May 7, 2012
Asuncion, Paraguay
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Long-time readers know that I’m unabashedly bullish on agriculture. Thesupply and demand fundamentals for food speak for themselves, but let’sbriefly review:
On the demand side:
1) World population isn’t getting any smaller for now. Even some of themost Malthusian models show a continued rise in global population forthe next few decades until peak resources and economic conditions beginto thin the herd. In the meantime, demand for basic sustenance willcontinue to rise.
2) More importantly, millions of people in the developing world arebeing lifted from poverty into the middle class. More wealth meansdemand for more Calories. Not only does this increase general fooddemand, but often specific demand for things like beef which require fargreater resources to produce.
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On the supply side:
1) While industrial farming techniques and genetic modification havedramatically increased productive yield, cultivated land is on thedecline. The UN Food and Agriculture Organization estimates that, overthe last several decades, cultivated land per capita has declined by 43%worldwide.
2) Topsoil erosion, anomalous weather, and lack of water availabilityare becoming especially problematic in certain countries, furtherreducing the supply of arable land.
3) Rising input costs (particularly oil prices) have pushed many farmersout of business in recent years, reducing the already low number ofpeople who dedicate their lives and land to feeding everyone else.
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And of course, there’s the monetary side… arguably the most importantfactor:
1) Central bankers continue to expand their balance sheets and createmore money at an alarming rate. This pushes up the price of real assetslike agricultural commodities as there is simply too much paper chasingto scarce resources.
2) Meanwhile, politicians have enacted completely idiotic policies tosubsidize and encourage inefficient biofuels, further reducing foodoutput.
It’s true that technology may very well save the world from itsagricultural woes one day, but this is unlikely to take place over thenext few years.
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As such, the above points suggest that, at a minimum, food prices arebound to keep rising.
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I see this over and over again throughout the world as I travel,particularly in developing countries where food purchases often comprisemore than half of a typical household budget.
Rising food prices mean that people are forced into making verydifficult choices. And history teaches us that, while people generallyput up with a lot of BS from their governments, all bets are off if afood crisis strikes.
From the French Revolution (Let them eat cake!) to the Arab Spring,messing with someone’s ability to put food on the table for his familyhas almost always caused a restructuring of the social contract.
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Politicians understand this. It’s why some governments (Saudi Arabia,Kuwait) provide retail food subsidies, and why others (Russia,Argentina) foolishly mandate food export bans… or even try pricefixing.
Between the obvious supply and demand challenges, the political andmonetary idiocy that exacerbates the problems, and the potentialrevolutionary spark, it makes sense to have a position in agriculture.
The most comprehensive way to do this, by far, is to own agriculturalproperty. Sure you could buy ETFs and futures contracts, but just likein the gold market, such instruments are full of counterparty risk andexposed to a manipulated financial system.
Owning a farm or ranch is like owning physical gold. Instead of tradingone kind of paper (fiat currency) for another (ETFs), buyingagricultural property or physical gold is essentially trading paper fora real asset.
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Regionally, the best deal in the world right now on a risk-adjustedbasis for farmland or grazing land is definitely Latin America,specifically Chile, Uruguay, and here in Paraguay.
Paraguay is, in fact, still the cheapest place in the world I’ve seenfor agricultural property… particularly in the dry Chaco area whereyou can pick up an acre of land for the price of a couple of pizzas.
To give you an example, a friend of mine is looking at a 5,000-acre plotin the central Chaco for less than $300,000.
On the other side of the country near the quaint town of Paraguari, I’veseen a small 50-acre, fully planted personal farm with a spacious homefor just over $100,000. Based on my math, they’re selling the house forthe cost of construction and giving away the land for free. Not a baddeal…
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The carrying capacity, growing conditions, and soil quality in Paraguay are lower than in most of Uruguay and central Chile, but the net yields(particularly for cattle, soy, corn, and stevia) are still strong.
The dark side to Paraguayan agriculture is that ultra-cheap prices haveattracted the likes of Monsanto, which is using some of Paraguay’scountryside as proving grounds for its genetically modified seeds.
Overall, though, Paraguay is definitely worth the trip if you’reinterested in foreign agricultural property. The barrier to entry isquite low given the ridiculously cheap prices and reasonable foreignasset ownership rules, while the potential for both yield andspeculative upside are quite high.
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