“Enormous potential” for new Agro funds in South America

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farm-paraguayBuy land, said Mark Twain; they ain’t making it anymore. He also observed that one of the secrets to success in life is to eat what you like and let the food fight it out inside. These two aphorisms go a long way to explaining the appeal of investment in agriculture.

The world may not be making any more land. Still, it’s undoubtedly making more people, and increasingly millions of those extra mouths are, consuming what they like – which means protein-rich meat diets that the advanced economies have been enjoying for years.

The world’s population is forecast to increase from seven billion to 9.3 billion over the next 40 years, so food production must increase by at least 70% by the middle of the century.

Such is the challenge that the Global Harvest Initiative, a group of some of the world’s biggest agricultural companies, estimates that agriculture will be called on to produce more food over the next 50 years than it has in the past 10,000 years.

You don’t have to be a financial genius to sense an opportunity here. The confirmation comes from investment guru Jim Rogers, co-founder of the Quantum Fund with George Soros, who says:

“If you want to get rich, you should be buying farmland. The farmers and producers will be in the captain’s seat when the prices go through the roof.”

Savills’ head of rural research, Ian Bailey, adds a  reason – short supply. “If you go back 50 years, we were turning over about 2.5% of all available agricultural land every year, but now it is only about a quarter of 1%. So the market is very tight. And of the land that comes onto the market, some 50% is bought by farm investors wanting to expand their businesses.”

Investor spectrum

Tom Raynham, head of the agricultural investment acquisitions team at estate agent Knight Frank, says the land is an asset that attracts a spectrum of investors.

“They include people who might not be able to buy a whole farm but have money to invest in a fund that will go out and buy a farm.

Then some private individuals are looking to either expand their land holdings or just invest in land for the first time. Then there are corporations, family offices, institutions and pension funds.”

An example of a farm asset manager is Manor House Farms, which set up Farm Funds in 2009. It runs farms on behalf of a pool of investors, each of whom becomes a “farmer” with access to the farmland assets and activities.

The system works rather like a racehorse consortium in which part-owners enjoy the asset but leave its management to experts. According to Ian Bailey, one of the attractions of land is that it does well in recessionary times.

“Food production and security fundamentals are high on the political agenda. Land may also produce energy with solar cells and wind farms. And you can live on it, enjoy it, and raise your family on it. It’s a very diverse product.”

Buying land is not the only way to invest in agriculture. Several funds specialise in the food industry. For example, the three main players in the UK are the CF Eclectica Agriculture fund, Sarasin Agrisar and Baring Global Agriculture. In South America, there El Tejar, UAG, Cresud, Adecoagro SA (NYSE:AGRO) and several smaller players.

You can divide the agriculture universe into three broad segments – upstream, midstream and downstream. Upstream are fertiliser, crop and seed protection, machinery companies, and plantations and farms.

These companies tend to be positively correlated to soft commodity prices or benefit from strong soft commodity prices.”

Midstream is the processing and distribution company that owns grain-storage assets and processes corn and soybean into ethanol. Meat companies, too, fall into the midstream.

The midstream tends to benefit from more significant volumes of grains and edible oils and lower crop prices. Finally, the downstream firms include food manufacturers such as Nestlé and Unilever and retailers such as Tesco.

When it comes to investing in food, we can discount the words of the economist John Maynard Keynes, who commented that we are all dead in the long run. Without agriculture, we would all be dead in the short run.

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 investment tours.


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