Post by curiousgeorge on Jun 27, 2011 20:44:20 GMT
This was very interesting on a couple of levels.
www.dtnprogressivefarmer.com/dtnag/common/link.do;jsessionid=24F35F0F07C16EE3724B32ADB4397CB8.agfreejvm1?symbolicName=/free/news/template1&paneContentId=5&paneParentId=70104&product=/ag/news/topstories&vendorReference=4377d365-60ef-42c6-b468-f07bce00071b
NEW YORK (DTN) -- Big Money has long played a hand in commodity markets. Now tycoons such as George Soros, British icons such as Lord Rothschild and pension giants such as TIAA-CREF are among the new breed of global investors.
They hope to strike gold by not simply buying futures contracts, but by investing directly in the world's frontier farmland. Some of China's largest agricultural companies also have joined the fray as a way to secure steady food imports.
In the past five years, the flood of land cash has helped South Americans raise billions of new dollars to develop Brazil's Cerrado real estate through public offerings and private placements. The gold rush paused temporarily in 2010 when the Brazilian government issued new guidelines on how it plans to monitor foreign ownership of farmland.
Wall Street analysts believe the real estate drives will relaunch once Brazilians remove the ban and clarify the laws on foreign ownership, perhaps within the next few months.
"Once Brazil gives the go ahead, it will be 'off to the races we go,'" said John Baize, a Falls Church, Va., agricultural trade consultant. Brazil has added 27 million acres of soybeans since 2000, but that clip was incremental in comparison to what's underway now, Baize added.
"What's different with this second wave is that you are throwing billions of dollars into real estate from people who don't know farming," he said. "That has the potential to ramp up world production pretty fast. When all those new acres come on stream in four or five years, will we have enough demand at good prices?
"And it's not just commodity prices I worry about," said Baize. "All these new acres will need plenty of fertilizer, and that will affect input prices, too."
Among recent developments:
--In January, Adecoagro, a South American farming venture backed by billionaire hedge fund manager George Soros, raised $423 million in its initial public offering in New York. CEO Mariano Bosch told an ag investment conference in May that the Argentine-based firm already owns 320,000 acres in Brazil, Argentina and Uruguay and is carving out a niche as a sugar cane processor and real estate developer.
In the last five years, for example, Adecoagro has generated $95 million in capital gains on South American land sales. Operating returns have been more challenging, largely because of Argentina's 2010 drought and the long lead time needed to correct Brazil's tropical soils into their high yield potential, but stock analysts here and abroad give the firm's model favorable ratings.
--Agrifirma, a real estate developer specializing in the Cerrados region of Brazil, is backed by Jacob Rothschild and other global tycoons. The London-based company is incorporated in the isle of Jersey and has been raising funds from wealthy individuals in Hong Kong and other global capitals, but its intention is to go public "in due course," a London-based spokesman said. The firm currently owns about 100,000 acres in Brazil's Bahia state, with an option to buy another 66,000.
--SLC Agricola first listed its IPO in 2007. The Brazilian family-controlled farming company purchases and develops land and owns a fleet of farm equipment, on-farm storage and cotton gins. SLC's size qualified it for a five-year World Bank loan at 2.4% interest when other Brazilian farmers struggled to find lenders and often paid double-digit rates. With cash to spend, SLC's empire has grown to more than 750,000 owned and leased acres grouped into 11 farms in six Brazilian states. It generated EBITA margins (earnings before interest taxes depreciation and amortization) of 23% last year and is on track for healthy profits in 2011, JPMorgan analysts report. The family group firmly believes there is money to be made investing in Brazilian farmland: Land bought in 1980 for $12 per acre could easily sell for $2,000 now, company officers told DTN.
--Brasilagro went public in 2006 at the BM&F Bovespa Stock Exchange. Similar to an urban real estate developer, its model is to transform Brazil's raw Cerrado and pastureland by clearing, correcting acid soils and improving fertility, then selling once the land reaches full yield potential. That formula meant some of its developers could double their money in four years, not counting operational returns, Brasilagro's CEO tells investment groups.
--In June, China's largest farming company signed a joint venture with Argentina's Cresud to buy land and farm soybeans. The Chinese firm Heilongjiang Beidahuang Nongken Group now farms 5 million acres outside China, and told Dow Jones it plans to buy 500,000 acres of land this year. Latin America is a prime target. Cresud is traded on NASDAQ and controls more than 2.47 million acres of South American farmland, including a large stake in Brasilagro.
SUPER-SIZED RESULTS
This real estate rush is transforming frontier states in Brazil. Properties run by companies, instead of individual farmers, rose to 131,000 from 67,000 between 1998 and 2008, Brazilian government records show. In Mato Grosso, the 20 largest landowners control 3 million acres, or 20% of planted land, according to the Mato Grosso Institute of Agricultural Economy (IMEA). That's up from 9% of the state's planted acres five years earlier.
Super-sized farms may not produce the highest yields per acre, say consultants, but their volume, access to global capital markets and ability to spread their risk over continents instead of counties confers major competitive advantages. Farms that annually spend $40 million each in farm inputs expect major discounts from seed and chemical suppliers. Large farms have the funds to double-crop more acres, and can better afford to grow capital-intensive crops such as cotton, than can Brazil's independent operators. Cresud tests new seed performance on 32 farms in different locations in different countries, giving it proprietary research results.
Given shortfalls in world grain stocks, few expect outsiders to lose interest in farm real estate anytime soon. Biotechnology and other productivity gains just aren't enough to help feed the world alone, Hunt Stookey, managing director of HighQuest Partners told a standing room only Wall Street crowd in New York in May. Citing research his firm conducted for the Paris-based Organization for Economic Cooperation and Development (OECD), Stookey estimated that agriculture needs about 160-210 million net new acres of farmland worldwide by 2015 to meet expected demand during the next decade, given normal yield gains.
Global pressure to increase the pool of farmland for crop production is so great that Brazil alone has the potential to attract $80 billion to $140 billion in farmland investments in the next few years. That does not include investments in storage, processing or transportation improvements, the OECD report said.
BLOWING UP THE BUBBLE
This overly enthusiastic farmland rush could be the next bubble in ag commodity markets, some trade experts worry.
"Having been around in the early 1980s I well remember the influx of investments by farmers and others in agriculture in the late 1970s and early 1980s that ultimately led to the collapse in commodity prices in 1983-1986," said Baize.
"My instincts tell me that when a pile of money starts flowing into agriculture from people who know little about agriculture, that it is a good time to head to the exit. Is food and agriculture really that different from the housing market in terms of supply and demand?" asked Baize.
