The South American agricultural landscape
June 2011 | by Simon Adamson
An arable crop of over a quarter of a billion tonnes is hard to imagine, but that’s what Argentina and Brazil are harvesting right now. Favorable weather, yields and prices have made many South American farmers winners again this season, but it also means shifting goalposts for agribusiness. Prices for arable land have jumped; in Uruguay they’ve risen 800% in the past decade.
Soybean rules the landscape; it’s the crop of choice wherever it can be grown in the region. In Uruguay, the area under soybeans has risen from 200,000ha to 1 million hectares in the past 10 years. Freehold land prices in the prime arable belt of Argentina are close to those of Midwest US; up to US$20,000/ha for yields of 10t/ha of maize or 4t/ha of soybean.
In Argentina, 60% of grain production is undertaken on rented land. The dominance of sowing pools – where a group of investors gathers expertise and funds to crop third-party areas – is a driver in the growth of Argentine arable agriculture. Usually nomadic, sowing pools use their experience and liquidity to forecast where and with what land and crop they can best turn a profit, often helping credit-strapped or absentee freehold landowners. To allow the latter a share of the action, rentals are often paid in grain; current soybean rental is 2.1t/ ha. In cash, arable rentals are around US$600/ha a year.
There is also a trend towards contracts of more than one year to increase the planning horizon and allow crop rotations which benefit both the owner’s soil and the sowing pool yields. There was a 35% increase in Uruguayan rentals last year; 1.1 million hectares were rented during 2010 with arable crop lands averaging US$271/ha.
As it has done to the beef industry, the Argentine Government has squeezed its arable counterpart, which it says has generated extraordinary profits. Its objective, to reduce domestic prices, has failed. Export taxes for maize are 20%, wheat 23% and soybeans 35%. So many larger farmers have simply moved across the border to Uruguay where, while the soil is not in the same league as on the pampas, a pro-agriculture Government makes life less taxing.
Last year over 400,000ha were sold in Uruguay; 70% of land buyers were companies, and the necessary corporatization of agriculture is both frightening locals and worrying the Government. Fast-growing forestry to feed new pulp mills is also in company sights. Labor utilization on large monocultures is low on a head/ha basis compared with, say, dairy farming.
Scale is a necessity and the rise in land prices has its positive side. Little emphasis has been placed on intensive farming for centuries. Typically, to expand production, one simply bought out the neighbour. It will be a balancing act between keeping local, usually small, private farmers happy and harvesting the benefits of multinational corporates and trickle down technology.
Despite the record prices being paid for cattle in South America, beef production is no longer the most viable use of better quality land. As forestry and cropping encroach, once rare feedlots are becoming more popular despite feed price increases. This has also created a ripple effect as ranchers look for new land. In nearby Paraguay, 200,000ha were bought by Uruguayans last year. Freehold western Paraguayan land with P rich soil is US$160/ha. With US$450/ha spent on improvements, it can produce 150kg meat/ha/year.
The strategic demand for land to produce food is also worrying governments. Uruguayan senator Enrique Rubio says: “A race has begun for natural resources in which sovereign countries are participating, directly or indirectly, and we are now seeing the first of this here.”
In the absence of any country in the region having a true Overseas Investment Office to analyse and approve proposed transactions, Brazil, Uruguay and Argentina have all tried blanket legislation. This does not recognize individual characteristics of investors or the industries they wish to produce in.
Often, the legislation can be counterproductive. Last August, Brazil’s President Lula reinterpreted a 1971 law and restricted to between 250 and 5000ha, depending on the region, the amount of land allowed to be bought by a foreigner or a company controlled by foreign capital. Since August, up to US$15 billion worth of potential offshore investment in agribusiness has been stalled, according to a study by two Brazilian rural organizations. The concerns on foreign land purchases often reflect nationalism coinciding with election years, as was the case of Brazil in 2010 and similar measures planned by Argentina this year.
Uruguay’s lower house has even gone so far as to pass a law prohibiting corporations owning farmland but this has yet to be ratified. The absence of a New Zealand-style Companies Office which would allow anyone to identify company owners plus individual exemptions for listed corporations (such as NZ Farming Systems Uruguay Ltd), complicate the objective.
Chile differs from its neighbors in that it is more “open door” for foreigners, but land holdings are fractured into smaller blocks often tightly held by families who do not necessarily depend exclusively on income from it. Booms in the salmon, mining and forestry industries have often created wealth that is then shifted into farming, forcing up land prices.
Jorge Chapresto is realtor Gateway to South America’s southern man. He says: “The higher the commodity prices go, the more inquiries we get. The foreigners who are buying on a global market, they’re more conscious of buying a business than the locals so where possible the smaller blocks are being bought and reamalgamated.”
As elsewhere, the forest industry with its long-term vision is pressuring agriculture. “We’ve had inquiries for big blocks from Chinese and Indians but the availability just isn’t there.”
Contact the Gateway to South America team to learn about the best agriculture investment opportunities in the region. The company is a benchmark for foreign investors wishing to invest in Argentina, Brazil, Uruguay and Chile, providing expert advice on property acquisition and investment tours.
The Gateway Team – When You are Serious About Property