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Are agricultural investment funds a bottomless basket?

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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).

In Chile, and according to Fedefruta, (Chilean Fruit Growers Association ) only the Chilean fruit-growing business will require at least USD 600 million a year to reconvert outdated orchards or with low and declining profitability. This without considering new investments to balance the deficit in processing infrastructure in cherries or walnuts or the enlargement of the fruit growing region in the southern dairy farming area.

Who will finance all these agricultural investments? Well for sure some investment funds will be interested.

Types of investment funds

The presence of investment funds in the region is not new. We have seen them appear in increasing form at least in the last 10 years. Despite the attempts of secrecy of many M&A offices about the names of who are the funds that invest in agriculture, a quick search on the Internet will reveal their names fairly quickly.  If before it was just a few tens, today there are easily more than 100 or 300 corporations and family offices depending on the size and type of targeted investment.

But how can you classify all these investment funds, to eventually approach one of them more directly and better informed?

Investment funds can be classified or segmented according to multiple criteria, but the most relevant is the one that indicates its investment policy. This policy defines the markets in which it can invest, the type of assets and the investment horizon.

In relation to investment policy, many agricultural funds have as well as agriculture, the same two profitability objectives:

1) The cash flow of the agricultural business, variable in its nature, and

2) The profitability of the capital gains coming mainly from the land, which in some regions could eventually ensure a minimum annual profitability.

Some real estate funds obtain their profitability from the income generated by renting the property for commercial purposes. So there are large funds that replicate this practice in agriculture, buying the asset and then delivering it by leasing to experienced operators. But in the end (at the investment exit) all funds bet on some degree of the land’s capital gains, either to participating in development projects (greenfields) or agricultural operations already underway (and with cashflows), but still with further growth potential.

General types of investment funds in Agro:

Large private institutions and intermediaries. Large private equity funds, or Sub-funds of funds, which in turn generate smaller funds to explore international opportunities.

A European classic is the German Aquila giant with several billion in play, earmarking only about USD 100 million to purchase land in the USA and subsequent leases. Other combinations of funds are financial groups or investment banks, entering into a partnership with other investment funds, such as the classic Amerra and the Australian Macquarie Group. Other very large names participating in agriculture in the world are Panda Agriculture and BlackRock, among others.  At the regional level, highlights AdecoAgro, with more than 340,000 hectares in Argentina, Brazil and Uruguay, and with investors of the stature of George Soros.

Institutional investors. In the USA investment funds are the largest investors in private equity, and most probably also in agriculture. Pension funds and insurance companies are relevant actors in the investment market, with large volumes of capital to invest in agriculture. A good example is the USA  is the Teachers ‘Insurance and Annuity with more than 487 USD Billion in managed funds, which is also one of the largest agricultural land investors in the world. Another relevant fund is the Harvard Foundation.

With their student fund investments and other private interests, they are commonly known as endowment funds.

In the specific case of Chile, it is pertinent to comment on the recent regulatory change that allows Pension Fund Management Funds (AFP) to invest in real estate assets. Although it will be a time-taking process, we should not be surprised to see AFP participating in agriculture soon.

Government agencies and Development Banks. They have a major focus in developing countries, with tax funding and motivated by a broad spectrum of political and economic interests. A classic in this group is the IFC or International Finance Corporation, which is the World Bank’s private investment arm. On the other side of the world, particularly in the Middle East countries, with large excesses of cash, a product of the wealth of oil business that must be diversified, large sovereign investment funds (SIF) of countries such as Kuwait, Saudi Arabia, Qatar or the United Arab Emirates (UAE) also seek to invest funds in agriculture. Such is the importance of food security and sectoral investment, which is part of the government’s public policies supporting the Food Security Center and agricultural investment fairs such as Agriscape.

Multinational corporations and other agribusinesses in the process of internationalization. This group includes large corporations generating their own investment funds, family businesses and family offices investing in agriculture.

In Chile, some large external funds already known are Cosco (Viña Bisquert), Joyvio (Subsole) or Yantai Changyu Pioneer Wine. At the level of a smaller public-private combination, a reference is the Sembrador Fund. Other exclusively private examples are the increase of capital by Drake (ex D&S-Lider Supermarkets ) in Manuka for USD 25,000,000 the purchase of Limoneira (USA) of Agrícola San Pablo (Larrain Vial) or the most important  M&A deal in the fruit industry of the last years, with the merger of Hortifrut with the blueberry business of Talsa-Perú, valued at USD 160 million.

