating businesses dropped 21 percent. The Agricultural Census attributed this decrease to a decision by more NSW irrigators in the Murray-Darling water network to trade their water allocation, instead of using it to grow a crop. The Murray-Darling Basin accounted for 57 percent of all water used for irrigation in 2015/16.¹⁷ This high dependency on the Murray-Darling water network exposes farmland investors to high levels of risk concentration. As rules and water values vary widely between rivers and regions, the key is to understand this variability, quantify it, then value it.

The limited opportunities for scale, heavy reliance on China as a major trading partner, uncertain foreign investor regulations, and challenging water situation are all risk factors that need to be considered.

Future Outlook

Investors should strive for a balanced approach between creating efficiencies and scale in Australian farmland while capitalizing on niche, high-yielding permanent crops in New Zealand. Consolidation at all levels of the value chain will continue to drive overall efficiency and management. The growing middle class demand from the Asia-Pacific region will be a positive trend for the region’s exporters, but will need to be a measured approach from investors due Australia/New Zealand’s high dependency on a major trading partner. Both countries will continue to adopt technology-enabled alternatives to increase yields and manage water challenges.

It is realistic to assume agriculture is moving into a phase where productivity growth will be driven by the more efficient use of existing land, inputs, and water. Therefore, future return potential will rest with technology-enabled improvements in per-hectare production, reductions in unit production costs, and creative solutions to waste management. Growth will need to be supported by effective R&D and the development of new pathways for the commercialization of new varietals. This will all need to occur against a background of a changing climate and varying input costs.

ABOUT THE AUTHOR

Michael DeSa is the founder/managing director of AGD Consulting, a U.S.-based, strategic advisory and business development firm servicing the agricultural and resource sectors in emerging and OECD markets. His agricultural engineering background, 10- years of leadership and project management experience with the U.S. Marine Corps, and extensive travels and investment experience in emerging market countries make him uniquely qualified to counsel companies and investors throughout the region. Services include farmland and agribusiness due diligence, project origination, market assessment, and competitive analysis for precision ag technology and international project management. DeSa can be reached at michael@desaconsultingllc.com.

Sources

^{1. 2016 and 2017 Australian and United States National Council of Real Estate Investment Fiduciaries (NCREIF) Indexes}

^{2. Organization for Economic Co-operation and Development (OECD). “Producer and Consumer Support Estimates database.” 2016. http://www.oecd.org/tad/agricultural-policies/producerandconsumersupportestimatesdatabase.htm}

^{3. Coriolis, New Zealand Ministry of Business Innovation & Employment, New Zealand Trade & Enterprise and Ministry of Primary Industries. “The Investor’s Guide to the New Zealand Produce Industry 2017 – Part of the New Zealand Food & Beverage Information Project, FINAL REPORT.” (v2.01; June 2017): 6. Web. 21 March 2018}

^{4. FarmInvest Australia. Invest in Australian Agriculture. 2015. http://farminvestaustralia.com.au/invest-in-australian-agriculture/}

^{5. Chepkemoi, Joyce. World Atlas – Top 10 Agricultural Exports of Australia. 25 April 2017. https://www.worldatlas.com/articles/top-10-agricultural-exports-of-australia.html}

^{6. Food Innovation Australia Limited, “Australia’s recent meat export performance.”10 August 2017. https://fial.com.au/australia-meat-export-performance}

^{7. RaboResearch Food & Agribusiness. “Rabbobank Australia Agribusiness Outlook 2018.” 16-17. Web. 20 April 2018.}

^{8. Hemphill, Peter. The Weekly Times. “Farming investment: Australian superannuation funds pulling out support.” 23 March 2017. https://www.weeklytimesnow.com.au/agriblusiness/decisionag/farming-investment-australian-superannuation-funds-pulling-out-support/news-story/31a1986bd6cedcbacce9f8669b75160e?nk=583a6e0595cf590e3d47fba9f5e7e20b-1520876030}

^{9. Coriolis, New Zealand Ministry of Business Innovation & Employment, New Zealand Trade & Enterprise and Ministry of Primary Industries. “The Investor’s Guide to the New Zealand Produce Industry 2017 – Part of the New Zealand Food & Beverage Information Project, FINAL REPORT.” (v2.01;June 2017): 44. Web. 7-22 March 2018}

