Agricultural Land Investment

Last week I wrote about biofuels and the opportunity they will present in Europe over the coming years. This week a friend in the timber and agriculture business forwarded me an industry report he receives quarterly. Some of it was statistics to do with the fundamentals that you’d see in any discussion about investing in agriculture…the global population continues to increase, there’s limited arable land in the world, and the demand for biofuels is expanding.

One statistic more interesting to me showed that institutions own twice as much timberland as agricultural land, even though the amount of available investible agricultural land is more than three times greater than that of timberland. This despite annualized returns over 20 years being higher for agri-land than for timberland. Trees are just easier to manage, I suppose.

The downside to timber for the individual investor is the long life cycle of the investment. Trees take time to grow. Assuming average growth, you have to wait 20 to 25 years for a full harvest with teak. Mahogany can be harvested at 15 years, but is better left for 25 years. This is the case for most hardwoods.

Softwoods like pine and eucalyptus can have shorter times to harvest, starting at 10 to 12 years if the end use is pulp or posts, but you’re looking at 25 years or longer with pine if you want larger-diameter logs for lumber.

While you can get cash flow from thinnings over the lifetime of the investment, the bulk of your return from timber comes at the end with the final harvest of the trees. Institutional investors don’t mind the long cycles; they have long-term outlooks.

The report my friend sent me included a table comparing the average annualized returns for agriculture, timber, stocks, and bonds. Agriculture comes out on top with 11.9%, but that includes land appreciation. Annual cash flow yields from agriculture (especially if you’re not doing the farming yourself) tend to be in the 7% to 8% range. Average annualized returns quoted in the report for timber are 8.9% including land appreciation, which seems low to me, but the report’s figures are based on properties owned by “non-profit” institutional investors, i.e. pension funds. I tend to see (and to look for) timber returns that reach into the double-digit range…10% to 15%.

The report quoted stock returns at 8.4% and bond returns at 6.4%. However, as an inflation hedge, both agriculture and timber score better. Stocks, in fact, have a negative correlation with inflation. The risk-adjusted performances for timber and agriculture also beat those for stocks and bonds.

So why isn’t everyone investing in productive land? Because, while it can be an easy investment to manage once it’s put in place, it’s not easy to put in place. It’s certainly not as easy as calling up your broker to buy a stock (does anyone still do that?).

Investing in productive land generally also requires more capital than a stock or a bond investment. You can’t invest US$1,000 in a portion of a farm like you can invest US$1,000 in a few shares of a company. Further, land isn’t as liquid as stocks, so if you need to be prepared to remain in the position for the long term…really, you have no choice.

Still, some portion of everyone’s investment portfolio should be in productive land.

Where, is the question, and everyone has his favorite market. For an investment in farmland, Uruguay and Chile are at the top of many lists. Both are stable countries, both economically and politically, and both have lots of productive land available. Chile is a dry country, so water rights are critical to any farmland investment there. Uruguay doesn’t have that problem for the most part. Plus, the government of Uruguay publishes a land chart that rates the productivity levels of land in every part of the country.

Brazil is top on the list of recommended markets for farmland in the report I just reviewed. However, Brazil is a complicated market for a small investor. You have a greater learning curve in Brazil than in Uruguay, for sure. Brazil imposes currency controls that you have to take very seriously or risk not being able to get your capital back out of the country easily (or maybe at all).

Brazil also imposes limitations on foreign ownership of agricultural land. This isn’t necessarily a restriction; it depends on where you decide to buy. Before you commit, check the current percentages of foreign ownership in the Brazilian state where you are looking to invest to see how much more land can be purchased by foreigners.

Other locations for investing in farmland suggested in the report are Australia and Eastern Europe, specifically Romania, the bread basket of this part of the world with plenty of productive land.

My preferred method of investing in agricultural land and timber (I think it’s the best option for the individual investor) is through managed, turn-key opportunities. These require a smaller investment than buying your own farm or forest and also require less management and administration. More and more turn-key investments are being put together specifically for individual investors, as developers realize that retail investors are seeking them out.

Whether it’s coconuts in Brazil, teak in Panama, coffee in Colombia, or an agriculture fund geared toward smaller investors in Uruguay and Paraguay (all current opportunities I’m either already invested in or preparing to buy into), it’s easier all the time for the individual investor to get into this category of investment. And that’s very good news for us.

Lief Simon

“Lief, I’ve been watching this ‘conditioned scenario’ for years.

“I dropped out of the banking system many moons ago (early 1980s). It’s the general consensus that doing business without a bank is not possible. I disagree. One just has to utilize creative thinking. In this day and age, the sofa cushion or the mattress may be the more viable options, so to speak.”

L.B.

Yes, it’s possible to opt out of the banking system if you don’t intend to do anything with your money beyond paying local bills…in person…and going to the grocery store. If you want to do more than that, certainly if you want to diversify in the way we discuss in these dispatches, you’re going to need a bank account.

“Lief, with regards to your recent Offshore Living Letter about foreign bank ATMs in Panama…

“My wife and I are just (yesterday) back from a 10-day trip to Panama, during which we were able to successfully use ATMs from several different banks for cash withdrawals, both in Panama City and outside.

“Banks involved were Bank of Panama (my wife) and both St. George’s Bank and BAC International Bank (myself). I’m not saying that you didn’t experience problems, but it doesn’t look like it’s ‘all us foreign-only ATM card-holders,’ as you put it.”

N.S.