AgriInvest

Published 31 May 2009. 45 pages. © Fabiano Costa

Brazilian agriculture has undergone enormous improvement in recent decades, transforming entire regions into rich farmlands and achieving global pre-eminence in the production of several agricultural commodities. In the process, considerable wealth has been created where previously there was often little more than subsistence farming. Not only has the general population seen an improvement in living standards but also landowners have seen their personal fortunes rise dramatically, underpinned by the rapid appreciation in land prices. The dynamic growth of the Brazilian agricultural sector is increasingly attracting international investors eager to share in the opportunities for excellent returns.

The Brazilian economy has not proved immune to the global recession but the fundamentals that have formed the foundations of growth in the agricultural sector remain robust. In addition to strong domestic demand, the world’s appetite for food, feed and biofuels continues to increase. Macroeconomic and political factors also ensure that Brazil is well placed to resume rapid growth sooner than many other countries. What is more, the current lack of liquidity in the market has reduced credit availability for farmers. This now creates more favourable conditions for well-capitalised investors.

Regardless of investors’ existing experience and expertise it is essential that they take account of the unique investment environment in Brazil. A detailed knowledge of national and local market conditions are prerequisites for success in both agricultural production and land investment. This is particularly the case in the more remote and underdeveloped regions of the interior where enormous potential is matched by major challenges that range from inefficient bureaucracy and difficulty in finding skilled labour to the sale of fake titles and the threat of land invasion.

The Brazilian agricultural sector is in a continuous state of change, with millions of hectares of underutilised land being converted to arable cultivation each year. The expansion of this agricultural frontier is strongly linked to soybean production, yet other crops also have their own dynamic frontiers, too. Value-added crops such as sugar cane, coffee and cotton are expanding across existing farmlands driven by market forces and improvements in on-farm and off-farm infrastructure. In a country as diverse as Brazil, investors must take specific regional variations into account in order to maximise returns.

Investors have deployed a number of strategies to unlock the value in Brazilian agricultural land, each with its own balance of risk and reward. Over the short term, investors may profitably exploit the cyclical fluctuations in commodity prices. Over a timeframe of a few years the installation of silos or irrigation plus the transition to higher value crops may reap considerable returns. Arguably the greatest rewards await the investor who clears the Cerrado savannah in anticipation of regional infrastructure developments – a strategy that may take decades but see a tenfold increase in land prices. Understanding the location and pace of change is of critical importance.

As pioneering investors have ventured into Brazil’s agricultural sector in recent years, so many companies have been created in order to acquire land. In some cases these companies have raised funds through IPOs, whilst in others they have chosen to partner with financial institutions. As well as traditional farm consolidation strategies, some highly innovative business models have been developed including active leveraging and agri-business partnerships. Many of these models have yet to be fully tested but they have already exhibited considerable potential.

Brazil is definitely not for the uninitiated but, despite the turbulence in world markets, it continues to offer huge opportunities. This report presents the whys, wheres and hows of agricultural land investment in Brazil and provides a framework within which the investor can evaluate the risks and rewards involved.

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Contents:

1    Investment rationale / page 6
1.1    Underexploited land / page 6
1.2    Asia’s appetite / page 6
1.3    Infrastructure development / page 7
1.4    The cost competitiveness of exports / page 8
1.5    A large domestic market / page 8
1.6    Food, feed and fuel / page 9
1.7    Government incentives / page 9
1.8    Transition of production frontiers / page 9
1.9    On-farm infrastructure / page 10
1.10    Commodity price cycles / page 10
1.11    Regional variations / page 10

2    Influencing factors for business in Brazil / page 11
2.1    Political Environment / page 11
2.1.1    Ecological/environmental issues / page 11
2.1.2    Legislative environment / page 11
2.1.3    Regulatory bodies and processes / page 11
2.1.4    Government policies / page 11
2.1.5    Forthcoming elections / page 12
2.1.6    Trade policies / page 12
2.1.7    Domestic market lobbying /pressure groups / page 12
2.1.8    International pressure groups / page 12
2.1.9    Wars and conflict / page 12
2.2    Economic Environment / page 13
2.2.1    Domestic economic situation and trends / page 13
2.2.2    General and specific taxation issues / page 13
2.2.3    Seasonality and climate / page 13
2.2.4    Interest and exchange rates / page 13
2.3    Social Environment / page 13
2.3.1    Lifestyle trends / page 13
2.3.2    Demographics / page 14
2.3.3    Media / page 14
2.3.4    Consumer buying patterns / page 14
2.3.5    Ethical issues / page 14
2.4    Technological Environment / page 14
2.4.1    Research funding / page 14
2.4.2    Information and communications / page 14
2.4.3    Technology legislation / page 14
2.4.4    Innovation potential / page 14
2.4.5    Global communications / page 14