^{10. Ibid. 44. Web. 26 March 2018}

^{11. Ibid. 36. Web. 13 April 2018.}

^{12. O’Connell, Tim. NZFarmer.co.nz. “Dazzle apple variety launched after twenty-year development.” 21 December 2016. https://www.stuff.co.nz/business/farming/87775089/dazzle-apple-variety-launched-after-twentyyear-development}

^{13. Ibid.}

^{14. Johns, Steve. Lexology. “Changes to FIRB laws make it harder for foreign investors to buy agricultural land in Australia.” 12 February 2018. https://www.lexology.com/library/detail.aspx?g=f689b841-3eea-4cb2-8a67-e3793ce688b7}

^{15. ABC Rural News. “Cubbie Station Ownership Changes.” 21 June 2016. http://www.abc.net.au/news/rural/rural-news/2016-06-21/cubbie-ownership-changes/7517058}

^{16. Vidot, Anna. ABC Rural News. “Farmers getting older as latest survey reveals average age is 56.” 6 July 2017. http://www.abc.net.au/news/rural/2017-07-07/whos-farming-australia-abs-agricultural-census-2015-16/8686750}

^{17. Ibid.}

Tags #aginvesting, #australia, #GAI, #globalAg, #NewZealand

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Brazilian Farmland – Is the Risk Worth the Reward?

Post author By Michael DeSa
Post date January 23, 2018
No Comments on 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

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.

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.

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.

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.

Agricultural Investing biotechnology Latin America relations market research

AgriThority® Grows Strategic Services with Experienced Project Manager

Post author By Michael DeSa
Post date November 3, 2017
No Comments on AgriThority® Grows Strategic Services with Experienced Project Manager

Pleased to announce that I am now formally an associate with AgriThority. Excited to be part of such a respected and well recognized team! Check out the press release below:

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AgriThority^®, an agricultural science consultancy focused on accelerating new technologies to commercialization in markets around the world, welcomes Associate Michael DeSa to expand strategic and product development services.

DeSa will lead account and project management activities in North America and Latin America, with strategic advisory services for customized investor initiatives. His leadership and agricultural investment experience is an asset to clients as they navigate the economic aspects of developing and commercializing new technologies. His activities will include project sourcing, risk mitigation, market/commodity analysis, boots-on-the ground due diligence, risk assessment/mitigation and land management. DeSa’s technical background, years of leadership/project management experience with the United States Marine Corps and extensive travels and investment experience throughout the Latin American region (Ecuador, Peru, Colombia, Chile, Argentina, Uruguay, Panama and Mexico) make him uniquely qualified to advise and guide investors and companies.

A seven-year veteran of the U. S. Marine Corps, DeSa is recognized for his leadership, management and training achievements in humanitarian and combat situations. While deployed to Afghanistan, then Captain DeSa served as the Chief of Staff for a 250-personnel organization, accounted for $35 million in itemized assets and supervised a geographical area of nearly 350 square kilometers.

“Mike is an initiative-based leader with a proven record directing large-scale operations to resolve complex issues. He knows how to maximize organizational performance that positively impacts the bottom line,” says Jerry Duff, AgriThority President and Founder. “His first-hand experience as an international agricultural land owner and foreign investor raises the level of strategic counsel he provides clients when navigating market access opportunities or building investor relationships.”

DeSa has guided investors in every aspect of foreign land investments from project sourcing and risk assessment/mitigation, to boots-on-the ground due diligence, overseas land management and ownership structuring.

DeSa graduated from Texas A&M with a Bachelor of Science in agricultural engineering.

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Is Potash Rising from the Investment Ashes?

Post author By Michael DeSa
Post date August 30, 2017
No Comments on 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:

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
Ibid.

Tags commodities, crops, market research, potash

Agricultural Investing asset class Avocado Investing Panama South American Agriculture

Agriculture in Panama – The Investment Landscape and Opportunities

Post author By Michael DeSa
Post date August 23, 2017
No Comments on 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.

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)

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.

Agricultural Investing Articles asset class Investing South American Agriculture

Agriculture as an Asset Class

Post author By Michael DeSa
Post date August 8, 2017
No Comments on 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 2^nd, 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.

Agricultural Investing Investing South American Agriculture

The Case for Ag Investment in South America

Post author By Michael DeSa
Post date April 26, 2017
No Comments on The Case for Ag Investment in South America

Insight from International Entrepreneurs in Agriculture

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.

