Evergreen Agri-Profits From A Tree You May Never Have Heard Of

Nov. 30, 2012, Panama City, Panama: The neem tree is a natural pesticide with many other potential commercial uses, making it a very attractive agricultural investment option.

Dear Live and Invest Overseas Reader,

I first alerted you to a Brazil coconut plantation offering I like about a year-and-a-half ago. In the 18 months since, the UK-based developer behind this project has sold it very successfully. Now he has conceived a next offering:

Neem.

In fact, neem was part of the development plan for this coconut plantation from early on. In the planning and preparations for the coconut trees, the question of pesticides had to be addressed. Finally, a solution was identified in neem, a natural pesticide. The drawback, though, was a limited supply.

Solution: Grow more neem trees. Thus neem became part of the big-picture plantation plan.

Having identified a potential market, the developers researched further to try to determine the commercial potential of neem beyond their own needs for their coconut trees. What they discovered was exciting enough to persuade them to expand what had been planned as a 20-hectare farm to 100 hectares, enough to create an industrial level of supply to fill the needs not only of their planation, but to be able to supply other coconut plantation owners in the area, as well.

Neem is an evergreen tree that can grow up to 30 meters tall. Its wide canopy forms a rounded crown of leaves, and the tree produces small, green fruit and delicate, white flowers. It is a hardy species that grows well in sandy, stony, and saline soils, and it has a lifespan of 150 to 200 years. The trees are often used to line streets and to surround markets or gardens, as they provide good shade and help to keep away mosquitoes.

The neem tree's ability to ward off pests was noticed by ancient farming communities who began using the tree's seeds, leaves, and bark to make pest control substances that helped protect and preserve vital crops and farmland. Not only do neem products keep crops free of pests, but the pressed fruit and seeds of the tree act as an effective fertilizer when added to soil.

The neem tree is also the source of a number of health and beauty products, including ointments, creams, etc., to treat everything from scratches and skin rashes to malaria and diabetes. As a result, the neem tree has developed a reputation as a cure-all in native regions worldwide; however, the rest of the world is only now beginning to recognize that almost every part of the neem, from root to tip, has potential to address a host of global concerns.

The first neem seeds were introduced to Brazil by the Agronomy Institute of Paraná (Iapar) in 1986. Since the late 1990s, the species has been grown in several Brazilian states, including Ceará, São Paulo, Pernambuco, Bahia, and Pará. Most of Brazil's neem plantations are relatively small and between 5 and 15 years old. Further, to date, neem has mostly been produced by small-scale farmers with limited understanding of the cultivation techniques required to produce healthy harvests.

In other words, most neem crops in Brazil have not been set up for the production of fruit and timber, and many neem trees are being grown in soils with unsuitable mineral contents.

Neem grows well in tropical countries, and Brazil's climate provides ideal conditions; however, it is in the northeast of the country where the perfect soil for growing neem trees is to be found. It is in this part of the country, therefore, that neem can best be cultivated for both fruit and timber. And this is where the plantation I'm highlighting is located.

Neem's fundamental uses are for products to repel insects (from both crops and humans) and as a natural fertilizer. Other products can be made from the tree's oil and leaves, but the developer has excluded those possibilities from the revenue projections until such time as they have a clear path to market for them. For the current launch projections, insect repellant for crops and fertilizer are the only two products factored into projected cash flows.

This new neem investment offer is similar to the coconut offer. You invest in fee-simple land that is planted with the trees. The developer manages the tree farm, harvests the crop, and sells the produce. Brazilian taxes are paid off the top, as is a fixed maintenance cost. The net proceeds are split 70/30 between the land owner and the plantation management company. It's a very straightforward set-up.

For this new neem offering, the minimum purchase is 1 hectare. That hectare will cost you US$30,000, including the first five years of crop care (during the first several years, not much care is needed, as the trees don't produce seeds until sometime during year three).

Once the trees reach maturity, the annual gross revenue from the seeds is projected at US$30,000. Take out the crop care fee and the tax bill, and you end up with US$20,500. After the 70/30 split, the owner of the land receives US$14,350. That's a 47.8% yield when the trees reach full production, which is expected in year eight. Annualizing the returns to take the first seven years into account, you get an IRR (annualized yield) of 19.65% using a 20-year investment timeframe (and no inflation adjustments for increases in revenue).

Again, though, note that one interesting thing about neem from the investor's point of view is that the tree lives for 150 to 200 years. That means you won't be replanting in your lifetime and probably not in the lifetime of your heirs. The 20-year timeline for projecting investment returns allows you to compare the IRR for this investment with other investment options you might be considering. However, your investment should continue producing long past that 20-year window, and the longer you hold the investment, the higher your IRR will go. And if you resell the investment, you'll, of course, have a return of capital along with, potentially, a capital gain.

One caution I would offer has to do with currency fluctuations. The currency of Brazil is the real. In the past five years, it has been as low (bad for them, good for dollar-holders) as 2.40 to the U.S. dollar and as high (good for them, bad for dollar-holders) as 1.55. Currently, the real is at 2.10 to 1 against the dollar. That will change. It likely will be higher at times and lower at other times. You have to be ready for what this might mean to your overall return.

Because your income from the neem oil and cakes will be in reais...at least initially. If the developer starts selling neem oil outside Brazil, this could change, but don't count on it. Your real income will vary in dollar terms each year, even if the income remains the same year to year.

The other variable I'd highlight has to do with the products being created initially—oil and cake. If the developer grows the plantations enough to warrant a processing plant, higher value products could be added to the mix in the future. This could mean additional upside.

I like this new neem product because it offers product diversification within an existing and proven structure. Further, its cost of entry is low. You can get in with a relatively small amount of capital, and you should see cash flow (that is, return) sooner than with the coconuts (although it will take a bit longer for the neem trees to mature and reach peak production).

For more details on this new neem plantation offering, contact the developer here.

Lief SimonContinue Reading:

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