Implementation Is The Key To Realizing Agricultural Investment Profits
Lots of investment deals look great on paper. But sizing up potential profits on paper and realizing those returns are two different things.
What’s the key to projections playing out? Implementation. And implementing is what the developers behind the mango plantation I’ve been recommending since the start of this year have been doing in an impressive way.
I visited the plantation recently to check on progress since my previous visit over the summer. On that visit about four months ago, the team on the ground was moving a lot of dirt and surveying the property with a drone to make sure they get the drainage right. This visit I saw that they’ve completed the clearing and earthwork for several hundred hectares of the plantation and have planted mango trees on more than 150 hectares. The planting teams move in right behind the clearing team and get the trees in the ground as soon as the land has been prepared.
Each tree is planted with a fertilizer mix to help it establish itself in the ground more quickly. You can see the benefit of the fertilization in the difference just a couple months in the ground makes. When each mango tree goes into the ground, it’s little more than a stick. However, already, the first trees planted look like trees.
The fertilizer is a proprietary blend of organic materials mixed on the property. The head of the farming side of the operation tried to explain the biology behind each aspect of the fertilizer mix to me, but, frankly, my eyes began to gloss over. More important to me, I could see the results for myself.
While continuing with the planting of the trees, the developer’s team is also installing the necessary plantation infrastructure. Miles of internal roads have been cut, and miles of fencing have been positioned. The onsite office is up and running, as is the fertilizer factory out back. Lagoons and ponds are being built to provide reservoirs of water. Rocks are being collected from around the property and placed to help protect the trees and to hold in the layers of mulch each tree receives.
As I said, the operation is impressive.
As the early investors are seeing their trees planted, the risk for new investors is being reduced week by week, even day by day. This work of clearing and planting will continue regardless of the rate of sales of future hectares. The developer is moving full steam ahead on all fronts.
One of those fronts is the plan for intercropping among the mango trees. After considering various options, the developer has begun planting certain grasses. This intercropping will provide additional long-term revenue for investors; moreover, it will bring cash flows forward.
The intercropping revenue is a bonus. The main revenue from the plantation, of course, will come from the mangos. The cash flow projections over 20 years are for an IRR of 17.04% per year. That’s an excellent annualized return by any account.
Those return projections are based on current, local mango prices in Panama. If the developer is able to open up his export market into North America, the returns will likely be much better than the projections.
Implementation risk is the big one for any undertaking like this. In my mind, that risk has been all but eliminated. Of course, there are other risks, including, as with any agricultural project, pests, fire, and drought.
The pest risk in this case is mitigated by the type of mango the trees being planted will grow. It’s a proprietary cultivar with a thicker skin and slightly less sweet pulp. The thick skin makes it more difficult for insects to get to the meat of the fruit. As well, though, insects don’t really try to get at these mangos; they just aren’t as interested in this mango fruit as they are in other readily available options.
Fire is a risk for any trees. In this case, the distance between the trees creates a natural fire break. Additionally, humidity levels in Panama don’t support high fire risk most of the year. I’d rate the fire risk in this case as negligible.
Water, of course, is important to any agricultural undertaking. Panama is a tropical location that gets plenty of rain. Still, during the trees’ early years, ample water supply is critical. I mentioned the lagoons and ponds being established on the property. In addition, the plantation is bordered by a river that runs year-round, and other smaller seasonal rivers run throughout it. Water supply isn’t a concern, and mango tree roots go deep, meaning that, once a tree is full grown, the risk from drought is virtually eliminated.
Country and currency risk are low in Panama. This is a stable democracy that uses the U.S. dollar. You’re making the investment in dollars, and your returns will be paid out in dollars. You have currency risk only if your home currency isn’t the dollar.
Another benefit of Panama is the tax incentives it offers for agricultural activities. A plantation with gross annual revenues of less than US$300,000 operates tax-free. Invest to keep the size of your plantation(s) under that figure, and Panama taxes aren’t a concern.
While implementation of the plantation is well under way and most of the risk has been eliminated, the cost of investing remains low. A 1-hectare investment costs US$36,500.
Again the IRR projections are for 17.04% per year. Intercropping revenue starts in year two, but the real cash returns come from the mangos, which should begin producing after four years. The trees should reach full production levels in year five.
If you’ve been watching this opportunity from the sidelines, I’d say that this is the ideal time to get in. Price increases surely must be on the horizon.
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