Tags agricultural investing, alternative investments, South American Agriculture

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Top Five Reasons to Walk the Ground Yourself

Post author By Michael DeSa
Post date April 4, 2017
No Comments on Top Five Reasons to Walk the Ground Yourself

In an age of market volatility, diversification is increasingly recommended. Investors bold enough to expand into international agriculture can find stores of untapped opportunities, strong upside potential, and an industry poised to profit from the coming rise in global population. As the Founder/CEO of AGD Consulting, a US-based, veteran-owned firm offering advisory services and due diligence trips for investors seeking experience in international agricultural investing, we believe overseas agriculture is an excellent way to achieve these goals. It’s imperative that investors walk the ground, experience the local financial and agricultural culture, and build trustworthy relationships with managers and communities before investing.

Below are the top five reasons investors need to walk the ground themselves.

A picture is not worth a thousand words

In my experience, online photos or reports can over or undersell an asset’s potential. Investment managers and syndicates tend to only present the best possible front for the project they’re promoting, therefore, it’s imperative for investors to see what they’re not showing you. Often times, these sites and experiences do not negatively impact the project, rather they add context and breadth for an investor to more fully understand what they are involved with. Find a company or expert to help you organize a research trip and perform your own due diligence before investing. As an example, AG DTours, a division of AGD Consulting, is providing customized expeditions to Colombia in partnership with Farmfolio as way to provide investors a richer understanding of their investment opportunity.

Meet the management

An experienced, well balanced management team who believe in what they’re doing is one of the most important indicators to investors on whether or not a project will succeed. If the project manager and his team don’t truly believe in the opportunity, it will be evident when you talk with them face-to-face. If you’re traveling to a country where you don’t speak the language, have your research trip provider arrange for interpreters to meet you at the project site. Talk to the local workers, ask what they think of the project, and watch how the investment manager interacts with his team. Listen and observe how the workers respond to your questions and watch how they perform their work; it will speak volumes as to how much they believe in what they’re doing.

Experience the geopolitical and economic climate

Potential investors need to experience the current geopolitical and economic climate of the country their investing in and/or what it could become during the investment’s lifetime. Talk with the locals about the current political administration, ask them what they think of foreign investors, and get a sense of how important agriculture is to their local economy. Talk to local street vendors selling agricultural products and ask them where they get their supply from, how business is going, and what would make their lives easier and more profitable. Learn how to convert money back and forth between currencies in order to get a sense for how easy or difficult it is. Go to a local bank and see if American citizens can open bank accounts. While you may never need to do this as an absentee agricultural investor, it will provide you with contextual and fundamental understanding of the geography and economic climate you’re investing in.

The right legal assistance

Understanding a country’s legal framework is crucial to protecting and insulating your investment as much as possible. This is where sound legal advice is an absolute must. If the investment opportunity you’re pursuing already has an embedded legal team with experience in the country you’re operating, great, if not, then you need to find one. 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. Investors should seek counsel from someone with international investment experience as local advisors may tend to favor loyalty to their local network more than providing you the best advice that suits your needs.

Understand the culture

One of the most common misconceptions foreign investors have regarding international investments, especially in the agricultural sector, is the assumption the processes move at the same speed as the Western world. The Latin American way of life is generally slower-paced than many Americans are used to. Foreign investors need to experience this culture for themselves and determine if it suits their personality and investment needs. If you try to force your cultural expectations onto the local management team and the surrounding community, you will struggle. As an absentee investor, you are asking the community and team on the ground to watch over your investment while you are away. This is simply not possible without an understanding and appreciation for the local people and their culture.

Tags due diligence tours, latin america investments, market research

Agricultural Investing Articles Latin America relations Uncategorized Veteran Entrepreneur

Our PodCast with Cigars and Sea Stories

Post author By Michael DeSa
Post date December 15, 2016
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AG DTours Featured on Cigars and Sea Stories

We were recently featured on Cigars and Sea Stories, a Podcast for Veterans who want to make a difference in the world. Enjoy as we talk about our current endeavors with AG DTours, my service in the Marine Corps, and our experiences traveling throughout the region.

http://www.cigarsandseastories.com/146-michael-desa-ag-dtours/

Agricultural Investing Argentina Argentina economy Articles Latin America relations Uncategorized Uruguay

Argentina and Uruguay Agree on How to Approach Trade with China

Post author By Michael DeSa
Post date November 28, 2016
No Comments on Argentina and Uruguay Agree on How to Approach Trade with China

Earlier this month, we talked about Uruguay’s trade dealings with China. Today, we’ll look at how Uruguay and Argentina have come to a consensus on how to approach future trade deals with China. My emphasis is in bold with my comments in italics

Macri and Vazquez agree that the trade approach to China should be done from Mercosur

Tuesday, October 25th 2016 – 10:29 UTC by Merco Press

Macri said that his government understands Uruguay´s need to have access to other markets and open to the world's second largest economy.

