Buy Farmland and Grow Rich | Pathfinder International

Monday, November 08, 2010

Dear Reader,

In today’s alert, I’m going to show you three ways to make money from farmland in an investor-friendly country.

The case for investing in agriculture and food is pretty straightforward. Increasing populations and wealth in emerging economies is the primary driver. As people in these economies become richer, they eat more food—and more meat.

In 2008, the population of China consumed 60 million tons of meat—or 119 pounds per person…an increase of almost 300% since 1980.

That’s roughly equivalent to 240 million cows…or 600 million pigs…or 24 billion chickens.

This trend is being repeated right across the developing world. In India, 400 million people are currently moving from having one meal a day to having two meals a day. The developing world’s demand for fruit, vegetables, meat and dairy produce is on the rise.

To produce one pound of beef, farmers need up to seven pounds of feed. Corn is commonly used. Increased demand for meat means much higher demand for the inputs such as corn. This trend is happening at a time when supply is coming under intense pressure.

Drought (or too much rain) will mean lower than expected harvests in major producers like Canada, the Ukraine and parts of Brazil. In the U.S., 20 million acres of land formerly used to produce maize, wheat, soya and other crops for food and animal feed have been diverted to produce crops for bio-fuels.

The countries producing food are restricting trade, as they fear shortages this winter. In 2008, there were food riots across much of the developing world. Fears are growing that this will be repeated later this year. Looking to the medium term, we can expect food prices to continue to trend upwards.

One of the key conclusions of a report published by NIC (National Intelligence Council) is that: “Unprecedented economic growth, coupled with 1.5 billion more people, will put pressure on resources—particularly energy, food, and water—raising the specter of scarcities emerging as demand outstrips supply.”

This report predicts a 50% increase in food demand by 2025. (You can download a copy of the full report here).

Most of the world’s unused agricultural capacity is located in Africa, Russia and South America.

Where Should You Be Looking?
Stability, crime, rule of law concerns and trade restrictions mean that neither Africa nor Russia is a place I’d consider investing in agricultural land at the moment.

The giants of South American agriculture are Brazil and Argentina. In Argentina, you face export tariffs of up to 40%. Regulations are vague and contracts difficult to enforce. Domestic prices are depressed as a result of the penalties that apply to exports. Less product is exported… and the domestic market is flooded.

Brazil is fast becoming the breadbasket of the world. Today, Brazil is the world’s largest exporter of coffee, soy, orange juice, beef, chicken, sugar and ethanol. Brazil’s high plains, the cerrados, cover 500 million acres. The US Department of Agriculture has estimated that 400 million acres of this could be opened for crop production. The area yet to be opened for agricultural production is 25% larger than the total crop acreage of the U.S.

Some of the world’s highest agricultural yields are achieved here. There are “red tape” challenges associated with Brazil and the lack of infrastructure can pose a challenge in some of the areas that offer productive potential. New laws also restrict the ownership of large tracts of agricultural land by foreigners.

Nestling between Argentina and Brazil is little Uruguay. This is a place the small guy can get in on this food trend, with ownership control.

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 are suitable for cultivation. This represents a great opportunity.

Uruguay produces soybeans, wheat, rice, dairy and beef. Argentine farmers have been active in recent years, purchasing farms, especially in the west of the country. Today, investors and farmers from across the globe are eyeing up Uruguay’s agricultural land.

With just under four cows per person, Uruguay has the highest ratio of cows per capita in the world. Beef consumption at 128 pounds per person per year is the highest in the world. Most of Uruguay’s cows are raised on family-owned farms. By law, cows must be hormone-free. The majority are grass-fed.

In recent years, the government has offered incentives to encourage the forestry industry and to reduce the dependence on imported raw materials for construction and the pulp industry. These incentives are available to foreign investors. In fact, Uruguay will welcome you with open arms if you want to buy land and farm it.

It’s Easy to Find the Good Land

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 the lot numbers in to the CONEAT website.

The system will show:

- a detailed map of the property
- types of soil in different colors
- productivity index of each type of soil
- average CONEAT Index for the property

It allows anyone to verify the productivity potential of a piece of land. In addition, the CONEAT index correlates with the price for the land. So, It’s easy to compare properties and determine their fair value. You could pay as little as $1,800 per acre…but for better land, you’ll pay more, from $3,000 – $8,500 per acre. Areas of the coast and around the major urban centers have land prices higher than would be justified by their CONEAT rating. That’s because these areas may have future development potential. For the area east of Punta del Este (in the path of development) you pay a premium—$10,000 + per acre.

Three Ways to Make Money with Uruguayan Farmland
Of course, few of us have the time or expertise to run a farm in Uruguay. With this play, you have three options:

1. Buy land and lease to a farmer. Expect to generate a yield of 3%-4%.
2. Buy land and employ a farm management company. There are specialist companies that will run your farm for you. They’ll look at your land and submit a proposal on what crops to farm. They’ll give you a business plan. Once you agree a plan with a company, they will implement it on your behalf. You will have the outlays to seed the land but you can expect a higher yield: 6%-9%.
3. Manage the farm yourself and you can do better. As much as 12% or more with soybeans…10% with cattle.

For the right land, I like the idea of buying agricultural land that might have future development potential. Particularly land with some beachfront in Rocha…toward the border with Brazil.

The case for farmland in Uruguay is strong. It gets stronger when you hear how low your taxes will be, and how free you are to sell your crops wherever and whenever you find a willing buyer. There are no export tariffs. 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! There is no asset tax, even if held by a corporation. Property taxes are low: they average 0.2% or less. You won’t have to pay V.A.T. or sales tax on most supplies and machinery…almost as if you are operating in a duty-free zone. Also, no V.A.T. or sales tax is applied to the sale of farm products (except a 1% municipal sales tax on the sale of livestock).

Little Uruguay is small country. That means the main markets are easily accessible from pretty much anywhere you are producing. The small guy without a logistics network can play.

Here are three sample pieces of farmland:

Farm 1: $550,000:This farm is 55 hectares (135 acres) in the Colonia area. Priced at $10,000 per hectare, it’s at the top of the market. You are paying a premium for proximity to Colonia city and possible future (long-term) development potential. The CONEAT Index indicates that this land offers superb agricultural productivity potential.

Farm 2: $246,500:This farm is 34 hectares (84 acres) and in the San Jose area. It’s priced at $7,250 per hectare. The CONEAT Index indicates very high agricultural productivity potential.

Farm 3: $1.5 million:This farm is 188 hectares (464 acres) and in Rio Negro. It’s priced at $8,200 per hectare. The CONEAT Index indicates high agricultural productivity potential.

My go-to contact in Uruguay is Juan Federico Fischer. In his 14 years as a corporate attorney, Juan has worked in some of Uruguay’s main privatizations (Punta del Este Airport in 1994; and Montevideo port, 1995 and 2000). Juan specializes in farm and real estate opportunities, and as an advisor to individuals seeking to buy properties or obtain residency in Uruguay. If anything I’ve mentioned in this alert is of interest to you, contact Juan at (JavaScript must be enabled to view this email address).

Ronan McMahon