Ask the Expert: Michael DeSa on Latin American Farmland Investments

In today’s blog we have the honor of speaking with Michael DeSa, Founder and Owner of AG DTours, a US based firm that offers support to investors looking to gain exposure to the agriculture sector in Latin America, specifically through the purchase of farmland.

 

Quarterra: Mike, thank you so much for joining us today. Could you begin by telling us a bit more about what originally drew you to agriculture investments in Latin America?

DeSa:  Five or six years ago, when I was still serving as an officer in the U.S. Marine Corps, my family and I felt we were being called to walk a different path, one that involved entrepreneurship outside the service.  At that point in our lives, our family office was also searching for an alternative investment class, something other than traditional stocks or bonds.  Our investment criteria included a tangible asset outside the U.S. as a way to geographically diversify, a long-term storage of wealth, an income generator, a strong likelihood for appreciation over time, and something less susceptible to U.S. market fluctuations. 

 

We began researching agriculture worldwide, searching for the geography that possessed the best possible value and long-term sustainability through sufficient water and arable land resources.  Agriculture in Latin America quickly emerged as the strongest investment opportunity.  The Latin American region accounts for nearly 30% of the world’s arable land, over 25% of the globe’s annual precipitation, and is home to the greatest agricultural land and water availability per capita.  Preliminary research first drew us to the region, but we wanted to see it for ourselves before investing. 

 

Quarterra: You have personally made farmland investments in the region. Could you share more about your approach to identifying the available investment opportunities?

DeSa:  We believe there is no substitute for boots-on-the-ground experience when it comes to making an investment in overseas agriculture.  In an effort to gain firsthand experience about the diverse investment opportunities in Latin America and to build a network of contacts and business associates before launching AG DTours, my family and I executed a 6-month, 6-country investment research trip to Latin America. 

 

We left in February 2015 and traveled to Ecuador, Peru, Chile, Argentina, Uruguay, and Panama before returning to Texas that August.  During that trip, I conducted over a 100 unique agricultural site visits in more than 50 different regions in all six countries.  Everything from coffee in Ecuador and vineyards in Mendoza to wheat in Uruguay and timber in Panama.  My experiences spanning such a diverse array of ag-based investments from across the entire region makes me uniquely qualified to match the right asset with the right private/institutional investor.  We know it’s not always possible for an investor to locate and research all of the available opportunities in a given region, so we offer a service that equips investors with firsthand knowledge about specific ag investments to meet their personal needs.

 

Quarterra: Eventually you found a suitable farm in Argentina, correct? What characteristics does the farm have and how did you make the final decision to invest?

DeSa:  We wanted a farm with strong upside potential, excellent access to water, proximity to power and roads, and a diversified production output, all of which we found with our current investment in San Rafael, Argentina.  In the heart of Argentina’s famed wine country, our farm consists of nearly 35 acres of quality alfalfa and thousands of producing pear and plum trees. 

 

The land has approximately 20 hours of weekly irrigation rights; more than ample to flood irrigate the entire farm through an established canal system.  Unlike many of the other farms in the area, our farm has a newly refurbished well, a 352-gallon per minute, 40hp, 3 phase pump, and a newly constructed pump house.  This feature will allow us to flood irrigate during years of decreased winter precipitation while also making the addition of a reservoir and drip irrigation system a future reality.  While the climate is very dry, both surface and sub-surface water comes from the Andes winter snowmelt.  A dry climate with abundant water is ideal for crops.  We currently use three-phase power for agricultural purposes in order to keep electricity costs low, but have access to single-phase power for future residential needs.  Our local management team, my investment partner, and I are also in the process of conducting a feasibility study to see if the re-introduction of cattle to our farm makes sense.  We also have some acreage presently laying fallow that we’re considering cultivating in grapes, peaches, or additional pasture land, allowing for future expansion and further diversification. 

 

We chose to own and operate the farm as individuals because it fit the needs of our family office best, but there is a clause in our contract that allows us to convert that ownership into a more suitable corporate structure in the future if we so desire.  I think it’s also important to point out here that foreigners also have the ability to own titled land as a corporation while still possessing the same property rights as Argentine nationals.

The DeSa Family farm in Argentina

The DeSa Family farm in Argentina

Quarterra: You purchased your farm in September 2015. Now with the benefit of hindsight, would you do it again? And if so, is there anything that you would have done differently?

DeSa: We purchased the farm right before the presidential election in Argentina.  Our practical experiences and Argentine contacts indicated to us that things were ripe for a change in Argentina.  The election turned out in our favor and President Macri is already making good on many of campaign promises to bring back foreign investment to Argentina.  For future investments, I’d like to continue to diversify.  I’m a firm believer in the five flags theory, an idea around diversifying aspects of one’s life in different countries as a way to increase personal freedom, reduce taxes, and gain exposure to markets with the strongest upside potential. At 31, I have a second passport in one country while maintaining legal residence in a second and hold a portion of my net worth in an asset haven in a third country.  In the future, I’d like to look for a second home in a fourth country as a way to further diversify.

