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Three weeks ago we mentioned that Morgan Stanley announced that it will close the agriculture segment of its commodities business.
The move was just another sign of hedge funds and banks electing to shift away from soft commodities, and place greater emphasis on the oil and gas markets.
Over the last two years, a number of banks have struggled in the agricultural sector. As they continue to show impatience for the long-term, many on Wall Street have picked up the ball and gone home.
Still, from our research and conversations with investors like Jim Rogers, the agricultural sector provides one of the best investment opportunities over the long term.
With demand outpacing supply and global food stocks hovering near record lows, the fundamentals are clear. It's is why Rogers told Money Morning this year "the price of agriculture has to go up a lot, or we're not going to have any food at any price."
But there's another important investor out there who is long South American agriculture. And he's using an entirely different strategy than the big banks in New York.
The investor is George Soros, Jim Rogers' former co-founder of the Quantum Fund.
Even though many Money Morning readers might not agree with Soros' politics, there's one thing you can't deny: Like Rogers, he too is a legendary investor.
And sometimes you have to put politics aside and find the right investment. And sure enough, he's long one stock that is ripe given the need for more food development in South America.
More than One Way to Invest
Wall Street banks are pulling out of the agricultural sector for two reasons: One, the short-term focus on profitability clouds their ability to see the long-term value of agricultural holdings. Second, soft commodities are a very difficult to master.
There are many different ways to invest in agriculture, but most are subject to short-term volatility given the global supply and demand picture, and the factors impacting prices such as planting cycles, weather variations, energy and shipping costs, and political uncertainty.
While animal technology continues to be our favorite way to invest in the sector, the Soros strategy has centered on a valuable investment vehicle that remains popular with hedge funds around the world: farmland.
Farmland continues to rise in price as investors attempt to cash in on the growing need for food in a world that will have nine billion mouths to feed in 2050.
And it's a solid hedge against rising prices. Over the past 70 years, farmland real estate appreciation has easily outpaced the annual inflation rate.
But farmland isn't just spiking in price here in the United States. It's also becoming a very hot commodity down in South America and portions of Africa.
And one stock provides an opportunity to get in on the development and ownership of farmland south of the equator.
Land Opportunities Abound in South America
Adecoagro SA (NYSE:AGRO) is a Luxembourg-based company with approximately 725,000 acres in Brazil, Argentina and Uruguay. Soros Fund Management controls more than a $200 million stake in the company.
The company is engaged in the purchase, development, operations and sales of farmland in these three nations. In addition, Adecoagro produces corn, soybeans, wheat, rice, and sugarcane (to provide to Brazil's booming ethanol sector). The company also engages in the highly competitive meat and dairy sectors.
Given that arable land is one of the safest long-term investments out there, AGRO provides a much sought-after way to invest in three of the world's most important agricultural nations. Investors simply need to be willing to park capital into farmland over the long-term and let the global fundamentals catch up over time.
Of course, there are risks to investing in a company like Adecoagro, given its exposure to foreign markets.
The stock has been deemed undervalued by multiple analysts given the location of most of its holdings. The principle location of its land is in Argentina, a country rife with economic uncertainty, political turbulence, and rampant inflation.
As we've discussed several times here at Money Morning, Argentina is one of the worst economies in the world when it comes to economic freedom and property rights.
The reality, however, is that Argentina really has nowhere to go but up, as the general business population, and particularly the agricultural sector, has grown tired of progressive politics and unfavorable business environments.
But concerns have also centered on the company's holdings in Brazil, where foreign property ownership is currently a topic of national outrage, and its ethanol development is subject to heavy volatility.
Perhaps the biggest threat that few tend to consider is the quality of the farmland in South America. Not all farmland is like rural Indiana. In fact, certain areas of Brazil require as much as six times the amount of water as a Midwestern farm would need in order to grow crops.
Adecoagro can counter the latter threat by avoiding land holdings in the lower-quality regions in the southern portion of Brazil where erosion levels are high in the soil and water retention is very low.
Currently, Adecoagro uses nearly 70% of its land for agricultural operations, while the balance is currently under development or being held given its long-term appreciation opportunity.
For investors looking to get into the global farmland boom, Adecroagro is a stock sitting below $10 that provides plenty of upside, particularly given the confidence shown by hedge funds like Soros Fund Management.
For more investment opportunities in the leading free-market countries in South America, see Martin Hutchinson's analysis of Chile, Colombia and Peru.
About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, and consultant with degrees from Northwestern, Johns Hopkins, Purdue, and Indiana University. He is a seasoned financial and political risk analyst, with a focus on stocks, hedge funds, private equity, blockchain, and housing policy. He has conducted risk assessment projects for clients in 27 countries, and consulted on policy and financial operations for some of the nation's largest financial institutions, including a $1.5 trillion credit fund, a $43 billion credit and auto loan giant, as well as two of the largest Wall Street banks by assets under management.
Garrett joined Money Map Press as an economist and researcher in 2011, specializing in alternative strategies with an emphasis on fundamental and technical analysis.