High net worth investors are increasingly looking at agricultural opportunities in Latin America, given falling stock and bond market yields, as well as rising land prices and falling cash returns in US agricultural markets.
As an agricultural investor [DeSa owns an ag-based investment in Argentina], analyst and investment research trip provider, I have seen how title issues, poor prior financial planning and due diligence, improper asset management selection and a failure to embrace the culture can quickly sour exciting investments in Latin America.
Here are the five key mistakes new investors make in Latin American agriculture and how to avoid them.
No boots on the ground experience
A picture is not worth a thousand words. In my experience, online photos or reports can over or undersell an asset’s potential. Find a company or expert to help you on a research trip and perform due diligence before investing. Walk the ground, experience the local financial and agricultural culture and build trustworthy relationships with managers and communities before investing.
Lack of consideration for the current and changing geopolitical climate
Potential investors need to consider the current geopolitics of a country and what it could become during an investment timeline. Consider how long a country’s president has been in office, what characterises the other political parties, whether they support foreign investment or not, and what their future agricultural policies might look like. For example, Argentina’s newly elected President, Mauricio Macri, has reduced the export tax on soybeans and its byproducts by 5 percent and eliminated all export taxes on all other remaining commodities. His administration also instituted new foreign investment incentives, including timber. However, his predecessor reigned over a government with strict currency controls and heavy taxation policies on agricultural exports. Potential investors must consider a country’s past and potential future currency controls, business taxations and foreign-investor practices when conducting due diligence and planning their investment’s exit strategy.
Not hiring the right lawyer to check titles
This starts with the selection of a legitimate local lawyer or escribano. In Latin America, much of the agricultural land is family-owned, some of it for generations, and it is imperative to ensure no extended family or distant relatives have existing claims to it. It is not uncommon for relatives to claim ownership or connection to a property after discovering that their family is selling – particularly if the potential buyer is foreign. Don’t just take the seller’s recommendation for an escribano. Research and ask around for reputable recommendations.
Absentee investors not hiring proper management staff
Absentee investors need a trustworthy local manager. Failing to secure one is one of the most common ways for an agricultural investment to end in disappointment. Many investors try to use the former land manager or property owner as an asset manager. However straightforward this seems, they might not be financially or otherwise qualified to manage your asset, or may not agree with your long-term investment strategy. Take your time finding the right manager – they will save you thousands of dollars in travel expenses and lost profits down the road.
Failure to create a plan for what to do with the profits: re-invest or repatriate?
Many foreign investors, particularly absentee investors, simply buy assets without a plan for the profits. Certain Latin American countries have limitations on the repatriation of profits or currency controls that affect converting local currency into US dollars or Euros and transferring it out of the country.
Reinvesting profits back into the asset or local community, in the host nation’s currency, can be easier, more beneficial and save money. For example, if you own a working farm in Argentina, the profits from that farm will likely be in Argentine pesos. Converting those peso profits back to US dollars and transferring the money using a private finance company could cost you 3-5 percent. If you don’t need to repatriate the profits yet, consider using peso profits to make planned capital improvements on your investment. If your investment generates profits in US dollars, consider opening a bank account and storing your profits locally, in US dollars. Take a small portion of planned profits and run it through your profit plan to identify any issues or road blocks and create branch plans. For your long-term profits at exit, often times the sale of agricultural land is done in US dollars, simplifying the repatriation process.
Failing to embrace the culture and appropriate people management
One of the most common problems are foreign investors assuming processes should move at the pace they are accustomed. When events, either legally or procedurally, don’t happen as quickly as they would like, investors can become frustrated with the community and local management. You need to embrace the local culture. As an absentee investor you are, to a certain extent, asking the community surrounding your investment to watch over it while you are away. This is simply not possible without winning the hearts and minds of the community.