Plain Speaking About Overseas Agro-Investments

Agro-Investments
Plus: Rural Property In South America

Feb. 17, 2015
Montevideo, Uruguay

Dear Overseas Property Alert Reader,

I don’t know about you, but I’ve heard plenty about investing in agriculture lately. If fact, I’ve gotten so much information on agro-investing that I found myself starting to tune it out.

And that would be a mistake.

So instead, I’ve decided to break down the big picture so that I can simplify what’s out there and understand it better.

By applying the tried-and-true analytical processes that work so well for residential property investing, it’s easier to determine if agro-investing makes sense and to see what segments of the agro-market, if any, are right for you.

Agro-Investing Starts With A Simple Matter Of
Big-Picture Supply And Demand

The world’s population is exploding, while the available farmland is shrinking.

According to The Economist, the world will need to produce more food over the next 40 years than it has in the previous 10,000 combined. Meanwhile, sprawling cities are using up arable land, while the production of biofuels demands an ever-increasing share of the earth’s surface.

Rising incomes in developing countries are causing the people in those countries to demand a more substantial and varied diet. They want more meat, which in turn requires more grain to raise the livestock. Per-capita calorie consumption increased by 23% from 1966 to present, due in part to higher incomes in developing countries.
According to the United Nations Food and Agriculture Organization, food production will need to increase by at least 70% by 2050. And with available land shrinking, the pressure on the value of agricultural land and products is obvious.

I won’t belabor the supply-demand point, because you’ve heard it before. Suffice it to say that agro-investing passes that test.

Let’s take a look at the types of purchases that are out there for the buyer or investor.

Individual Agro-Buyers Generally Fall Into These Four Camps

As we do with buying residential property, it helps to analyze your motive for agro-investing. I find that the agricultural offers out there (and the buyers thereof) tend to fall into four categories.

Survival: This type of buyer is interested in creating a self-sustaining environment for the personal use of his family. The objective here is not to reap investment gains, but rather to have a self-sustaining home to fall back on if necessary and to enjoy prepping it and working it in the meantime. It works well for people who enjoy the outdoors and appreciate the preparedness angle.

Land banking: Buyers in this camp are counting on the value of arable land going up as the supply shrinks and demand continues to rise. The idea is not to have the land produce anything, but to hold the land until you want to realize a long-term capital gain.

Hands-on agricultural production: This buyer wants to own the land and use it to produce an income. A friend of mine recently bought a coffee farm in Colombia and now sells the coffee into the marketplace. Also, a reader recently wrote to say that she and her family were now running their own productive cattle farm in Brazil. This investment works well if you want to make a living on your property.

A surprising number of people make this investment, but the ones who make money at it are usually those with prior farming experience. If you’re going to retire from your job as an accountant to raise blueberries in Uruguay, you’ll be more likely to have an expensive hobby than a serious income.

A variation on this theme is the investor who leases his farmland out to an experienced farmer. You’d typically get a share of the proceeds, and, of course, you’d benefit from the value of the land increasing. This scheme will net you about half of what you’d earn if you worked the land yourself—in Uruguay, for example, leased-out land nets about 3.5% to 4% annually.

Hands-off agricultural production: This type of investment can vary widely. It could be as hands-off as buying an agro-oriented mutual fund or an exchange-traded fund. Or it could be a hands-off investment where you invest in the actual production of an agricultural product.

Focus On The Type Of Investment That’s Right For You

Of these four categories, land banking and the hands-off production investment work best for me. This is because I know better than to think I’ve got the skills for running an active farm… with multiple residencies and banking presences around the world, I’ve got enough survival alternatives to suit my outlook.

My favorite market for land banking is Uruguay because of its plentiful water supply, abundance of different types of agricultural land, and mature infrastructure for getting things to market. They also offer a solid financial system and are friendly to foreign investors.

But hands-off agricultural production investments have the advantage of allowing a smaller investment than buying your own farm. I’ve seen a number of good deals over the past few years, including the production of coffee, teak, and mangos.

Here are some of the attributes that good hands-off agro-offers have in common:

  • These projects are normally a turn-key operation, where you buy into a project that’s managed professionally. Your job is to take the profits. More and more turn-key investments are being put together specifically for individual investors, as developers realize the collective power of the retail investor.
  • They should be offered with a strong management company who has experience at managing the type of crop you’re investing in. If you want maximum yields, you want industry experts in the field.
  • These investments offer economies of scale due to their size. This lowers the overhead for buying materials, machinery, and labor and leaves more available payout to investors.
  • When you’re part of a large project, market access is better than you could ever get on your own. If you want top dollar for the product, you need to be one of the big boys that the major retailers and processors want to buy from.
  • A good project offers a premium product, which is expected to weather market downturns better than the mass-market production fare.
  • Finally, with the best projects, the land is titled to the buyer. So if you invest in teak, for example, you’re actually buying the land that the trees are grown on and then sharing in the production profits. But if for some reason the teak profits don’t turn out like you’d hoped, you still own the land, not a piece of paper.

Of the three investment offers I mentioned (teak, coffee, and mangos), teak paid the highest returns when left until optimal maturity. And it offers the further advantage that you can time the market better when cutting the trees; if teak prices are down this year, you have the option to wait for better prices next year. The only drawback with teak is that it takes so long to grow to optimum maturity—maybe 25 years.

Coffee and mangos on the other hand, start producing relatively quickly and continue for a long time. Mango trees, for example, have a productive life of 60 to 80 years, providing cash flow for generations.

In the end, picking an agro-investment is no different than picking a residential property investment. You analyze what your motives are, take stock of the different categories of properties that are out there, and then focus in on the available deals.

But, in my book, agro-investments are a bit more stable than residential property investments. The agricultural production shortage is a worldwide problem, and agricultural products move freely between borders, resulting in a worldwide supply-demand equation. Accordingly, agro-investments are less susceptible to the quirks of a local market.

Lee Harrison
Editor, Overseas Property Alert

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Letters To The Editor

Lee,

Do you have any recommendations for rural property in South America? Maybe 2 to 4 acres for a little hobby farm? Clear water and air would be nice!

Thanks,
Wade

My first choice would be southern Ecuador due to the crystal-clear air, pure abundant water, 12-month growing season, and low property prices. For a cool climate, try the areas surrounding Loja to the north and east. If you like it a bit warmer (high 70s to low 80s), try the area around Malacatos or the valleys south of Vilcabamba.

If you’d like four seasons in more of a First World environment, you should consider Uruguay. Take a look at this article on Uruguayan chacras to get more info on these hobby farms.

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Lee,

I’m visiting Uruguay for five days in late February, staying in Montevideo, Punta del Este, and La Pedrera. Would you have any suggestions for specific areas to check out for buying a retirement house or apartment?

Thanks,
Kent

You will be covering a lot of ground in five days. Based on nothing more than my own preferences, I’d look to Punta Carretas or Centro in Montevideo, depending on your own taste and budget (Centro is a lot cheaper).

In Punta del Este, I’d check out Pinares on the Playa Mansa side of the peninsula and San Rafael/Rincón del Indio on the Playa Brava side. I like the beaches better on the Brava side but find the Mansa side to be a bit homier, with more of a community feel.

In La Pedrera, I’d check out the village itself or some of the nice developments just inland. Between La Pedrera and neighboring La Paloma, I think you’ve made a good choice in La Pedrera.

To look at properties in Punta del Este or La Pedrera/La Paloma, contact Alberto Prandi. In Montevideo, get in touch with Veronica Algorta.

Have a question? You can write to Lee here.

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