Adventures In Farmland

Entrepreneurs are prone to imaginative recruitment, so when the invitation to pack my bags for Buenos Aires came through, it should not perhaps have taken me that much by surprise.  I have known Jim Slater, the former corporate activist turned investor-entrepreneur, for several years. We meet periodically to discuss the stock market, one of our mutual professional interests, play bridge together regularly and at one point considered jointly writing a book. The idea that I might one day join forces with him to go scouting for farmland in South America was not however something that had crossed my mind.

It turned out however that Jim and his longstanding business partner, Ian Watson, were in the process of liquidating one of their most successful collaborative ventures, a listed mining business called Galahad Gold, and were now looking to repeat that success in agriculture, which they, in common with George Soros, Lord Rothschild and a number of other smart money investors, believed was set to become the “next big thing”.

The plan was to start a new business which would contribute to filling the growing shortfall of global food supplies engendered by the rising and insatiable demand for protein and better living standards of the emerging middle classes in China, India and other developing countries.  Experience long ago taught me to pay attention when serious professionals are converging on an unfashionable investment theme. Despite my lack of practical farming knowledge, I found the arguments for investing in agriculture convincing, and agreed to help in some on the ground research.

And so it was that, in the early spring of 2007, I found myself travelling down the Rio Negro valley in Argentina, camera, notebook and laptop in hand, to report back on whether a land deal in this region made economic sense. I covered hundreds of miles in a dusty Toyota truck to survey, among other projects, a potato farm, several commercial fruit farms, and a number of cattle ranches where there was potential to start growing crops on uncleared land. It was the latter that struck me immediately, as it had already struck Jim and Ian, as the project with the best potential economics.

Despite breaking a tooth on an otherwise immaculate barbecued steak, I found it impossible not to be awed by the beauty and rich potential of the Rio Negro valley. The river, more blue than black, runs from Neuquen in the West to the Atlantic coast, bisecting the rich farming hinterland of Buenos Aires to the north, and thousands of miles of bleak and windswept Patagonian terrain to the south. The night skies offer a breathtaking display of glittering stars. The soil is fertile, but patchy in the lower reaches, where irrigation is needed to maximise the crop potential.

By the time I returned with my report and spreadsheet calculations, Jim and Ian were well advanced with the planning and initial funding of the new business. Within six months they had recruited a board of directors, hired a first class farmland management team, with an Argentine CEO and Brazilian COO, and raised $150m of equity in London, most of it from members of the Watson-Slater fan club, but including $25m from professional and personal contacts of mine. Lord Rothschild stepped in with $30 million to become the largest seed investor.

By this stage agricultural commodity prices were already on the increase, and it only remained to finalise the strategy.  Argentina, the board quickly decided, despite its wonderful agricultural potential, simply carried too much political risk, and farming on its own was too haphazard a business to offer the kind of returns that we were seeking. Brazil, however, was much better suited for land transformation, the business we were all now convinced had the most potential. Soon afterwards the farmland team began acquiring blocks of cerrado, the unproductive scrubland which stretches across large parts of central western Brazil (nowhere near the Amazonian rain forests, incidentally).

Once treated to reduce its acidity and increase its productivity, using a technology developed by the Brazilian research institute Embrapa in the 1990s, the soil in these inland areas is capable, within a relatively short period, of supporting large scale farming of soybean, corn and other staple crops which the world’s hungry consumers need. By using no-till farming methods and recycling the plant residue from each year’s crop, it is possible to obtain economies of scale while limiting carbon emissions. After four years, even without irrigation the yields from newly transformed land can rival the average obtained in the Prairies, Midwest and Central European steppes, the food baskets of the northern hemisphere.

Agrifirma's Campo Aberto farm

Four years after my first visit to Argentina, our company Agrifirma has acquired 100,000 acres of cerrado, with another 65,000 acres under option, cleared and planted 25,000 acres for cultivation and obtained prior approval for the development of a further 60,000 acres. In due course we plan to list the shares on a stock market, as Adecoagro, another South American farming business, this one founded by George Soros, did in January.  There is a shortage of quoted vehicles through which investors can put their money directly into well managed farmland, and none that focus solely on the higher return business of land transformation, as we do.

Like all rewarding investments, Agrifrma Brazil faces its share of risks. The global banking crisis sent the price of commodities, land and the Brazilian currency into a temporary tailspin, forcing us to challenge all our original assumptions. We have experienced the effects of both La Nina and El Nino, and learnt a huge amount we did not know before about how business in Brazil operates. Fortunately the original assumptions on which we based the investment have proved extremely resilient, in spite of everything that negligent bankers and passive regulators have done to damage the global economy.

Agricultural commodity prices are rising strongly again, global demand for food and feed continues to outstrip supply, prompting new warnings about food prices from the UN and other international organisations, and transformation is already being reflected in revaluation gains on our land. If the world is to meet its global food requirements, there is simply no avoiding the fact that it needs a lot more farmland, and it needs to make that farmland as productive as possible. Brazil has more suitable land for that purpose than anywhere else. In western Bahia, where we operate, the sky is big, water is plentiful, and the prairie stretches for miles in every direction as far as the eye can see, making it ideal terrain for modern farming methods, sensitively applied.

Government bureaucrats and food rioters, however well-intentioned, cannot will into existence all the extra land and productivity which is needed to solve the world’s looming food crisis.  The private sector will have to provide a good deal of the capital, management and technology that are needed, and absorb the attendant risks. In any event, whatever the eventual financial returns from our endeavour prove to be, doing your bit to feed the world is a far more satisfying way to invest than, say, indulging the habits of tobacco addicts, picking up the bill for oil disasters or lending money to near-bankrupt governments.