The Opportunity For The Small Investor In Paraguay Today
Mid-19th century, Paraguay was a wealthy nation thanks to protectionist dictators who happily exported tea and wood to the outside world but taxed imports heavily, creating a self-sufficient, wealthy, and (unlike neighbors Brazil and Argentina) debt-free country. In fact, at the time, Paraguay was flush enough to pay cash for technology that allowed it to own its railroad. Elsewhere in the region, it was the British who owned and profited from the railway operations.
According to locals, that healthy economy inspired an attempt to interfere with Britain’s tea monopoly in Europe, which led to the war of the Triple Alliance in 1864. Other stories about the start of this devastating conflict include that Paraguay was just trying to protect Uruguay’s independence and got tricked into a much larger-scale conflict. Still others say the dictator at the time, Francisco Solano Lopez, was delusional enough to attempt to take over South America.
Whatever the reasons for the war, the results were disastrous for Paraguay. By the end of fighting in 1870, the population was decimated and 25% of its territory was lost. Brazil occupied the country for six years.
A century-and-a-half later, Paraguay is back on the path to prosperity. The country has the second-lowest per capita GDP in South America, but its economy is growing (at an average rate of 7% per year for the last five years). Our impressions on the ground this week reinforce the point. Hotels and restaurants are full, shopping centers are busy.
Agriculture and cattle are major contributors to Paraguay’s economy and among the big opportunities for investors. One focus for anyone interested in Paraguay is productive land, specifically in the Chaco.
This region is attracting increasing attention among foreign investors, especially from Uruguay. Raw land in Chaco is much cheaper than land in Uruguay. Plus, little raw land remains available in Uruguay. A hectare of undeveloped land in Chaco costs about US$500. For another US$400 per hectare, you can develop the land for cattle. I’m personally interested in this idea and am speaking with local industry experts to pin down the numbers. I’ll have a detailed report for my Marketwatch members as soon as I’ve put all the pieces together.
Land in Chaco is cheap today, but it was far cheaper just a decade ago. Ten years ago, you could have bought a hectare of land in this region for US$30; 15 years ago, you could have bought for less than US$10 a hectare.
A French friend of Kathleen’s visited Paraguay as a 20-something young man, in the 1960s. He fell in love with the country. Land was cheap, so he bought some… at a cost of US$4 a hectare. When this Frenchman returned to Paraguay 20 years later, land was still cheap. In fact, the land he’d bought for US$4 a hectare was worth about US$4 a hectare. Best to cut and run, he figured, and sold it all. He was onto something but too far ahead of the curve. If only he’d held out.
Which leads to the obvious question today. If land values have appreciated so dramatically in the past decade-and-a-half, is it too late to buy? No. This country’s land is still a regional and a global bargain, with a lot of room for continued appreciation.
Of course, property values move down as well as up. One Argentine colleague I met with in Paraguay this week pointed out that productive land prices in Argentina are falling right now because farmers who need to sell can’t find buyers, thanks to the situation in the country overall (you know… Cristina). Still, prices are higher than in Paraguay.
That colleague is buying grass land in the Oriente to convert to farmland for soy and corn. Land in the Oriente is more expensive than raw land in Chaco, but adding value through farming should make the land more valuable still. Meantime, this colleague will earn annual returns from his crops.
The challenge is identifying opportunities for the small investor. You need to buy a few thousand hectares to realize the economies of scale that make a cattle land investment like this work. At today’s values, this means you need at least US$1 million to stake a worthwhile claim; US$2 million is better.
That’s why a focus this week in Asunción has been meeting with ranch managers who are putting together projects that allow smaller investors to take positions. Again, I’ll have more information on this for my Marketwatch members.
Lief Simon
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