Global Property Investing

Coconut Profits

June 3, 2011, Fortaleza, Brazil: Fortaleza, Brazil, can be an ideal place for an investment in productive, agricultural land.

Dear Live and Invest Overseas Reader,

I've written in the past about my general concerns related to the Brazil real estate investment market. Not because I don't think there's money to be made here, but because it's a difficult market to navigate. You've got language issues, currency issues, and issues to do with moving money in and out. Bottom line, this market is more complicated than the typical small investor is prepared for. The costs of investing here, in terms of both time and money, can easily eat up any profits you might otherwise realize.

That said, I've kept Brazil on my radar, thinking that, eventually, I'd find an opportunity in this market that makes sense.

And I have.

A group I know in Fortaleza is offering an agricultural investment opportunity that I believe is interesting even for small investors. The minimum capital requirement is low, and the risks aren't extreme. Plus (and this is important), they've eliminated at least one of my big concerns--getting your money out of the country when you decide you want to.

The opportunity is coconut trees. The premise is straightforward. You buy 2 hectares planted with coconut trees, and the management company does the rest. The reality isn't quite that simple, but that's the bottom-line idea.

A managed plantation is really the only way for an individual to invest directly in agriculture...short of becoming a farmer yourself. The management company handles all the work, from planting and maintaining the trees to harvesting the crop. In this case, the crop is coconuts.

Coconuts produce several end products that give them value--coconut meat, coconut milk, coconut oil, and the husk of the nut. The big value is from the oil. It's used for biofuel, and, as you probably know, Brazil is a leader in developing biofuels. Right now more than 50% of the cars in Brazil run on bioethanol, and 90% of new cars in Brazil are designed to burn biofuel.

The price of coconut oil increased 93% from August 2010 to February 2011. It's expected to continue to rise as demand increases for biofuel, but, even if it doesn't, owning a couple of hectares of coconut trees can be a profitable concept. Of course, owning a couple of random hectares of any kind of tree doesn't make much investment sense. For this kind of investment to work, you need trees that are managed professionally by an outfit that has access to a ready market for the sale of the end product.

You could always invest in a plantation of your own, but this is an ambitious undertaking, and, unless you're willing to invest a lot of time in understanding the industry and in managing the farm, you'll likely end up with little more than a bunch of trees. I see this all over Panama--teak "plantations" planted by people wanting to take advantage of government tax incentives for reforestation. Most of these plantations won't yield any return to speak of, because the owners haven't managed the tree growth and have no idea how or where to sell the timber when it's time for harvest.

This is why, for my money, buying into a managed plantation where you own the land is the only sensible way to invest in trees. You have direct ownership (rather than shares of a company, which I don't recommend), while benefiting from the management company's economies of scale and expertise.

Over the years, I've looked at several tree investment opportunities. In the case of the coconut plantation on the table now, the numbers are compelling.

Here's how this works.

You invest in 2 hectares, on which you can plant 500 trees. Each tree produces about 150 coconuts a year and each coconut sells for about 47 cents in today's market. This gives you around US$35,000 in gross revenue annually. The plantation manager takes 30%, leaving you with about US$25,000 a year in net revenues.

The cost of the investment is US$35,000.

What's the catch? The trees don't begin producing fruit for three years and aren't fully mature (that is, producing the 150 coconuts a year) until year five. Still, the projected returns are high.

The long-term projection for your return on investment is 33% annualized. Coconut trees produce for 60 years, so you wouldn't have a replanting issue in your lifetime. Should you want to resell your 2-hectare plantation at some point in the future, I would think that a buyer could be found if the management company isn't interested (and they likely could be, depending on the price you seek). There are always investors looking for a productive yield.

Back to my concerns about Brazil...

Language: In this case the marketing company speaks English and they have an English version of the contract. Management at the plantation company also speaks English, so you'll be able to communicate with them.

Currency: Investing the full amount at once (rather than signing on for monthly payments over three years, as many promoters are suggesting for the pre-construction condos being marketed in this part of the world) helps eliminate currency risk. You only have to worry about future ups and downs of the currency exchange if you've got an extended payment liability. In this case, you know up front what your actual dollar investment will be.

Of course, your returns will be in Brazilian reais, meaning you still have this currency exposure. But one can't predict and therefore can't worry about long-term currency rates, especially over a 60-year cash flow.

Getting your money out: The contract states that investors can elect to have their profits wired to any bank in the world. You just pay the wire fee. The burden of getting your money out of Brazil, in full, is borne by the plantation company, which has accounts outside Brazil for operations. Therefore, this risk is greatly reduced.

One more thing to consider with any investment is local taxes. The projected returns I'm quoting here for this opportunity are pre-tax both in Brazil and obviously in your home country. The income tax rate for non-residents in Brazil is 15% on "non-earned" income. It is also 15% on capital gains. Any taxes paid to Brazil can offset U.S. taxes for U.S. citizens (and should for other countries, as well, but check with your tax accountant). So the net tax bite shouldn't interfere too much with your net ROI.

With the minimum investment being only US$35,000 (you could buy more than one 2-hectare investment, of course), this is a low cost way to diversify your real estate holdings. You get titled land with productive trees, turn-key management, some currency diversification, and a potential yield that is very appealing.

For more details on this opportunity, get in touch here.

Lief Simon

P.S. I wanted to hop on a plane to go to see this plantation and to meet with the management company in person. Unfortunately, getting to Fortaleza from Panama isn't as easy as getting there from the United States (and it's not easy getting to Fortaleza from the United States). I still intend to try to make it down there at some point, but the travel itineraries mean a big investment of time.

You might find it easier to connect with Anthony (as I'm looking forward to doing), regarding this investment and other current opportunities in Brazil, during our upcoming Offshore Summit, taking place in Panama City, Sept. 14-16. You can read more here.

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