AGRICULTURAL INVESTMENTS IN PARAGUAY: FARMING SYNDICATES OR INDIVIDUAL OWNERSHIP?
The word has been out for some time: there is a country in South America where grasses grow as tall as cattle horns and crops yield 50% more than in the pampas. Paradise? No, Paraguay
Inland of the continent at the Tropic of Capricorn latitude, Paraguay is bordered by mighty rivers Paraná, Paraguay and Pilcomayo that give it access to the Atlantic Ocean. Its namesake river divides the country in two distinct regions. On the left bank, the eastern region concentrating most of the countries riches, urban settlements and population is hilly and humid, with a temperate climate and rich soils for cultivation. On the other bank, the western region (Chaco) is a big dry plain that extends into Bolivia and Argentina and is exploited mainly for extensive cattle raising.
|PARAGUAY REGIONS: DIVISIONS BY POPULATIONSource: country presentation Ministerio de Industria y Comercio, Red de Inversiones y Exportaciones||PARAGUAY LAND USESource: report (Spanish)“La gente que siembra el futuro”, Instituto de Biotecnología Agrícola (INBIO)l|
Paraguay’s economy (2015 projected growth 4.5%), depends heavily on agricultural production and foreign trade, mostly soybean and beef. Yet there are some hindrances on agricultural development: lack of infrastructure, scarce product diversification, technical backup deficit, unequal resource allocation, undefined agrarian policy, poor market knowledge and scarce credit sources.
In these conditions, it makes sense to aim for the most productive and developed region and strive to increase productivity through the use of smart agriculture technologies. In the southern corner of Paraná river, the Itapúa Department stands out, to the point of being called “the countries granary”. It boasts almost 40% of total soybean and wheat crops, growing agro-industrial facilities, direct access to the Paraná-Río de la Plata and Paraná-San Pablo waterways and abundant hydro -electric energy supply.
ITAPÚA PRODUCTION MAP. Source: Itapúa Government Portal
However, even in a region accounting for over 14% of Gross Domestic Product, land exploitation structure makes it tricky to start an agribusiness. In Paraguay, about 15% of producers are medium to large enterprises or cooperatives while the other 85% are traditional peasant exploitations. And over 91% of farms are under 50 hectares whilst a little under 3% -accounting for 85% of arable land- are larger than 500 hectares. That translates into the need to invest huge sums to achieve a reasonable amortization of fixed costs.
An alternative is to invest in extensive cattle raising, which is predominant in the Chaco region. However, the comparatively low cost of the land is offset by climate and security issues and a severe lack of infrastructure and human resources.
In the case of agriculture, the land available for purchasing in sensible extensions (1.500 to 5.000 hectares) is mostly undeveloped natural grassland. To transform it into agricultural land, the poor infrastructure (such as irrigation and disease control) and an underdeveloped agriculture service industry add significantly to startup costs. That’s why syndicated farming makes sense in Paraguay.
A farming syndicate is an entity engaged in the business of farming with interests offered for sale. While it may be established by a group of individuals wanting to share resources to rationalize assets and skills and achieve economies of scale, the term usually refers to professionally managed entities marketed to the public, be it existing farmers or new investors. As with any collective enterprise, there are questions to be asked before committing hard earned money, related to management and the investment itself:
Questions relative to the Promoter and the professional farm syndicate Manager
- Promoter, Operator and Management Team experience. Previous experience must assure the necessary know-how to design the investment project and execute the business plan as forecasted, integrate into the farming value chain and develop long term relationships with the best industry professionals.
- Promoter track record. Besides having the necessary know-how, the Promoter should have obtained significant internal rates of return (IRR) on managed syndicates, compared to other asset classes.
Questions relative to the business plan
- Investment opportunity. Some syndicates are dedicated to buying land, developing it and then selling while others aim to produce for many years and coordinate with the industry. The time frame, the risks and the returns are different.
- Due diligence procedures before investing. Land buying must be decided after thoroughly investigating location, size, local conditions, development potential and title strength and that the required funds are available. The investors must accept the results of those investigations.
- Proposed transformation and risk management. To minimize risks and maximize returns, land must have assured water reserves, erosion control, soil preparation and PH correction. The planned use, crop rotation, no-till technology and precision agriculture also contribute to sustainable development. Farm management services to be provided must be detailed. Profitability may be affected by weather, prices, regulations and market variations, and those risks should be assessed and a strategy proposed.
- Investment structure. The transparency degree (where is your money invested, who are your fellow investors?), cash flow as opposed to delayed returns, legal entities used for operation, produce selling and investment exit and the leverage ratio are to be studied. Paraguay being part of Mercosur trade zone, allows tax advantages in using a multinational network of companies as general and limited partnership, holding, operating and farm exploiting.
- Projected economic returns. Minimum assured and expected returns, management and equities fees, promoter share ownership and distribution sequence can make the deal more or less sweet.
- Reporting and access for investor inspection. Frequency and content of reports should be established in the contract and investor inspection be available.
- Exit strategy and dispute resolution. Besides the general exit strategy detailed in the business plan, investors should know about early individual exit, share valuation, priority rules and secondary markets. As a longer term venture, these investments are somewhat illiquid, but provisions must be made to allow selling or purchasing shares during the project span.
In farming as in any other investment, the choice between going solo or associating is not easy, but I hope to have given you some basis for an informed decision. Good business!
Researcher for this Article was Alice Bonet
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