Brazilian Soil

“The power of its soil always saves Brazil,” observes Stefan Zweig in his book, Brazil: The Land of the Future. Brazil’s place as an agricultural superpower is secure given its vast amounts of land, ample rainfall and bountiful sunshine. There are many opportunities here for investors in soil remediation, forestry, dairy, livestock, biofuels and more. These are the things that inspired me to organize an embark on an investing field trip to Brazil last month.

We started in Campo Grande, in the state of Mato Grosso do Sul, to check out the cerrado, Brazil’s vast prairies. The cerrado is the world’s soil bank, with more than 80 million hectares of available arable land. There are about 45 million hectares (or about 110 million acres) of land under cultivation now. Most of this is pastureland for beef cultivation. There were only 200,000 hectares under cultivation as late as 1955.

For a long time, people thought the soil too poor for agriculture, but modern science changed all that. Today, the cerrado is a leading source of soybeans, corn and coffee, not to mention beef. Other crops grown here include rice, cotton, cassava and sugar.

There is an attractive opportunity today in remediating the soil of degraded pastureland into this kind of productive farmland. The raw land is cheap, but productive farmland is dear. The remediation process takes three-four years and uses a proven 40-year-old technique. At the end of the rainbow, you can potentially double your money.

New money has come in to continue to do just this. Agrifirma, a company backed by Jacob Rothschild, the fourth Baron Rothschild (read: very rich), and a pair of Hong Kong tycoons, plans an IPO next year. And Macquarie also raised $500 million to invest, in part, in this process.

On this trip, we finally got to see and walk different properties. We spent some time with Rob Hill, the director of one project and a good fellow all around. Recently, it looked like farmland investing might reach an impasse, as Brazil’s government put restrictions on foreign ownership of land. While here, we heard that the rules were hastily put in place to quash buying by the Chinese. Apparently, Chinese entities were buying up huge tracts of land and banking it. This troubled the Brazilians.

The government’s restriction, though, affected everybody investing in the region, not just the Chinese. But it looks likes there are ways to go forward. Rob has a structure to satisfy the new rules. His legal team is working out the final details, but I think the game is back on.

In any event, there are other opportunities in agribusiness here. Brazil has come to dominate certain aisles of the world’s grocery store. For example, of the top 10 meat producers in the world, three are Brazilian. And they control about 40% of the global protein trade.

The largest is JBS-Friboi, owned by the Batista family and led by Joesley Batista, “The King of Meat.” The company is public now (only in Brazil, unfortunately) and has other shareholders, but the Batista family controls it. JBS is the largest meatpacking company in the world, bigger than better-known Tyson Foods. (It was JBS that bought Pilgrim’s Pride and maintains a controlling 40% interest. Probably the easiest way to invest with the Batistas is to buy Pilgrim’s Pride – PPC on the NYSE.)

The third largest player is Brasil Foods, which trades on the NYSE under the ticker BRFS. It has grand ambitions to become a great branded food company like Kellogg’s, General Mills or Nestlé. Besides being huge in Brazil, it is also the largest poultry exporter in the world and the second largest meat exporter. It has 9% of the global protein trade by itself. The stock is too expensive now, in my view. But it’s one to watch.

If we know one thing for sure, it is that the new consumers in these emerging markets will eat more processed meats, Brazilians included. Just to get to a level of poorer European countries, consumption would more than double. This bodes well for Brasil Foods’ business.

There is also a somewhat surprising opportunity in dairy. More than once on our trip, we heard people tell us that “Brazilians are eating yogurt!” Apparently, they didn’t eat much before. Again, as part of this big bulging consumer class – some 30 million new consumers since 2005 – people are starting to enjoy a more varied and complex diet. Brazilians consume only 2.5 liters of dairy per capita per year, versus nine in Argentina.

But the Brazilian dairy industry is gearing up for a lot more. It is forecast to grow by a third in the next decade. In the process, it will become a top exporter of milk and milk products. Why? Think Asia.

Per capita consumption of dairy is booming in Asia, too. For instance, in China, Vietnam and Thailand, per capita consumption increased 206%, 91% and 65%, respectively, since 2000. There is lots of upside remaining. The typical Chinese citizen, for example, consumes less than a third of the dairy a typical EU citizen does.

Some of the fastest growing importers are in markets where there are constraints to new production (such as a lack of available land). These include Thailand, the Philippines, Indonesia and Malaysia, as well as North African states such as Algeria and Egypt and the Middle East.

Brazil has no such constraints. There is lots of pastureland and water. Production is low-cost. So more and more of the world’s dairy products will soon come from Brazil.

While in Brazil, our crew also visited Rob’s dairy project at Jaragua, a beautiful 3,000-hectare farm near Campo Grande. The farm is in a great location, right near a major road. It is also four kilometers from a new dairy factory under construction in a nearby township. We also drove by this site, which will produce 150,000 liters per day, expanding to 700,000 liters per day by 2014.

Vencedor, the firm building the plant, is an established dairy producer. “They are desperate for milk,” Rob told us. He has signed agreements at very attractive rates to provide them with milk.

And then there is forestry. I would guess most investors have little patience for forestry investing, so I won’t cover it here, except to relate a funny story Rob told us. He was giving a presentation in New York to a group of prospective investors. He told them it was a 20-25-year investment, to allow the trees sufficient time to mature. An elderly lady told him afterward that she couldn’t wait that long. “Hell, I’m so old I don’t buy green bananas!”

Speaking of old, I enjoyed reading an old book called The Conquest of Brazil by Roy Nash, first published in 1926, which I lugged around on my trip. Nash was a remarkable character who wrote a lot about these aspects of Brazil that interest us.

He studied forestry at Yale and served in the Philippine Forest Service. He was a captain of artillery in World War I and then traveled far and wide in Brazil for three years, and spent a summer in Portugal. During this time, Nash wrote The Conquest of Brazil. He continued his association with Brazil for the rest of his life. In World War II, he served in Brazil wearing various hats, including cultural attaché at the US Embassy in Rio.

In his book, Nash talks about the great plains of Mato Grosso. The name “Mato Grosso,” he points out, means “thick forest.” Those forests are long gone. “When the world was young,” Nash writes, “the forests were as luxuriant as the whiskers of the barbarians.” After it was logged, beef farmers used great swaths of land as pasture.

Nash’s book gave me a useful historical perspective on Brazil. It reminded me how some things never change. “Brazil is so predominantly an agricultural and pastoral country,” Nash observed then, “that no other facts can have quite such importance as the facts of the productive occupation of her soil.”

For me, some of the most exciting investment themes in Brazil revolve around its ability to produce food for the rest of the world. I’m keeping a close eye on these investment themes.


Chris Mayer
for The Daily Reckoning

The Daily Reckoning