By: Todd Davis and Tyler Mark
The class had an eye-opening discussion with Cresud which started as a farm management / farmland owning company that has grown to be the primary holding company of office real estate, shopping malls, and real estate throughout South America and Israel.
Cresud has a focus on ROI whether in farmland or commercial properties. They choose to purchase undeveloped farmland on the edge of the primary production region that is not in any type of agriculture. They pay a very low price to buy the land, make improvements to bring the land into cattle production and then eventually into crop production. This process takes time but can earn a return of over 5 times the purchase price. The same philosophy applies to their investment in commercial properties.
Cresud manages farms but prefers to only buy assets that generate a return. Hence they do not own farm machinery and instead prefer to hire custom farming operations which transfer a fixed cost into a variable cost. In an environment that lacks the tax incentives for machinery investment and lacks low-cost credit, this business model makes sense even if it is a foreign concept to American students. Could US farmers implement this strategy?
MSU is another land holding company but does not have the commercial diversification as Cresud. MSU has financed growth by selling bonds to European insurance companies that wants to add commodity agriculture to their portfolios. MSU uses the capital to purchase land and serves as a farm management company to generate a return to the bondholders.
Both Cresud and MSU spark the philosophical question of why are farmers involved in farming? Farmers that do not budget a return to owned land, operator labor and management are serving a noble production of food production but are selling their resources (land and human capital) cheaply. In the words of Cresud they are the “world’s gardeners”. Cresud and MSU are not ashamed of their goal of fulling compensating all economic resources.
The afternoon meeting with HSBC highlights the credit constraints in Argentina. Many farmers use vendor credit on a rural credit card that has a promotional interest rate of zero percent for 6 to 12 months. If the balance is not repaid, the interest rate becomes about 40%. In a period of low prices and high costs, Argentine farmers have experienced profitability and liquidity problems. The 40% interest rate on operating credit only adds to their liquidity problems.
AACREA is similar to a private sector Extension organization. The goal is for farmers to work together to share information in learning new technologies and improve their management skills. The class seemed focused on the non-profit and communal aspects of AACREA. The members of AACREA are not working towards a socialistic utopia. They are focused like a laser to improve their profitability. The non-profit aspect of AACREA is for tax purposes and helps in sourcing sponsorship from agribusinesses to reduce the per member cost of the association.
HSBC and AACREA are important parts of the supply chain. The technical information provided by AACREA helps farmers become more efficient. HSBC and other credit institutions are vital to agriculture as money truly makes the world go around.