Investors make land bets as agriculture play

Brazil's cerrado region
MarketWatch | Sept. 13, 2011

Investors make land bets as agriculture play

By Andrew Peaple

With food prices relatively strong even during recent market turmoil, investors remain keen for exposure to agriculture. One popular theme: investing in land.

Bringing more land under cultivation is crucial to meeting global food demand, as crop yields stagnate. From 1990 to 2007, farmers squeezed about 1% more maize, rice or soybeans per year from their land, down from the 2%-3% growth between 1961 and 2007, according to OECD figures.

So the search is on for more land to plant. Brazil alone could have 190 million hectares of under-utilized land, according to Renaissance Capital, equivalent to the European Union's total farmland. One answer has been to transform large areas of scrub land, known as cerrado, into arable land, by reducing the soil's acidity to make it suitable for cattle grazing and soybean cultivation.

Agrifirma, a private investment company backed by financier Lord Rothschild, raised $159 million in 2008 to invest in 40,000 such hectares. With cerrado land prices rising fast, and more crops being harvested from the land, it hopes to generate a 20% internal rate of return for its investors over a five to seven year period. Last week, it transferred around half of its assets to a new joint venture with Brazilian private equity firm BRZ Investimentos, which will majority-own the company and invest a further $82 million.

Technological development, available land and adequate property rights made the cerrado attractive to Agrifirma. Such a happy confluence of factors may be hard to find elsewhere. With 85% of the world's farmland held in smallholdings of two hectares or less, many countries are nervous of foreign investors looking to build large land banks that disrupt rural life. Brazil itself is considering laws to restrict foreign land ownership, one factor behind Agrifirma's deal with BRZ.

Agricultural companies can't escape the underlying volatility of commodity prices, or land values. SLC Agricola, a listed Brazilian cotton and soybean producer, saw its return on equity fluctuate from 15.9% in 2008, to 0.7% in 2009, back to 14.1% in 2010, with its land value returns moving wildly. Adecoagro, another Brazilian company, saw first half earnings at $28 million this year after a $70.6 million loss in the same period in 2010.

Agrifirma itself recently shelved plans for a Hong Kong flotation. But with market volatility spiking, appetite will likely return for the ultimate hard asset: land.
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