The 10 most important rules for investing in agriculture
Rule 1. Only invest in countries that are investor-friendly: Agricultural investments require a medium to long-term view. A typical investment in mainstream agriculture will require 70-80% of your investment to go into land. There is no need to add to these risks by going into countries where you put your capital at risk. This rules out most of Africa, Eastern Europe and parts of Asia.
Rule 2. Countries with low, preferably no, subsidies for agricultural.
Subsidies can be alluring because they can be seen as underwriting performance but they have serious long-term impacts. These include a loss of focus on remaining globally competitive because the imperative to do so is either removed or reduced by the subsidies. Secondly, there is substantial medium to long-term risk that the nature and quantity of the subsidy will change over time. The likelihood of this increases as government budgets come under increasing pressure. If the sector does not have any subsidies they cannot be removed.
Rule 3. Invest in countries with low land cost per unit of production. As an example, in many of the EU countries (including the UK), land for wheat production costs in excess of US$2,500/ton of yield. In some South American countries the land cost is around half per ton of wheat produced compared to the EU.
Rule 4. The production system must be low cost per unit. The majority of agricultural products can still be considered commodities – it is difficult to differentiate to receive a premium and then to maintain the advantage that this may offer. For all commodity producers, the key to being profitable over the long term is to invest in countries that have sustainable low cost of production per unit. It is important that the land is cheap per unit (Rule 3) but also the system of production used on the land is efficient so production cost per unit is low.
Rule 5. Invest in countries that have exportable surpluses. This means they produce at a competitive price and/or at high quality. Both are essential to underpin demand over the long-term.
Rule 6. Favour sectors that have a diversity of markets. This reduces market risk compared to sectors that have one dominant purchaser, be they domestic or international.
Rule 7. Understand volatility and how it can be managed. Greater volatility will usually mean greater risk. Some countries tend to have more volatile agricultural sectors than others, either because of production volatility or price volatility. If there is substantial volatility, are there means available to manage it? Examples might include diversity of regions or commodities to reduce portfolio volatility.
Rule 8. Land use flexibility is good. Agriculture is a sector that favors longer-term investments. This brings uncertainty around production systems and around demand. Investing in land which has scope for a number of different land uses helps reduce this risk over the long term.
Rule 9. Look for sectors that can deliver productivity gains: Without productivity gains it becomes hard to remain competitive against other sectors. Productivity improvements are critical to help drive land appreciation.
Rule 10: Climate Change: Negative climate change is real and is happening right now. It is without doubt, one of the most important points on the list. Countries like parts of the US, the Middle East and Australia are being seriously affected by this. This is leading in some cases to water wars ( Syria ) and in others a relocation of agro-industries to other countries.
Summary: Looking at the past most popular agricultural investment destinations is a sure recipe for failure. One must now look for countries with the above characteristics. South American countries have many of these positive features that are necessary to obtain success.
Contact the Gateway to South America team to learn about the best investment opportunities in the region. The company is a benchmark for foreign investors wishing to invest in Argentina, Brazil, Chile, Paraguay, Peru and Uruguay, providing expert advice on property acquisition and disposal.