Big Picture– why do you buy an asset?

By: Todd Davis and Tyler Mark

March 15

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.


Big Picture: The importance of supporting institutions in a supply chain

March 14

By: Todd Davis and Tyler Mark

The class jumped into the discussion of supply chains at 8 am Monday with a visit to Aceitera General Deheza at their corporate office in Buenos Aires. Carlos “Billy” Haeberle, AGD’s economist and trader, provided an excellent overview of Argentina’s agricultural economy. AGD is the largest Argentine oilseed crusher/exporter and Billy provided an overview of the company’s product lines beyond soybean meal and oil like vegetable oil, mayonnaise, and other cooking sauces. Billy also shared AGD’s infrastructure, and risk management practices. AGD has a competitive advantage by owning a network of grain elevators in the interior in an area void of on-farm or off-farm storage bins. AGD also owns a rail line that runs through the main production region which is a low cost alternative to trucks which hauls the majority of Argentina’s grain and oilseeds to the port at Rosario. A final risk management tool is that AGD owns and farms grains, oilseeds, and peanuts which provides commodity inputs whenever there is disruption in the cash market and keeps the processors running to avoid the costs of a total shutdown of crushers, ethanol and biodiesel processing.

Schutter Argentina provides certification and verification services that helps the supply chain function. John Adams once said that “If men were angels, no government would be necessary.” The same applies to certification and verification of quality and grade standards with regards to trade. The buyer has the right to use Schutter or similar companies to ensure that the seller meets the contract terms. This service is paid by the seller which helps motivates proper delivery of the grades and standards. Schutter maintains the quality samples in case of an arbitration of a dispute between the buyer and sellers.

The final visit was to the Senate Agriculture committee. This committee is similar to the US except that the professional staff serves both the majority and the minority political parties. The staff shared with the class how they work with Senators and related groups to form policy that affects farmers and agribusiness.

In the context of supply chains, it is clear why we visited AGD as they are a principle player. The role of Schutter is more subtle but may become more important if consumers increase their preferences for sustainably certified produced agriculture. For example, ISO 9000, Round Table for Responsible Soybeans (RTRS), and Global Gap just to name a few of the certifications gaining popularity.  RTRS is a large organization that certifies sustainable farming practices for soybean production. RTRS is gaining acceptance in South America but has limited adoption in the United States. If China ever decides that sustainability is an important part of their tastes and preferences, then the US will have to obtain RTRS certification in order to sell soybean and soy products to China. This implies more of an identity-preserved and segregated export chain that is higher cost and less efficient than the bulk commodity system currently in the US.

Value chains need supporting institutions like Shutter and even government to keep the players in the chain coordinated and to mitigate disputes. The US is fortunate to have a government that is supportive of agriculture and infrastructure. Other competing countries do not have that same advantage.

Managing and Financing with no safety net

By: Connor Jones, John DeReamer, Brad Blincoe, and Dante Zanelli

On Tuesday March 15 during our second day of meetings for the Argentina Agribusiness Seminar we had the opportunity to meet with officers of four (4) companies. We visited the offices of Cresud S.A., Group MSU, HSBC Argentina and CREA.

To start the morning off, we met with Cresud S.A. ( officers which provided a look into their diversified elite agriculture business operation. Santiago Donato, the investor relations officer of the company, explained the model of the company and how their vertical integration led to concentrate their focus in real estate holdings. This diversified model focused on holdings like farm land, shopping centers, hotels and office space. This allowed them to hedge against devaluation and inflation, but overall the company appears to be land developers, and not necessarily long term farmers.

The next meeting brought us to MSU, a family owned company that was grown into a co-joined enterprise between the Manuel Santos Uribelarrea with Spain and Dutch based investors. Our speaker was Guillermo Marseillan, the company’s business development manager. MSU labels themselves as a “pure play” agriculture company. They manage farmland, and receives a management and performance fee for their services. Their model differs from Cresud’s, as their focus is farming, but also that they have concentrate those farming efforts while leasing most of the land they manage; a model that is not common in the United States.

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Later in another of our meetings, Patricio Gonzales Chaves, an HSBC Argentina Team Leader Agribusiness banker explained to our group that when Cresud S.A. wants to purchase more land they just issue more shares, but in the other hand MSU raises funds through third party investments on basis of commodities funds sold to European investors manage with international pension funds. It is what they called a pure play of soft commodities.

This brings us to our third meeting. This was with the banker Patricio Gonzales Chaves from HSBC. Chaves began his meeting outlining the policy challenges of the last 12 years in Argentina where the situation was not good for the free market or farmers. After the election of the recent president, Mauricio Macri, business policy has begun to be more pro market. Whereas, before they had a “closed economy,” they now have a more open economy with lowered tariffs and more access to U.S. dollars. They still face challenges though, such as inflation, concerns of a weakening ARS, more tariffs, and no majority in Congress. Patricio also explained how most Argentine farmers use vendor financing to purchase inputs on a rural credit card. This card offers a zero percent interest if repaid in 6 months. Then the interest rate soars to 35% to 40% interest (paid on Argentine Pesos). This is crazy! Do you think US producers would know how to manage this type of risk?

Lastly, we were given a presentation by Federico Guyot, a team member of the organizational direction for AACREA. This is known as the Argentine Association of Regional Consortiums for Ag Experimentation. Federico was a great speaker and started out describing the non-profit organization that gathers groups of farmers and gives them support that leads to better productivity, yields and relations between farmers. CREA, which was founded in 1960, stands for Association of Regional Consortium for Agriculture Experimentation and has 2200 members throughout 18 regions in northern and central Argentina. Members work in groups to share experiences and generate knowledge as well as share ideas. Benefits of this system have been proven to increase yields by over 50%. The benefits also include teamwork, development of new skills, training, adoption of new technology. This contrasts to the more independent and competitive nature of North American farmers, and the closest comparison to the services provided by this organization will be to those provided by the extension programs by the Land Grant Universities in the United States. Mr. Guyot shared a thought that could interpret as a Trading/Enrichment Golden Rule: “An apple for an apple = 1 apple each, while an idea for an idea = 2 ideas each”.

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In the beginning there was grain…

By: Lexington Everett, Ashleigh Blausey, John Marsh, and Dakarai Howard

After spending a night in the city and exploring a little the day before, today was our first day of meetings and we hit the ground running…literally. On the way to the first meeting of the day John (AKA Dreamer) tripped on one of the pillars on the walkway and met the concrete.

Our first meeting was with Aceitera General Deheza, or AGD ( who specializes in seed crushing, specifically soy beans as well as peanuts and sunflower seeds.  In this meeting we learned about their business model, compared the company to what we see in the United States, and created our own personal SWOT analyses of what we learned about the company.  Since this meeting of the day was the most interesting and informational we decided to provide you a brief overview of what we came up with.

  1. Strengths:
    1. Ability to adapt new technology
    2. India is importing more thus providing a steady increase of profit for AGD
    3. UN Clean Development Mechanism Certification
    4. Vast railway network
  2. Weaknesses:
    1. High tariffs
    2. Argentina relies heavily on truck use for transportation (expensive)
  3. Opportunities:
    1. Population increase, higher demand
    2. Middle class and average income increasing
    3. Room to create added value
    4. Biofuels
  4. Threats:
    • