Where To Profit From The Global Race To Farmland
Nov. 5, 2012, Montevideo, Uruguay: Productive land is the world’s best possible store of value, and the best place to invest in productive land in Uruguay.
Dear Live and Invest Overseas Reader,
Warren Buffet wondered not long ago: "Would you rather own ALL the gold in the world or ALL the farmland?"
Everyone is talking about the new asset class. Farmland isn't a new asset class. It's the world's oldest asset class. However, it has become very attractive in the past several years and is going to become more attractive over the coming decade as the world's population continues to expand. We're looking at a total world population of more than 9 billion people by the middle of this century. This is translating to a global race for farmland, with some countries imposing restrictions on foreign ownership of productive land.
The old real estate investment adage recommends buying beachfront because they're not making anymore of it. There's a limited supply of farmland, too, and a fast-growing demand. Farmland, therefore, is and will continue to be the world's best possible store of value. Looking at a world map, three places are interesting in this context: Africa, Eastern Europe, and South America. Among the three regions, South America is the most competitive; Africa and Eastern Europe are more volatile, with more corruption, lack of clear rules, and restrictions on foreign ownership.
In South America, Uruguay, in particular, stands out; about 95% of the land in this country is farmable. Until the start of this century, most of Uruguay's land was used for cattle. When farmers began to recognize the implications of the coming global population crisis, they switched from cows to soybeans. Because Uruguayans haven't farmed their land for 200 years, it's virgin. There's been no soil degradation as in more recognized global breadbaskets.
Foreign and local investors are treated the same in Uruguay, and there are no restrictions on foreign ownership or use of land. No exchange controls or currency restrictions either. Uruguay is a foreigner-friendly, investor-friendly place and, as a result, has enjoyed the highest foreign direct investment per capita of all Latin America for the past three years.
Uruguay sees even rainfall year-round, plus the country sits on the world's largest untapped aquifer. The climate is temperate, with four mild seasons. Farmers can raise two crops per year.
Uruguay's farmland market is transparent. The entire country has been mapped. Each parcel has an ID number. You can plug this number into a map (available online: www.prenader.gub.uy/coneat) to see the productivity rating for that piece of land. The system amounts to an MLS for farmland, making it very easy to compare all your options at once. The average productivity rating for the country is 100. A lower rating means you're looking at land suitable for running cattle only. You want land rated 120 or 130 or better. Price correlates to productivity rating.
What could you produce? Almost anything you could imagine, from agricultural crops (soybeans, wheat, rice, etc.) to cattle or sheep for dairy, forestry (eucalyptus, pine), vineyards, olives, blueberries... None of these is a new crop to Uruguay—5% of the world's meat exports come from Uruguay; the country has the two biggest paper mills in the world; and Uruguay is the world's sixth-largest exporter of soybeans and fourth-largest exporter of rice. If you're buying for investment, plant soybeans (to sell to China). If you're buying for investment and for fun, try a hobby crop, like blueberries or grapes.
You could buy 50 acres to tens of thousands of acres. One of the many unique things about farmland investing in this country is that there are brokers with access to available farm investment opportunities across the country. All things considered, a farm in Uruguay is one of the most turn-key, user-friendly land purchases you could make anywhere in the world.
What would you do with your land once you'd bought it? You could either rent it out or hire a farm manager. A farm manager is like a property manager for a rental property. He is the key to your success. In Uruguay, there are many professional farm management companies, meaning, again, your options are turn-key.
Prices for farmland in Uruguay range from $1,000 to $4,000 an acre ($2,500 to $10,000 per hectare). Again, this is tied to productivity rating. Buy as much of the most highly productive land you can (as opposed to more of lesser rated land) with the budget you have. The better rated land will hold its value. Your return will depend on what type of product you instruct your management company to farm. Agriculture will return 4% to 9% per year; cattle 3% to 6% per year; forestry 6% to 10% per year. The most productive land is to be found in the country's southwestern corner.
The option would be to lease out the land you buy. Your return this way is less but more reliable, at about 4% a year. Many people buy and rent out for a year. Then, when they're more comfortable with the whole idea, they hire a farm management company for the greater yield. Farm management companies charge 5% of gross sales or 10% of net income.
These returns don't include appreciation. Farmland in Uruguay has been appreciating at a rate of 10% to 15% per year and this should continue.
Taxes related to farm revenues are low. Regular corporate income tax is a flat 25% in Uruguay. However, if you have a farm producing less than $240,000 per year (this would be a farm valued at $1 million or less), you pay only a capped tax of $5,125 annually. Property tax on farmland averages 0.2%. There's no VAT on most supplies and machinery or on the sale of farm products.
Farmland in Uruguay can be both an investment and a lifestyle, even a retirement plan. You could buy a small working farm (say 10 to 15 acres) with a small house (say 1,500 square feet) for US$300,000 to US$400,000. Engage a farm management company to maximize the return from whatever crop you decide to farm while keeping perhaps some small field for your own hobby use.
For more information on making a productive land investment in this country, I recommend English-speaking attorney Juan Federico Fischer with long experience counseling foreign investors in his country. Reach him here.
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