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Forget Beachfront...Farmland Is the Next Big Play

Date: 09/20/2008 Author: Ronan McMahon

Saturday, Sept. 20, 2008

Read more about investing in real estate in International Living Postcards—Saturday Edition

Dear International Living Reader,

What does the supervisor of a Chinese contract manufacturing factory and a hybrid-driving socialite in L.A. have in common? A lot more than you might think. Both are driving a mega global trend...one that you can profit from. The emergence of a new middle class is one of the trends I study when looking at a real estate market. Here’s a twist on how you can profit from the emergence of a new middle class.

Last year the population of China consumed 60 million tons of meat (that’s 54 kilograms per head anually)...an increase of almost 300% since 1980. That’s roughly equivalent to 240 million cows, or 600 million pigs, or 24 billion chickens. This trend is being repeated right across the developing world. In India, 400 million people are now eating two meals a day instead of one. Meantime, the world’s population continues to rise...doubling in the last 50 years and predicted by the U.N. to hit 8 billion by 2025.

Across the globe, the demand for food is on the rise. This trend is accentuated as people in the most populous regions of the world begin to eat more meat. To produce a kilogram of beef, farmers need seven kilograms of feed (corn is commonly used). Increased demand for meat means much higher demand for the inputs such as corn.

This trend is happening at a time when supply is coming under intense pressure. Australia, one of the world's largest exporters of wheat, is experiencing the most prolonged drought in more than 100 years. In the U.S., 20 million acres of land—formerly used to produce maize, wheat, soya, and other crops for food and animal feed—have been diverted to produce crops for heavily subsidized biofuels.

Food prices have been rising relentlessly. This year, we saw food riots across much of the developing world. The demand for food isn’t going away...we all have to eat. Today, there are more mouths to feed than at any time in the history of our planet, and the middle class in Asia and South America continue to grow and demand more food.

Buy agricultural land today and you can profit from one of the biggest trends the planet has ever seen. Buy agricultural land with potential to increase its productivity, in a politically stable country that is accessible to a major market, and you will do even better. Brazil’s high plains, the cerrados, cover 500 million acres. The United States Department of Agriculture has estimated that 400 million acres of this could be opened for crop production. The area yet to be opened for agricultural production is 25% larger than the total crop acreage of the U.S.

Bahia’s coast is known as a vacation playground. Move east to the Bahia Cerrados where some of the world’s highest agricultural yields are achieved. Here you can buy unimproved land for as little as $500 per acre. It takes two to three years to start to get strong yields from this type of unimproved land. Well-managed farms that are producing good yields in soybean, corn, cotton, or coffee sell for $2,000 per acre. Given the yield potential, growing global demand for food, and the booming domestic economy on your doorstep in Brazil, expect the prices of land here to rise.

Ronan McMahon

Editor’s Note: This is one of the many trends Ronan is currently studying to provide wise investment advice for his Real Estate Trend Alert members. Learn more about this valuable service here.

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Reader Comments

Bahia land

Fred

Tuesday October 07 2008 05:20:57 am

Beachfront land in Bahia is incredibly beautiful.
A nice 50 hectare farm combined with a beachfront home is within any North Americans financial grasp, and this comes complete with a lifestyle you have probably dreamed of, thousands of times. I have purchased my own beachfront and now about to purchase more sand as well as farmland.
Bonita Bahia!

Cerrado land

J Congdon

Tuesday September 23 2008 04:32:25 am

What is good cerrado land?

There is good and poor rainfed cerrado land. For rainfed land, we define good cerrado land as land that is highly productive or has the potential to become highly productive with the least investment. Rainfed land productivity in the cerrados is heavily dependent on two factors--manmade fertility improvements and rainfall--the amount and distribution of rain through the growing season.

Cerrado land produces nothing of value without fertility improvement. The cost of improving fertility varies greatly from one area to another. For example, soils with aluminum saturation of around 0.5 require approximately 4 tons of limestone/ha on opening, while soils with aluminum saturation of 1.0 need 8 to 10 tons. Furthermore, soils with high aluminum saturation require continued high annual maintenance applications of limestone. With current technology, it can take 10 or more years for soils with high aluminum saturation to reach fertility levels sufficient to produce corn, and several more years to produce cotton.

Once soil fertility is corrected and maintained, land productivity on rainfed land depends on rainfall amount and distribution. Annual average rainfall in Western Bahia ranges from 1,100mm to more than 1,800mm during a 6 month period from October to April. Soybean production is feasible with precipitation of 600 mm (25 inches) if rain is evenly distributed over the growing season. However, the probability of perfect rainfall distribution in the dryer areas of the cerrados is virtually nil.

Brazil's entire cerrado region is subject to veranicos, a period of little or no rainfall during the rainy season. Although these mini-droughts typically occur in January, they may hit at any time. The veranicos may last from 10 days to more than 30 days and may seriously affect yields of some crops. In general, lower rainfall areas have longer veranicos, but this is not an absolute rule.

By definition, good rainfed cerrado land, among other qualities, is land that is less impacted by veranicos than poor cerrado land. Land in some locations is more productive because average duration of veranicos is shorter and less severe than in other locations. Soil water holding capacities of different areas also vary and affect how crops are impacted by veranicos (see note below).

Agronomists emphasize basic input/output relationships and point out that the cost of production for crops on good cerrado land is the same as production cost on poor cerrado land. But the probabilities of a good crop on good land are significantly greater than on poor land.

It is important to note that the potential productivity of land receiving 1,100 mm of rainfall can be equal to or better than that of land receiving 1,800 mm of rainfall, but only with irrigation. With irrigation, two or more crops can be produced each year. This is an attraction to some investors. Should you buy expensive prime rainfed land or cheap dryer land that must be irrigated? AgBrazil can help you work through that decision.

If you are seriously considering buying land in Brazil's cerrado area for rainfed crop production, be certain you know what you are buying. There is a fairly direct relationship between rainfall and price. Land with high rainfall sells for more than land with low rainfall. No seller of land is likely to understate the amount of rainfall, but many will overstate the amount of rainfall. Buyer Beware!

Location

Dr. George Fleming

Monday September 22 2008 04:30:11 am

So, where is Bahia Cerrados?

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