Wednesday, June 8, 2011

Uruguay Farming and Investing

"Uruguay is a good place to be in the farming business."

writes PathFinder International Executive Director, Ronan McMahon, in this article that just posted to my Facebook feed, "A Good Business To Be In."

After our 3 week scouting trip in Uruguay, we have to agree.

"Tucked between the farming giants of Argentina and Brazil is little Uruguay."

One Uruguayan referred to her country as a "big farm." After leaving the city limits of Montevideo, it is evident why. Once you leave the populated areas of Montevideo, Colonia and Punta Del Este, all you see is "agri rich" farmlands. We visited the departments of San Jose, Colonia, Soriano, Florida, Durazno and Rocha in search of farms suitable for our farm operations and land appreciation syndication. In truth, we saw all but 3 of UY's departments and they would be unsuitable for farming.

"Uruguay has good land." I would add "and the most advanced farming methods in the world."

A hedge fund manager, reviewing our investment, asked why we would farm in UY.

The Ogallala aquifer, which yields 30% of all US ground water is drying up. The entire of Uruguay sits on the Guarani aquifer and it is untapped. Adequate rainfall provides for the crops of UY while the US is irrigation reliant. Arable lands in the US are being lost to urban sprawl while only 1M hectares of 3M are currently cultivated for agriculture in UY. Uruguay's agriculture industry is less than a decade old and adopted the zero tillage, mechanization and logistical infrastructure of the Argentines. Conventional US farming has diminishing productivity with irreparable damage to the soil. Uruguay's methods are cost effective and sustainable while US methods are expensive and thought to contaminate the environment. The US farmer makes enormous investments in machinery while the UY farmer uses outsourcing for cost containment. US conventional farming techniques release carbon and other greenhouse gases while zero tillage is recognized as a conservation practice and farmers may sell carbon credits to energy corporations. UY farmland is price based on a scientific soil type classification and productivity index (CONEAT). US farmland uses a USDA system transferred from the Soil Conservation Service in the 1950's and may be inferior to the CONEAT. US "custom operated" farm management is a less desirable operating arrangement (versus crop share or direct management) while similar services of seed and planting to harvesting and exporting are routine operating arrangements in UY. The US climate restricts farms to single planting season with the exception of LA. The UY climate allows for "double cropping" or two planting seasons annual, thus making the farmer twice the gross income for the same acreage. The US farmer relies on subsidies to be profitable as products such as soy are sold below cost of production while the UY farmer does not. US farmland sells at $3638 per acre where UY farmland sells at $2633 per hectare ($1066 per acre for 2.47 acres). Finally, US farmers must hold assets in US dollars while UY banks offer the Dollar, Euro and UY Peso as depository currencies.

The question should be why would you farm in the US.

"As food prices continue to rise, so will the price of agricultural land. And when there are concerns about inflation and the value of paper money, agricultural land prices rise."

Investors in our farmland operation and syndication, a UY corporation, receive an annual dividend from the income of crops or rental of farmlands. Additionally, as the land appreciates in unison with commodities, the investors capital grows as well. While crops must be protected and risks managed, investors can expect an 8% ROI and 15% in land appreciation annually.

Our business plan is to have 3 ventures raising $5M each. Minimum investment is $200K. Each venture will own 3-4 farms in several departments to mitigate climate and other perils to crops. Each venture will provide the founder with 15% stock, a syndication fee of 1.5% and a modest annual general administration and management fee.

"Uruguay has good land. Of course you need good land to raise cattle or grow soya. But you need more than that to make the business work."

Weather and human error are the threats to farm profitability. Weather risks can be insured against. More than one farmer told us prayer is integral to the cycle of the crops.

Industry standards are known. They must be adhered to. The same skills that once managed, at the time, the 3rd largest Supercuts franchise will be applied in operating farms successfully.

"Uruguay is peaceful and stable. The economy is strong, and the people well- educated."

The best law firm in Uruguay. A landowner and farmer as consultant and broker, whose family has been in UY farming for generations. The most respected agronomists, farm managers and facilities. Accountants and tax attorneys specializing in international clients.

Investors can be confident not only in the founders but in every professional that works with the farms.

The devaluation of the dollar. Food inflation. Housing and asset deflation. These are just a few of the reasons why we changed our minds about investing in a First Choice Business Broker franchise. Uncertainty about availability of capital due to mounting US debts and deficits and tax implications of healthcare reform are others. We began to search for investment opportunities without these adverse conditions. Our search led us to South American and Uruguay.

Uruguay uses the dollar. But you can hold Euro and UY Peso currencies instead. The UY real estate market is robust, with Montevideo growing 18% last year. As one "big farm", all the food is grown "locally" and sustainably. Uruguayan beef is the most prized in the world. Uruguay's leftist president, Mujica, demonstrates himself to be pro-business, works with his adversaries and has even spoken of learning from the mistakes made in revolutionary times. Best of all, Uruguay is effected very little by either the economies or policies of the US or the EU.

Our visit to Uruguay verified what is reported . The political and economical environments are stable. The streets are safe and clean. The people are friendly and educated. The food is delicious and grown or raised in the most healthy way possible. The "investor migration" is encouraged and the people of Uruguay welcome working with international partners to improve their prosperity.

Uruguayans have been some of the best beef producers in the world. Their agricultural partnerships with their "cousins", the Argentines, rendered them some of the best farmers in the world as well. The Texan in us can't wait to join them.

"The future is in the land."


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