Free Markets vs. Government Regulations – Farmland Investments In South America

Alex Tiller - Monday, February 14, 2011

On the surface, the South American company Adecoagro – which operates in Brazil, Uruguay and Argentina – would seem to be a good investment. Billionaire financier George Soros thinks so – enough to put a sizable chunk of his own change into the company. Owning and controlling an area of farmland equivalent to the size of Florida, Adecoagro is involved in the production of a range of commodities, including cereal grains, oil seeds, coffee, cotton and biofuels.  One thing on the company's website that impressed me was what it said about its people:

 

"The human capital of Adecoagro is one of the most valuable assets of our company, which allows us to achieve management excellence thanks to its technical education level and the permanent training of our people."

 

They also have a philosophy of "Corporate Social Responsibility" that are "intended to contribute to the increase of wealth and general well-being of the communities in which we operate". Of course, a company can say anything it wants on its website – but given the current free and open nature of the Internet, I suspect if the folks at Adecoagro were being less than honest about themselves, folks would be calling them out on it in a heartbeat.

 

Adecagro appears to be a decent company that is seriously looking to solve problems related to the issues of food and energy security in a way that is genuinely beneficial and human-centered – and still manages to turn a profit.

 

Now, as food prices in the U.S. are shooting up, Adecoagro is offering stock to U.S. investors. According to a Bloomberg news article last month, about 29 million shares (new and existing) were being offered (about $429 million). Most of this is to expand production of sugar cane, which is a primary source of ethanol. Not a bad idea, given what's going on with petroleum these days.

 

Originally, these shares were going to be priced between $13 and $15 each. However, by last week, this figure had dropped to $11 a share.

 

Heck of a bargain, you say? Hold on a sec...as good as this company seems to be, there's reasons why you might want to avoid this one – at least for now.

 

First of all, go back and revisit my entry of 09 August 2010. Here's one of the problems: the Brazilian government puts some heavy restrictions on how much land foreign investors can own or even lease. According to a recent edition of the FarmlandInvestorLetter, if there is a great deal of foreign investment in this company, it may very well put a damper on things where the Brazilian government is concerned. 

 

Another problem appears to be Argentina, which is undergoing some serious transitions right now. This is a country that has been on an economic roller coaster for decades (not to mention a lot of political and social upheaval). Over the past few years, that country has made some steps to get its act together, rebuilding some of its industries and propping up some parts of the economy that haven't done so well since the Wall Street crash of middle and late 2008.

 

Still, it's not the most stable country in that region.

 

It seems that there is still some debate going on in Brasilia (that's the capital) about foreign ownership and control of Brazilian farmland. (Oddly, this "South American" company has its headquarters in Luxembourg for some reason.) Until that debate is resolved however, those of you with a few extra bucks considering investing in South American farmland stocks should consider all the risks and consequences.  As with all investments, there are associated risks and you could lose money investing.  Prior to making any investment, a prospective investor should consult with its own investment, accounting, legal and tax advisers to evaluate independently the risks, and suitability of that investment.