The 10 most important rules for investing in agriculture favour South America
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Rule 1. Only invest in investor-friendly countries: 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 the 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 agriculture.
Subsidies can be alluring because they can be seen as underwriting performance but have severe 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 subsidies. Secondly, there is a 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. They cannot be removed if the sector does not have any subsidies.
Rule 3. Invest in countries with low land costs per unit of production. For example, in many EU countries (including the UK), land for wheat production costs more than 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 the 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 maintain the advantage that this may offer. For all commodity producers, the key to being profitable over the long term is investing in countries with a sustainable low production cost per unit. The land must be cheap per unit (Rule 3), but also, the production system used on the land is efficient, so the 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 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 domestic or international industries with one dominant purchaser. Watch out for China-centric countries.
Rule 7. Understand volatility and how it can be managed. Greater volatility will usually mean more significant risk. Some countries tend to have more volatile agricultural sectors than others because of production or price volatility. If there is substantial volatility, are there means available to manage it? Examples might include a diversity of regions or commodities to reduce portfolio volatility.
Rule 8. Land use flexibility is good. Agriculture is a sector that favours longer-term investments. This brings uncertainty around production systems and demand. Investing in land which has scope for several 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 helping drive land appreciation.
Rule 10: Climate Change: Negative climate change is real and is happening right now. It is, without a doubt, one of the most critical points on the list. Countries like parts of the US, the Middle East and Australia are 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 necessary to succeed.
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.
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