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Rule 1. Only invest in investor-friendly countries: Agricultural investments require a medium- to long-term view. A typical investment in mainstream agriculture will require 70-80% of your investment to go into the land. There is no need to add to these risks by going into countries where you put your capital at risk. This rules out most of Africa, Eastern Europe and parts of Asia.
Rule 2. Countries with low, preferably no, subsidies for agriculture.
Subsidies can be alluring because they can be seen as underwriting performance, but they have severe long-term impacts. These include a loss of focus on remaining globally competitive because subsidies either remove or reduce the imperative to do so. Secondly, there is a substantial medium— to long-term risk that the nature and quantity of the subsidy will change over time. The likelihood of these increases as government budgets come under increasing pressure. They cannot be removed if the sector does not have any subsidies.
Rule 3. Invest in countries with low land costs per unit of production. For example, in many EU countries (including the UK), land for wheat production costs more than US$2,500/ton of yield. In some South American countries, the land cost is around half per ton of wheat produced compared to the EU.
Rule 4. The production system must have a low cost per unit. Most agricultural products can still be considered commodities – it is difficult to differentiate between receiving a premium and maintaining the advantage that this may offer. For all commodity producers, investing in countries with a sustainable low production cost per unit is critical to profitability over the long term. The land must be cheap per unit (Rule 3), but the production system used on the land is efficient, so the production cost per unit is low.
Rule 5. Invest in countries that have exportable surpluses. This means they produce at a competitive price and/or high quality. Both are essential to underpin demand over the long term.
Rule 6. Favour sectors that have a diversity of export markets. This reduces market risk compared to domestic or international industries with one dominant purchaser. Watch out for China-centric countries.
Rule 7. Understand volatility and how it can be managed. Greater volatility will usually mean more significant risk. Some countries have more volatile agricultural sectors than others because of production or price volatility. If there is substantial volatility, are there means available to manage it? Examples might include a diversity of regions or commodities to reduce portfolio volatility.
Rule 8. Land use flexibility is good. Agriculture is a sector that favours longer-term investments, which can create uncertainty around production systems and demand. Investing in land that can be used for several purposes helps reduce this risk over the long term.
Rule 9. Look for sectors that can deliver productivity gains: Without productivity gains, it becomes hard to remain competitive against other sectors. Productivity improvements are critical to helping drive land appreciation.
Rule 10: Climate Change: Negative climate change is real and happening right now. It is, without a doubt, one of the most critical points on the list. Countries like parts of the US, the Middle East, and Australia are seriously affected by this. This is leading, in some cases, to water wars ( Syria ) and, in others, to the relocation of agro-industries to other countries.
Rule 11: Political Risk: never before in living memory have we seen much change in political risk. Countries or regions that were once considered stable are no longer considered so, and historically unstable countries have now become a focus of plan B: more stable destinations.
Summary: Looking at the past, the most popular agricultural investment destinations are a sure recipe for failure. One must now look for countries with the above characteristics. South American countries have many of these positive features necessary for success.
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The New Zealander has a distinguished career of over 30 years in 7 countries, specializing in South American real estate, agriculture, and commercial matters. As the founder of Gateway to South America, he is known for his discretion, expertise, and experience in representing active clients in the region. His extensive knowledge of the market has positioned him as a leading authority and trusted advisor.
