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Farmland Investment Opportunities in Brazil
The best farmland opportunity may not be a few miles down the road. It may be a continent away in Brazil.
“There are multiple avenues for appreciation that are unique to Brazilian farmland,” says Justin Kirchhoff, investment development manager at Summit Agricultural Group. This is why Summit Agricultural Group, an Iowa-based agricultural investment and farm management company, has invested in a 10,000-acre farm and a 50-million-gallon-per-year corn ethanol plant in Mato Grosso, Brazil. As the investment company has learned, these opportunities do not come without challenges, which is why they stress significant due diligence with input from local experts before making investments in Brazil.
Avenues for Appreciation
The ability to double crop is what fundamentally separates Brazil’s cropland from many other countries. “In September, Brazilians can plant the first crop of soybeans, which will be harvested in January or February. Then they go back and immediately plant corn, which can be harvested in July,” explains Kirchhoff. “If you have irrigation, you can produce a third crop like edible black beans.”
While double cropping is certainly a compelling reason to invest in Brazilian farmland, it isn’t the only one. Brazil has 100 million acres of pastureland that could be converted to row crops, so there is land available to expand production. In addition, Mato Grosso has a significant amount of value-added production, including soybean crushing plants, biodiesel, and corn ethanol in the future.
Brazil also has room to improve in terms of both yield and transportation costs, which could greatly increase the revenue per acre. Right now, Brazil’s corn yields drag behind the U.S., the European Union, and China. With improved varieties better suited to its growing conditions, Brazil should be able to boost corn yields, according to Kirchhoff.
Brazil is notorious for its inadequate infrastructure that leads to a higher cost per bushel. In Mato Grosso, Kirchhoff is hopeful that this is changing. “There are a number of infrastructure projects scheduled during the next 10 years, including new roads, waterways, and port systems,” he says.
“Today, approximately 85% of production in Mato Grosso goes to ports in the southeastern part of the country. This is inefficient and expensive – about $2 a bushel,” he says. “A new port system in the North and waterways are under way, which will lower transportation costs. The last quote was for $1.77 per bushel.” With 60-bushel-per-acre soybeans or 120-bushel-per-acre corn yields, that adds up to a $15 to $30 savings per acre.
“The combination of all of these things makes Brazilian farmland a compelling investment opportunity,” says Kirchhoff.
On top of those factors, Brazil farmland prices have remained strong despite the depreciating Brazilian real. “You’d think that if you have a Brazilian asset, that the value of the asset would depreciate as the country’s currency does,” says Kirchhoff. “However, that isn’t what has happened because commodities are denominated in U.S. dollars. This has kept the price of corn and soybeans higher in Brazil, which in turn has kept farmland values strong.”
Minimizing Downside Risk
After maximizing the avenues for appreciation, Summit Agricultural Group works to minimize the downside risks. This starts with due diligence upfront.
“One of the most important aspects is how you structure the investment from a legal, financial, and environmental perspective,” explains Kirchhoff.
Summit Agricultural Group was one of three groups worldwide that has received approval for foreign ownership when they purchased their Mato Grosso farmland in 2013. This was a two-year process that allows the group to own a 100% share of Brazil farmland through a U.S. corporation. Most foreign groups must purchase land with a Brazilian partner who owns 51%, which is a risk that Summit Agricultural Group did not want to take.
From a legal perspective, Kirchhoff also recommends setting up the tax structure to avoid double taxation and ensuring you have environmental compliance. To guarantee a clean title in Brazil, you need to have georeferenced legal boundaries. Brazil farmland values can vary greatly, depending on these legal agreements. “For $2,000 per tillable acre, you can buy a farm with a loose legal title and environmental issues,” explains Kirchhoff. “Farms with an established production history, clean title, and environmental compliance go for $6,000 to $6,500 per acre.”
In terms of long-term management, it’s imperative to find a quality tenant that will use the best practices. “Then you need to have boots on the ground to make sure the asset is maintained in a way that’s consistent with your organization,” adds Kirchhoff.
First Brazil Corn Ethanol Plant
Investing in Brazilian farmland is not a new concept, but that isn’t all Summit Agricultural Group is doing. The investment group just broke ground on the first large-scale corn ethanol plant in Brazil.
“Getting corn to an export market is expensive because of the transportation costs,” explains Kirchhoff. “In addition, ethanol in Brazil is $3 per gallon at the pump. The combination of those two factors makes this a really attractive investment.”
The 50-million-gallon-per-year corn ethanol plant is being built in Mato Grosso, where a large portion of Brazil’s corn is produced. Demand for ethanol in Brazil is expected to double by 2022, and Summit Agricultural Group is betting that sugar ethanol won’t be able to fill the demand gap.
“There are inherent challenges to the sugar ethanol industry, including low yields and restrictions on new plantations,” explains Kirchhoff. “Fundamentals suggest that Mato Grosso will be home to the lowest priced corn in the world for the foreseeable future, giving corn ethanol production a long-term advantage.”