In Peru, for example of recent important private operations could be the purchase of  Hoja Redonda  (PE) by the group San Miguel (ARG) for USD 64 million, the takeover of Sunshine by Limones Piuranos (PE) and Wealmoor (UK), or another, the purchase of Agricola Challapampa by Vanguard International Corporation. as many other investment funds buying operations extending their operations beyond their home counties.

In Argentina, given its increasing political, exchange-rate and inflation instability, coupled with export restrictions, external investments funds have been less frequent. In addition to the giant AdecoAgro and other equivalent cases, more local funds have been generated to offer profitability in dollars to private investors who do not have more traditional investment vehicles available locally. Some known names in this segment are ManAgro, AdBlick, Faro Capital, among others.

Individual investors. Although on a smaller scale, it is not necessary to forget high net worth individuals, that either via Family Office or directly, could contribute several thousand or even millions of dollars for some Food Agri development or investment. In short, a neighbor, a relative, the partner of your cool store provider or exporting company could be a potential investor in a direct or indirect way, via a Private Investment Fund (FIP or SAFI).

What are they looking for?

The three big drivers are profitability, food security and/or greater control of an agri-food chain. But in addition to the obviousness of agricultural land alone, some seek integrated operations or invest in those solutions to problems that generate higher productivity.  It has been already said that all the necessary food for  2050 is already available but what is lacking is better technology, logistics, storage, conservation and sustainability.

So there are specialized funds for small Start-Ups or already operating companies that support the agricultural sector, such as irrigation, development of new plants varieties, GMO or Non-GMO, vegetable proteins, new data management technologies, storage, etc., because without more and better technology it will not be possible to feed humanity in the year 2050.

Precisely this new technology in the agricultural sector has increased the interest of investors to venture into this perceived risky ‘ or rather variable agricultural businesses. Technological advances have increased the productivity of multiple sectors, which in turn increases the profitability of the business (and thus also of the underlying asset, the land). But most importantly, technology has made it possible to generate more data to manage these businesses at a distance and better mitigate their risks.

Another classic way to mitigate risks is to diversify a portfolio. Thus, many funds invest in different crops in different areas to reduce the agricultural risk. This, along with managers specializing in the agricultural sector, opens an opportunity for smaller businesses to be acquired by the investment portfolio of a larger fund.

Finally, the ticket and the problem of the size of the investment is a relevant topic and depending on the extensions available and the values of the land or the business, it is not evident to find the combination of scale of investment-type of business sought-socio-political stability desired by a particular fund. However, our agriculture and food chain is diverse, and there should be a business for each every type of invetment fund.

Why a farmer or agricultural entrepreneur, might look for an investment fund?

In line with my last two articles on Banking & agricultural debt and external directors for family businesses, agricultural funds come to complement well some of the same common needs and problems in regional agriculture:

  • Indebtedness: When the business has hit a ceiling on its debt level, the next step is equity. Whether it’s 3F (friends-family-fools), new professional investors, or an investment fund specializing in agriculture, this can be the way to bring that new capital value-added to the business. In addition, some funds also have senior, subordinate or mezzanine debt divisions that could complement local or regional agricultural banks before they are considered as partners in the capital. Here we would have to add investment funds specializing in working capital and Trade Finance, a whole world in itself.
  • Family Directories: An agricultural fund, like any other fund, adds professionalism and best practices to a family business. This will bring one or more external directors to the board, enriching the conversation and management of the company. One of the great benefits of incorporating to an investment fund is to be able to take the company to that ‘ next level ‘ that in an organic form would have taken more time.
  • Strategy: An agricultural fund could be part of the short, medium or long term strategy to grow faster locally or regionally or internationalize. It can be to expand the commercial channel, generate a vertical integration with other businesses in the background, or openly be part of a succession or exit plan. Consequently, there are funds for the short, medium or long term. In most cases, and given the specialization of the business together with the local idiosyncrasy, will require the presence of the founder, either in the administration, the property or the directory.
  • Sustainable Development. Contrary to the common belief that funds are agricultural businesses predators, many of these funds have strict investment policies, where sustainability and community development are fundamental, as well as having important resources to support a growth business. According to FAO, agricultural investment funds can be a positive value chain accelerator in developing countries if their interests (e.g. Export) require further development of the primary producers (farmers). Then the incorporation of an investment fund in addition to solving a particular problem can also generate a great overall benefit.

In short, investment agricultural funds are not a bottomless basket, as the resources in any economy will always be limited. But agricultural investment funds do have significant capital in search for profitability and new food agriculture investment opportunities in the region.

Source: Gustavo Cardemil, AdeAgro 2018

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