 

Quarterra: Tell us about how your personal experience inspired you to found AG DTours. 

DeSa: My technical background in Agricultural Engineering, years of management and problem solving experience in the military, and my previous and current land ownership endeavors in South America make me uniquely qualified to lead investment research trips as well as provide expert consulting services to help clients identify the right ag investment for them.  I’ve always enjoyed helping people become more aware and thrive in the world around them.  I also get a tremendous sense of accomplishment producing what I consume.  As the co-manager of a nearly self-sufficient farm in Texas, we raise a variety of agricultural crops, hydronic greenhouse produce, bees, and multiple breeds of chickens for meat and eggs.  Finally, my experiences in the Marine Corps exposed me to cultures from around the world which served as a catalyst for our family’s quest for a diversified investment into agriculture.  Essentially, it’s been a culmination of all these experiences that inspired me to found AG DTours.

 

Quarterra: Could you elaborate on the kinds of services that AG DTours offers?

DeSa: We offer two unique services for investors seeking to diversify their portfolios:

1.     Customized agricultural investment research trips, and

2.     Advisory services to identify appropriate agricultural investments for a variety of investors

 

We utilize our experience, education, and network of contacts across the region to offer family offices and private/institutional investors customized research trips to Ecuador, Argentina, Uruguay, and Panama in order to showcase Latin American agriculture as a formidable investment alternative.  We also offer advisory services for private investors who need assistance matching their investment needs with the right opportunity in Latin America as well as sourcing and due diligence work for institutional investors. While we are not a brokerage or real estate firm, we can introduce our clients to the necessary personnel should they choose to make an investment in Latin American agriculture.

 

Quarterra: From your point of view, are there particular industries or geographies that offer particularly compelling fundamentals for foreign investors?

DeSa: So much of this depends on the individual investor. Some investors are more risk-tolerant than others while some prefer “safer” investment alternatives.  Certain investors like the liquidity of stocks while others are drawn to tangible nature of certain commodities, precious metals, or agriculture.  The most important point in all of this is for each investor to understand in which category they belong.  I prefer Latin American agriculture as a form of diversification.  As someone who has experienced agricultural markets in six different Latin American countries, each offers their own unique opportunities for every investor.

 

Ecuador’s varied agricultural market, strategic location, and extremely competitive land prices speak to the do-it-yourself investor while Panama’s proven timber industry, fast growing economy, and proximity to the U.S. are more suited for those looking to ease into agriculture as an asset class.  Uruguay’s world renowned beef industry, completely unique soil and productivity classification system, stable geopolitical climate, and time-tested agribusiness industry are ideally suited for the foreign investor who is willing to travel, take a serious position, and understands that you get what you pay for.  Last, but certainly not the least, Argentina’s abundance of natural resources, famed agricultural exports, and ideal geopolitical timing may speak to the more risk-tolerant investor who is willing to get in early and ride the uptrend. 

 

I don’t think one particular industry or geography offers the most compelling opportunities for all foreign investors, rather, each industry and region of the world offers something captivating for the right someone.

 

Quarterra: When we talk about Latin America we hear a lot about geopolitical and macroeconomic instability. Do these factors concern you and how do you mitigate their impact on your investments?

DeSa:  As with every investment, it’s important for the investor or institution to understand the risks.  Our approach for mitigation is education in the form of boots-on-the-ground experience and expert advice.  We believe there are three key factors associated with risk that we want our clients to understand:

 

1.     Agriculture is a long-term investment that can be affected by weather variations, changing energy and shipping costs, labor costs, etc; all of which may produce short-term fluctuations in annual yields.  It’s important for new investors, especially if they’ve never been exposed to agriculture before, to be aware of this consideration.

2.     When it comes to geopolitical and macroeconomic instability, our experience has been that reality often differs from perceptions or what is portrayed by the media.  You need to experience it for yourself.

3.     Investors need to understand the currency controls, if any, affecting their country of interest.  If there is an official vs unofficial exchange rate (as there was in Argentina only last year), how easy is it going to be to transfer money into and out of a country, what is the plan for profits (repatriate or reinvest)? 

 

Bottom line for mitigation: Research and prior due diligence, firsthand experience, set realistic long-term goals, expect short-term fluctuations in yields, and finally be patient and let your asset appreciate.

 

Quarterra: What other risks do foreign investors need to be prepared to deal with when considering investments in Latin American agriculture? 

DeSa: We recently published an article with Agri Investor (read here) discussing the top five mistakes new investors make in Latin American agriculture.  Essentially as an agricultural investor, analyst, and investment research 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 an exciting investment in Latin America.

Michael DeSa is the Owner and Founder of AG DTours, an advisory firm that creates customized agricultural investment trips to Latin America and provides consulting services to help investors gain exposure to the agriculture sector in the region. Michael can be reached at contact@agdtours.com.