World Population and Income Trends Favor Brazilian Frontier Investment

If current world population and income trends continue, world agriculture faces real challenges in the future. World population is expected to grow by more than 1 billion people--the equivalent of another India in the next ten to fifteen years. An expanding middle class in China, India and other emerging economies will translate into sharp increases in demand for more food, fiber and energy.

No nation on earth is in a better position to respond to these demands than Brazil. Among all the world's nations, only Brazil has a massive untapped frontier capable of producing the food, fiber and biofuels the world will demand. That means profitable investment opportunities in Brazil's frontier will expand dramatically as production profits improve, land prices rise and agricultural and forestry output growth continue.

Land Investment Decision Options

There are several land investment options:

• Buy high rainfall developed land. This option is initially the most expensive, but may be attractive to investors who want return on investment within one year or less. Major crops include soybeans, corn and cotton. Developed land in lower rainfall areas increases the probability of yield loss. Option 1 typically produces one crop per year, although grain sorghum following the rainy season crop may be a viable second crop. Needless to say, irrigating high rainfall land is not economically viable.

• Buy undeveloped land in high rainfall areas. This option is initially less expensive than Option 1, but the return on investment is delayed due to the time required to open new land and enhance soil fertility. Typically, rice was the first crop planted, but soybeans are now viable with application of gypsum upon opening new land. Soybeans continue for three to four years, then corn, then cotton. Top yield on soybeans begins the second or third year depending on soil fertility management. Significant investment in limestone, gypsum and phosphate application is required during the first four to six years if cotton is to be planted in year in year five or six.

•   Buy undeveloped land in low rainfall areas.

          -Irrigate: Two or more crops per year. Major field crops are corn and cotton. The opportunity to grow specialized crops such as seed and horticultural crops is almost unlimited. This option requires significant up-front investment in irrigation equipment and infrastructure. Land cost is a minor part of total investment.

         -No irrigation: This option may be attractive to investors interested in producing Eucalyptus, jatropha, castor and livestock on dryland pasture. Most of the investment is up-front--opening and clearing land, applying limestone and, in some cases, gypsum and establishing the crop or pasture. Land cost is a minor part of total investment.

Land Investment Vehicle Options

There are a number of options regarding investment vehicles. While we do not describe all of the options, below are some of the more popular options.

• Hands-on farming. In most developed nations such as the US, farmers face great challenges trying to expand operations. In the US, farmers have great difficulty acquiring more land even though their financial situation may enable them to. Land, especially nearby land, rarely comes on the market and when it does, there are many competing buyers--both farmers and land investors. In Brazil's frontier, there are many, many sellers and few buyers. Why? Because long-term credit does not exist and short-term capital is  expensive and difficult to access. If a farmer of a developed nation can take locally-sourced capital to Brazil, there is essentially no limit to the amount of land that can be purchased. What's the catch? Frontier agriculture is big agriculture; starting a commercially viable, hands-on, farming operation on rainfed or irrigated land requires access to liquidity of at least US$2 million. If hands-on farming is what you seek and you can access the necessary capital, AgBrazil can assist you.

• Absentee Land Ownership. Absentee ownership of land can be a profitable investment. There are a number of operation options available to the absentee investor--cash rent, crop share rent, complete management, etc. Farm operators, including US farmers in Brazil, may lack sufficient capital to expand their Brazilian land holdings and seek additional land to operate. Good local management is available. Land prices have moved up in recent years and investors may profit from both current operations and capital gains. A potential absentee investor will need at least US$2.5 million for a commercially viable operation. Note: Most knowledgeable observers do not recommend buying and holding undeveloped land as a long term investment. If your are interested in absentee land ownership, AgBrazil can assist you.

• Investor Pools. There are pooled investment operations involving a relatively small number of individual foreign (mostly US) investors. These often form outside of Brazil as partnerships or limited liability companies. Investment pools typically employ a farm operator and manager, usually an experienced US operator. Some own the land they farm, others rent the land they farm and others both own and rent land. These operations generally have low management costs and have shown attractive profits on current operations as well as capital gains. As of August 2010, there were no pools known to be actively seeking new investors.

• Other Investment Vehicles. A number of Investment Funds have been formed over the past several years, most based in the US. These vehicles have tended to attract small investors looking to diversify their investment portfolios. Somewhat resembling private hedge funds, these funds have had mixed success from the investor perspective. The founders of some funds had little or no previous experience in Brazil and encountered unanticipated challenges working within the Brazilian business culture. Investors express concern that active secondary markets for investor shares have been slow to develop, and management and administrative overhead has been high. Yet another investment vehicle is the Investment Condominium. These operations involve several investors who each own land that is operated jointly as a single farm and may thus enjoy scale economies. A land owner may have a reasonably liquid investment as he/she may sell his/her land at any time to anyone approved by the condo association. These operations tend to be popular with European investors. Competent management is critical to success. Given the somewhat mixed track record, AgBrazil does not assist investors with Investment Funds or Investment Condominiums.