Friday, June 03, 2011
The planet’s population keeps on growing. And as the population grows, so does the demand for food. In parts of the world like Asia not only is the population rising but you have a compounding trend of higher incomes. Higher incomes means that people can afford to eat more food—eating three meals a day rather than two, say. And they tend to eat more meat. That means an increased requirement for animal feeds like corn. To produce a kilogram of meat requires seven kilograms of inputs (corn, for example). So you need more land to feed the world’s growing population…and even more land to produce meat. That’s part of the reason why we have seen food prices rise in recent years.
As food prices continue to rise, so will the price of agricultural land. And when there are concerns about inflation and the value of paper money, agricultural land prices rise. Plus, owning agricultural land that has development potential can be like holding a winning lottery ticket.
Tucked between the farming giants of Argentina and Brazil is little Uruguay. Uruguay is peaceful and stable. The economy is strong, and the people well- educated. Uruguay is flat with some gently rolling hills. Much of the country sits on an aquifer, so water isn’t a problem. Uruguay has over one million hectares (2.47 million acres) of farmland under cultivation. This leaves two million hectares of unused land that is suitable for cultivation.
Uruguay produces soybeans, wheat, rice, dairy and beef. Most of Uruguay’s cows are raised on family-owned farms. By law, cows must be hormone-free and grass-fed.
Agricultural land prices and the volume of sales are on the up. By 13% in fact on both counts between 2009 and 2010. Last year the average size of agricultural land parcels sold was 161 hectares (398 acres) at an average price per hectare of $2,633.
Uruguay has good land. Of course you need good land to raise cattle or grow soya. But you need more than that to make the business work.
Here are four reasons why even a small player can get in on this food trend in Uruguay:
The market for farmland in Uruguay is about as transparent as you’ll find. All of Uruguay is mapped, with soil types classified according to their productivity. Productivity is measured by an index, known as the “CONEAT Index???. For any property, plug in the property title number into the CONEAT website: http://www.prenader.gub.uy/coneat .
The system will show a detailed map of the property, the types of soil in different colors, the productivity index of each type of soil and the average CONEAT index for the property. 100 is the average CONEAT value. A CONEAT index of 80-120 is usually grassland suitable for cattle. An index of more than 120 means the land is suitable for intensive crop farming. Values of 150+ indicate prime land, say for growing wheat.
Most farmland that comes on the market has a mix of soil type and values, but each will have an average CONEAT index that correlates with the price of the land. Land with a CONEAT index of 100, for example, is valued at $3,500 per hectare. Proximity to the coast or a major city, or improvements such as storehouses, farm houses and irrigation will add to the overall cost per hectare.
There are no export tariffs. In Argentina if you want to export your beef the government slaps you with a huge bill. This is one reason why so many Argentinean farmers have purchased land in Uruguay. Uruguay doesn’t impose production quotas or other restrictions that we see in Europe, either.
In Uruguay there is a flat 25% income tax rate (the effective rate can be 10% to 20% depending on deductions). Farms with income below $205,000 per year have tax capped at US$5,125. Almost negligible! You won’t have to pay V.A.T. or sales tax on most supplies and machinery. It’s almost as if you are operating in a duty- free zone. And your average property tax will be 0.2% or less.
Little Uruguay is a small country. That means that the main markets are easily accessible. The small guy without a logistics network can play. In Brazil, the big land opportunities are often remote, away from infrastructure and major markets. In locations like that you need serious scale to make a profit.
Uruguay is a good place to be in the farming business. And you don’t have to farm the land yourself. You can lease it to a farm or outsource the management to a farm management company.
Argentinean buyers aren’t just buying agricultural land in Uruguay. They’re also spending top dollar on “chacras???. These are large lots of up to five acres in pastoral settings, accessible to Uruguay’s tourism centers. Prices in chacras that colleague Margaret Summerfield checked out on her last scouting trip ranged from $40-$135 per square meter ($162,000 to over $500,000 per acre).
If you buy land cheap, subdividing it into these chacras seems like a nice business to be in. You could buy in an area on the up, and maybe even lease it out while you wait for development to come.
More about that on Monday…