3    Creating Value / page 15
3.1    Land value model / page 15
3.1.1    Phase 1: Stable farming investment / page 15
3.1.2    Phase 2: Crop transition investment / page 15
3.1.3    Phase 3: On-farm infrastructure investment / page 16
3.1.4    Phase 4: Off-farm development investment / page 16
3.1.5    Intra-phase speculation / page 16
3.2    On-farm improvements / page 17
3.2.1    Silos & Storage / page 17
3.2.2    Irrigation  & water Supply / page 17
3.3    Agricultural transition / page 17
3.3.1    The soybean frontier / page 18
3.3.2    The sugar cane frontier / page 21

4    The investment time frame / page 22
4.1.1    Long-term investment / page 22
4.2    Short/Medium-term horizons / page 24
 
5    Brazil’s advantages for investors / page 25
5.1    Land availibility / page 25
5.2    Cash is king / page 25
5.3    Improving macroeconomic conditions / page 26

6    Challenges facing investors / page 28
6.1    Language difficulties / page 28
6.2    Legal uncertainty / page 28
6.3    Fraudulent land titles / page 30
6.4    Farm invasions / page 30
6.5    Lack of local knowledge / page 30
6.6    Summary / page 30
 
7    Existing models of land investment / page 31
7.1    Traditional farm consolidation / page 31
7.2    Active leveraging / page 31
7.3    Real-estate investment / page 31
7.4    Partnership with agri-industry / page 32
7.5    Summary / page 32

8    Regional Analysis / page 33
8.1    Land use dynamics / page 33
8.2    Regional Climates / page 34
8.3    São Paulo     / page 35
8.4    Minais Gerais / page 36
8.5    Paraná / page 37
8.6    Mato Grosso do Sul / page 38
8.7    Goiás / page 39
8.8    Bahia / page 40
8.9    Mato Grosso / page 41
8.10    Maranhão / page 42
8.11    Pará / page 43
8.12    Piauí / page 44
8.13    Tocantins / page 45

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Notes on the Authors

Fabiano Costa (Author)
Based in São Paulo, Fabiano has extensive experience working with agriculture corporations, having worked for Rabobank’s Corporate Finance department for almost 10 years. He has facilitated mergers and acquisitions activity and led major strategic advisory projects involving companies across a broad spectrum of Brazil’s agribusiness sectors.

Fabiano is experienced in working with a range of different company structures including individual farmers, co-operatives, listed companies and family-run businesses. Most recently he led the set-up of a new service in Brazil, developing special financial structures for the country’s leading farmers. Fabiano’s expertise also includes collaborating with the pre-eminent growers in the major agricultural states of Brazil and supporting their development through land acquisition or organic growth.

Fabiano graduated as an Agricultural Engineer from the Universidade de São Paulo, where he also completed his MSc in Applied Economics. In 2006 Fabiano was awarded an MBA from IMD, Switzerland.

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Emma Cardy-Brown (Co-author)
Emma’s agribusiness background has its roots in the family beef and soybean enterprise in Brazil. A BSc (Hons) degree in Animal Science (Leeds University) and an MBA in International Agribusiness (Royal Agricultural College, UK) led her to Seminis Vegetable Seeds (Monsanto) where she became Head of Business Intelligence for Europe and the CEEC. In 2001 Emma moved to Switzerland to lead Syngenta’s global business-planning team for the Seeds and Biotech Division.

Joining Rabobank in 2004, Emma developed the commercial focus of the Food & Agri Research and Advisory team. She was the author of two major reports, Emerging Feed Markets: Pinpointing Potential and BRICs & Biofuels: The Modern Day Challenges to the Mature Feed and Meat Markets.

Emma Cardy-Brown formed Cardy-Brown & Co Ltd in July 2007, a network of leading agribusiness specialists. She went on to found AgriInvest Publications in December 2008 to facilitate synergies between knowledge publication and bespoke support in all areas of agribusiness.