Macri said that his government understands Uruguay’s need to have access to other markets and to be open to the worlds’ second largest economy.

Argentine president Mauricio Macri promised his Uruguayan peer Tabare Vazquez to look into the draft of a Uruguay/China free trade deal, and expressed their deep concern about political events in Venezuela suggesting that under the current circumstances the Nicolas Maduro government cannot be considered a member of Mercosur (Things in Venezuela are not looking good. Drastic shortages of food, medicine, electricity and other necessities are causing small riots. Organized crime and extrajudicial police killings have given the country a frighteningly high rate of murder and violence. Runaway inflation means that from March 2015 to 2016 a basket of basic goods for a family of five became 524 % more expensive).

During a meeting on Monday midday at the Olivos presidential residence in Buenos Aires, Macri said that his government understands Uruguay´s need to have access to other markets and open to the world’s second largest economy.

“China is an option for Uruguay. With Vazquez we ratified the need to speed up this deal, in principle from inside Mercosur, but anyway I promised an open attitude and to look into what Uruguay is requesting”, said the Argentine leader. (Mercosur, which translated means Southern Common Market, was created in 1991 as a trade agreement aimed at providing free circulation of goods, services, and productive factors within member countries (Brazil, Paraguay, Venezuela, Uruguay, and Argentina) through the elimination of obstacles to regional trade).

“We understand that Uruguay produces food for ten times their population (A population of only three million people currently feeding 50 million) so it is only natural they should look for markets, but the ideal situation would have been for the issue to have been presented by Mercosur as a block, as we are doing with the European Union” emphasized Macri (Earlier this year, the EU Trade Commissioner and the Foreign Minister for Uruguay, who currently holds the rotating presidency of Mercosur, discussed the next steps in the negotiations on an EU-Mercosur trade agreement. The EU and Mercosur agreed to exchange market access offers specifying ways to increase mutual openness to each other’s goods and services, including access to public tenders. Those discussions also resulted in the adoption of a road map for talks during the rest of the year).

Vazquez underlined the very generous attitude of Macri and thanked Argentina for having such consideration.

“We coincided in advancing in a free trade agreement with China through Mercosur. But [we need to take] into account that Beijing came up with the possibility of such a deal six years ago and Mercosur did not reply, it would be positive that at the next Mercosur meeting we address the issue”, indicated Vazquez.

“In the meantime Uruguay will continue to explore the way to advance in a free trade project with China. We’ve already presented the road map for such a treaty and the extent planned. China has not replied yet but when they do, it will be shared with all Mercosur members”, he added.

Regarding Venezuela, both presidents agreed that under the current situation, “we are deeply concerned with the political problems, and we shared the opinion that under these circumstances they can’t be members of Mercosur. The Maduro administration must be condemned and disavowed by all American countries since there is no respect for human rights” (As another point of context, in May of this year, Uruguay prepared to pass the president-pro-tempore seat to Venezuela by the end of June. However, Argentina, Paraguay, and Brazil fiercely opposed this. Their arguments against Venezuela’s new role cited the country’s failure to follow the union’s rules as well as concerns about the government’s stance against its opposition).

Vazquez went further and said concern, regrettably, grows by the minute and “we are looking forward to a peaceful solution to the controversy, to dialogue between the Venezuelan government and the opposition. We also talked about the mediation from Pope Francis”.

Macri and Vazquez added that during the next Mercosur meeting whether to apply or not the democratic clause on Venezuela will be considered, since that is the correct place to consider such option.

“Uruguay will be attending the meeting and demand respect for peoples’ right to express their opinions and be respected. That is the essence of democracy and the direct participation of peoples”, added the Uruguayan leader.

Other issues considered by the presidents were drugs and crime, pollution in shared rivers and water ways, natural gas sales and the possibility of building another bridge across the River Uruguay that acts as a natural border between the neighboring countries.

Finally Vazquez, who never had a good relation or chemistry with the Kirchner couple, was most grateful with Macri and his hospitality. “I am profoundly grateful for his hospitality and friendship, with the Argentine president we have found ample paths of understanding”.