The Key To Agricultural Profits
The Chinese couldn’t source enough walnuts for their recipes so they started substituting pecans. A colleague from Georgia, where they grow tons of pecans, explained this to me earlier this week when I told him I’m more interested in agricultural investments than ever and aggressively trying to source new opportunities.
Pecans can be so profitable, my colleague continued, that some farmers who had been paid not to farm their land (gotta love government farming subsidies) have planted pecan trees and paid the government back its subsidy along with a 300% penalty. This despite the fact that the pecan trees they’ve planted won’t generate cash flow for about five years. That’s how great the eventual profits are expected to be.
Of course, to make money from trees (fruit or timber), you have to have a means to sell them. I own with partners a 10-hectare parcel on a river in Panama that had teak planted on it when we bought it. We made the investment for the location and the development potential of the land. The teak was a bonus…or so we thought.
One of the partners who owns this piece with me also owns thousands of hectares of teak in Panama’s Darien. When we made the purchase, he figured that, when it came time for the next thinning of his Darien plantation, he’d simply have the company buying his trees come harvest ours, too.
No luck. After much discussion, his Darien buyer simply refused to make the detour to harvest our little parcel. We didn’t have enough volume to warrant the effort. The good news is that the trees continue to grow while we try to figure out what to do with them.
Still, this situation makes the point. The end market is the place to start when considering an investment in any agricultural product. The projections for profits from whatever crop you intend to grow can be phenomenal on paper, but they won’t materialize if you don’t have a buyer for your harvests.
Another friend may learn this lesson soon. He’s planted thousands of coconut trees in Panama because coconuts have become a hot commodity for both their oil and their water. He made the investment in the plantings, though, before he had pinned down a sales outlet, and now he’s scrambling to find a buyer. Probably he’ll be able to sell his crops locally, but the local price won’t get him the profits he projected based on international market values.
I’m in the process of planting timber and fruit trees on 10 acres I own in Belize. My first question to the agriculture guy who’s going to manage the work was, What can we sell easily locally? I know that the volume of production from the mixed trees I plant on my relatively small piece of land won’t be enough to sell for export. Therefore, I want to grow things that the locals need and buy.
The guy I’m working with recommended a couple of hardwood trees that few outside Belize have heard of but that are sought-after for local home building and wood working. It will be 15 to 25 years before these trees are ready for harvest, though, so I’ve got to bet that current demand won’t shift over the next couple of decades. If it does, the trees still will have value as hardwoods, but the returns will be less than we’re projecting now.
For the fruit trees, again I’m going with what can be easily sold locally—avocados, bread fruit, bananas, and a few others.
Once you’re sure you have an outlet for where to sell your produce, then, unless you’re interested in doing the farming yourself, you need an “operator,” as one colleague with many agricultural undertakings calls the guys who do the work on the ground. Finding an operator can be easy enough in countries with an agricultural base. When this is the case, you’ll find many companies in the business of running farms for people. Your challenge will be to identify one who has experience with your planned crop who you can also trust.
My 10 acres in Belize won’t throw off the same annual yields as a focused farm, but that’s not the point with this land. This is more a personal experiment than a serious investment, and we intend to build a house here, too. Still, I’d say that planting trees is a good idea under any circumstances.
As a friend who shares this perspective likes to say, if you need the income in 10 or 15 years, you’ll be happy you planted the trees…and if you don’t ever need the income, you’ll be happy you planted the trees.
Meanwhile, I’m researching pecans.
Lief Simon
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