Are agricultural investment funds a bottomless basket?
Financially, we all remember the date: September 2008. The Sub-prime crisis and everything that’s happened in these 10 years. Global rates fell, the profitability of many businesses went down and various businesses ‘too big to fail‘ finally did also fall. But there was a common denominator in a particular sector. Where there were real assets such, as agricultural land, the financial damage was a lower.
On the other hand, the dilemma of world food supply continues. By 2050 the population will be 9 Billion inhabitants. Some people think it could be 10 Billion The United Nations has estimated that the supply of food should increase between 25 and up to 70% in order to feed these 9 Billion inhabitants. Other organizations indicate that the food to achieve this is already present and that the problem is rather one of distribution, conservation and access, all of which will require a great investment in the different levels of the productive chain.
Independent of the position, the population continues to grow, as does the average income in many countries, increasing the purchasing power to buy more and better quality of food. Thus, after satisfying basic needs, dairy, meat, fruit, and other plant-based foods will continue to increase their participation in the diet of millions of people.
The problem to the above is the availability of suitable land and clean water in sufficient quantities. We know that arable land to produce food is scarce or at least is limited and that this reality coupled with a developing climate change will make this productive asset even more scarce.
Then, the fact that agricultural land is a safe investment refuge, is not a new idea for anyone today.
According to figures from Global Ag Invest, investment in the agricultural sector went from USD 150 million in 2012 to USD 2,500 million in 2015 and is expected to reach 3,000.000 million (3,000,000,000,000,000) in 2050 to feed the population of 9 Billion people.
All of the above has mobilized multiple investment funds to direct more resources to buy land and agro-industrial businesses, either for food security, control of food chains or simply looking for the profitability of an investment rate higher than that of their countries origin. This has generated an important focus in developing countries, particularly in the southern hemisphere, generating pressure on land availability for local businesses, and in turn creating a pressure, upwards in value.
To what extent will funds continue to invest in agriculture? What are the amounts involved? What specifically are these funds looking for? In the following paragraphs, are some reflections on what could be the opportunities and threats for the different actors involved in agriculture.
The values of the agricultural land in the region.
In Latin America, between forests, high mountains, mountain ranges and deserts, arable farmland is not necessarily abundant, to which we must add the pressure of urban growth and of course the growing lack of water in many agricultural regions.
The problem lies in the distribution, sustainability and climate change, which will require better management of irrigation, logistic chains, storage of food, such as applied technology so that productivity and yields per hectare do not drop.
With this, we can already estimate that the values of the land will be positively correlated to the availability of irrigation, road infrastructure and ports (and the sociopolitical stability for these to operate), besides of course the associated climate and the crops that generate profitability on this land.
Therefore, it is not surprising that only in the USA, and according to the National Council of Real Estate Trust Investments (NCREIF) since the year 1992, the agricultural properties sector has never presented negative values, and that between the years 2003 and 2015 the profitability average has been above 15%.
Nor is it strange that China, with 20% of the world’s population in a territory that represents only 8% of the total arable land on the planet (and already mostly cultivated for thousands of years), has no choice but gain access to more land overseas which makes Latin America a good option for them.
Thus, numerous investment funds have purchased large extensions in Brazil, Argentina, Uruguay, Paraguay and Bolivia, and recently increasingly larger areas in Peru and Chile. The general motive is the same: lower relative values, availability of water, fertile and productive land, as well as fewer limitations for foreign investors than in other countries.
In relation to land values and investment opportunities, according to Gateway to South America (GTSA), the country with the lowest land values in the region is Bolivia, where political instability and social risk are still evident.
In the same vein, Paraguay has a similar potential, with a little more stability, achieving land values between USD 6000 and USD 10,000 per hectare (ha) for well-developed livestock and or cropping lands or USD 400 to 1000/ha for virgin land to be developed. In the more remote regions ( the Chaco ) undeveloped land prices are even lower.
Uruguay, on the other hand, is a smaller country and a more orderly political and social system, which is reflected in greater values of the earth around USD 4,000 to 12,000/ha, depending on the livestock or agricultural type.
In Argentina, extensions and diversity are huge. First-level agricultural land will be similar in value to what can be found in neighboring countries. Colombia has not been left behind, and thanks to a greater climate of peace and openness to foreign investment, the land with an aptitude for some fruit growing can be found from the USD 500 and 1000/ha. It is no surprise that there are companies from all over the world, and with participation in Chile and Peru, exploring or openly investing in Colombia.
By comparing these values to dairy or fruit growing hectares in Europe, California or New Zealand, one begins to better understand the movement of agricultural investment funds to South America.
Looking towards the APEC region in Peru, the value of the land has evolved equally very quickly. Until not long ago, in the coastal valleys, the agricultural land was around USD 5,000 to 12,000/ha. However, the explosive growth of the fruit export sector has generated an upward pressure in the best valleys and some irrigation projects, where land increased to USD 15,000 and then USD 30,000/ha. Thus, it is not surprising to find transactions with prices above USD 50,000/ha and up to USD 100,000/ha in very specific valleys and in smaller land areas. Remember, however, that price, does not necessarily relate to its value.
This price escalation has also occurred in Chile with a history of open economy and fruit-growing of several decades. In the best central agricultural valleys, land values can reach commonly USD 40,000 or 50,000/ha, presenting transactions that have reached USD 70,000 or USD 100,000/ha (and USD 180.00 as well!), but it is clearly not the norm nor is it agriculturally explainable.
In the context of climate change, the rainiest area of the southern part of Chile has aroused a lot of interest. Thus, it is not uncommon to find land values from USD 20,000 to 30,000 per hectare with fruit growing potential or USD 10,000 to 20,000 per hectare in the larger cattle and dairying farming areas, which only 10 years ago had a value of USD 8,000 or less per hectare. The experience and positive externalities in the value of the land that has been generated by companies such as Manuka Dairy Farm are already well known.
In other words, value increases between 25%, 50% and up to 100% are not scarce in recent years, and this attracts investors of all kinds.
Again, if any crop can justify these high land values will depend on the buyer’s ability to generate the necessary future cash flows. Yet, as our countries continue to grow, and farmers get old, the space for land consolidation and value growth is evident, and so is the potential profitability for the investor.
In Peru alone, new irrigation projects such as Majes-Siguas, Chavimochic III or Chinecas are expected to contribute more than 300,000 new hectares of high-quality agricultural irrigation. With an average investment rate of only USD 10,000/ha (e.g. soil arrangements, irrigation systems and others), this means the non-negligible figure of USD 3,000 million (3 trillion). We know that capex in high-yielding and high profitability fruit businesses is considerably higher (USD 30 to 70k/ha).