What are the key Reasons investors should consider with Agri-Funds
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Agri-Funds are an innovative and smart way to reap the benefits of agribusiness investments using an efficient, transparent and liquid investment vehicle. While agricultural commodities prices have been low during last year, the long-term growth story is still strong. As a matter of fact, short-term uncertainty could even create an attractive opportunity for investors in Agri-funds right now. Here’s how the business works; The business model for Agri-Funds is actually quite simple and straightforward.
Investors place their money with a limited partnership company, in the case of the company we are working with, the partnership company is based in Canada. The fund managers lead the operation and funds are available for distribution or reinvestment after the end of the cropping cycle, which is annual. Returns can vary substantially from year to year, but average returns are usually between 9% to 13% in U.S. dollars. This is a considerably higher return than those typically available from other investment vehicles in the market, especially in the current conditions of low-interest rates and record valuations in the stock market.
Agri-funds also provide the benefits of diversification, as they have low correlation with stocks and bonds, so they have a lot to offer in terms of risk reduction and potential benefits as part of a sound and well-diversified portfolio of global assets. The business model has many important advantages. To begin with, investors have access to world-class industry experts to run the business. The company we represent relies on a team of specialists with decades of experience in the agribusiness industry on a global scale. Their global vision provides the chance to capitalize on the best opportunities in the world, as both Uruguay and Paraguay are among the most promising countries in the industry.
Not only because of their attractive weather and soil conditions, but also because of their business-friendly political environment and the solid economic performance they have delivered over the last decade. When it comes to managing the risks, the agro-trust structure is also a major plus. Scale reduces costs and increases profitability. Also, geographic and product diversification provides reliability and predictability. Price risk is managed by using hedging instruments such as futures and options contracts to mitigate the inherent volatility of commodities prices.
Short-term weakness in prices is both a challenge and an opportunity; Grain prices have been bearish lately, soybeans have been down by approximately 35% in the last year, corn has fallen 20%, and wheat is down 14% over the last twelve months. Production has been quite strong due to favorable weather conditions around the world, and to top it off, the possibility of rising interest rates in the U.S. and a strengthening of the U.S. dollar are adding extra pressure on agricultural commodities prices. Prices depend on a multiplicity of factors, not only on supply and demand, but also on expectations and speculation. It’s hard to answer how prices will evolve in the coming quarters, but one thing looks quite clear: current entry prices look quite convenient from an historical perspective. In fact, soybean prices have not been this low since the aftermath of the global financial crisis in late 2009 and early 2010, when the world economy was in a much weaker shape and fear was rampant due to the collapse of Lehman Brothers and the resulting global financial stress.
This company is in the business of managing risk and making smart decisions, not making price predictions. However, current price levels look quite attractive, since grain prices seem to offer substantially more upside potential than downside risk based on comparisons versus average levels over the last five years. It’s important to keep in mind that low commodity prices are already reflected on costs. Land rent represents approximately 60% of total costs, and so they are capitalizing on the opportunity to secure convenient deals at attractive costs and flexible conditions in the current industry scenario. Also, inputs such as agrochemicals, fertilizers and seeds account for approximately 30% of total costs, and these prices are also adjusting down in reaction to lower grain prices. This means that low product prices are already reflected in the cost structure.
If crop prices remain low through the coming year, then agro-trusts should deliver returns in line with historical averages and expectations. In a more optimistic scenario, a bounce of grain prices could generate exceptional returns for investors in these vehicles, buying at historically low prices and selling under improved conditions. As a side note, the El Niño (CTRL+click for more information) phenomenon has a positive impact on production in South America. Prices are hard to predict, but production volume should be quite vigorous over the coming year. The long-term growth story remains intact The World Bank estimates that demand for food will rise by 50% by 2030 following population growth, rising income levels and changing dietary habits. The world´s population is growing at approximately a 1% rate per year, although it does not sound like much, it means approximately 70 million new mouths need to be fed each year.
Moreover, most of this population growth is coming from developing countries. As big masses of populations move from the countryside to the cities, arable land per person is declining, so both the land and the products from that land should become more valuable over time.
Variables such as interest rates, currency exchange rates variations and even speculation are weighing on agro commodities prices currently. But don’t miss the forest for the trees; the fundamentals are still remarkably promising over years to come.
Renowned investor George Soros once said: “Markets are constantly in a state of uncertainty and flux, and money is made by discounting the obvious and betting on the unexpected”. There is a lot of pessimism currently reflected in agribusiness prices; this means there is also a lot of money to be made when things turn for the better.
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.