Identifying Private Equity Opportunities in Agribusiness
April 21, 2016
By Alejandro Quentin, CEO, Pampa Capital
At Pampa Capital we believe that the Ag sector continues to offer attractive long-term “under-the-radar” investment plays. The Ag sector has attracted significant investor interest over the last decade after being neglected for a long time. However, today its main challenge is to show it can offer opportunities beyond just chasing a bull market in commodities.
Some examples are agricultural inputs, machinery, crop protection, grain-to-protein conversion and logistics. We continue to see less value in mature markets such as North America and Europe, and higher value creation opportunities in emerging economies in South America, as well as certain regions in Australia and Africa.
We believe that value creation in the following decade will not come from a rise in commodity prices. Stocks are high and there has been carry over for a long while in every major row crop. Agriculture production has diversified into many new frontiers. This expansion has occurred because of the very high penetration of new technologies and a sophisticated entrepreneurial class, which in turn has increased / stabilized yields and diversified geographical risk. In Ag economies such as Argentina and Brazil, competitive advantage is not only based on natural resources, but also on tech leadership and availability of skilled and sophisticated work force. Argentina has been a pioneer in the adoption of new agricultural technologies and Brazil and other regional economies have been following. Certain parts of Australia also offer some interesting unexploited potential.
It is difficult to get the timing right chasing a bull market in commodities. Investments in agribusiness need to be made based on asset and market fundamentals with a long-term time horizon and with the resources available to navigate the natural volatility of commodity markets. In a stable commodity prices context, opportunities will arise in sectors with a direct positive impact on farmers’ income. However, the ability to capitalize on these opportunities will not only depend on the skill to identify early such opportunities and availability of capital, but on other key factors such as: (a) possessing the management resources to execute aggressive business plans where leadership and restructuring skills are vital (b) drive growth organically and through acquisitions (c) work in an environment where it is crucial to counteract quickly to micro, macro movements and to changes in government policy. Below are some segments where we believe the investment potential lies.
First, in South America (especially In Brazil and Argentina), despite its resource and technology leadership, one of the challenges to grow the Ag Sector GDP has to do with its infrastructure. This is the greatest bottleneck that needs to be resolved, and investment opportunities in logistics, storage and elevation will be highly valuable. Governments have painfully and slowly come to this realization and are taking actions to generate the framework and incentives to attract local and foreign investment in this sector.
Second, we continue to believe in the enormous value of new Ag technologies as no-till farming and GMO crops. The experience of Brazil, following Argentina’s lead in this respect, is compelling and illustrates the potential of other regions such as Australia and Africa. For example, in Australia GM traits in corn and soybeans are not allowed as they are for canola and cotton. The introduction of corn and soybean GM traits will be crucial in order for production to grow and thus will have a significant impact in the cattle protein chain. The genetic materials found in Brazil today in these two crops can be adapted quite easily to prevail in Australia’s tropical and subtropical climates. This in turn will enable the cattle industry to count on a stable feed reserve composed of corn silage and soybean meal. This will enable significant increases in the pregnancy rates of the herd and in turn allow protein exports to be more stable in both beef and live exports.
Third, the majority of new traits mainly in corn and soybeans have broken its tolerance. For the amount money that has been invested in genetic engineering by multinationals over the last decades the number of new traits that worked is very low. Thus, we are seeing a very strong comeback of the value of local germoplasm, herbicides, fungicide and insecticides. As we have seen over the last year, M&A activity will continue to dominate the crop protection and seed sectors.
Fourth, transformation of crops to proteins is still a play where we see abundant growth. With current commodity prices and growing protein consumption, integration towards production of proteins continues to make sense. Even more, it has become a necessity in certain regions to deal with high transportation costs. The challenge in this sector is the operational expertise and execution, in order to achieve attractive margins in a context of rising environmental standards.
Fifth, we believe that land prices are at all time highs in developed agricultural regions. However, potential plays still exist in the transformation of under-valued grazing land to agriculture. This needs to be done very responsibly by using the best no-till farming practices in order to preserve the ecosystem and with the introduction of mosaic agriculture.
Sixth, over the past years there have been significant advances in machinery, software, IT platforms targeted at farmers. To give some examples, technologies that optimize the use of chemicals (e.g. weed detectors) or that allow to vary the seed density and fertilizer application depending on the soil’s potential, will significantly reduce farming costs. Companies that develop these technologies and that are able to successfully communicate these benefits to farmers will be extremely valuable.
Lastly, niches will always exist and finding the competitive advantages is the driving factor behind successful models. French cheese, Italian risotto, Colombian coffee are some examples. There will always be space for products where the consumer is willing to pay a premium. Water availability, nutrients in the soil, temperature, daylight hours, are all factors that have to be factored in.
In conclusion, we believe there are many attractive opportunities to invest in across geographies and agricultural sectors, and that whoever is able to identify, have the capital and management resources to execute those opportunities will be able to generate significant value.
Alejandro Quentin is a member of the speaking faculty at GAI New York in New York, April 25-28, 2016
The opinions expressed in this editorial are the authors’ own and do not reflect the views of GAI News.
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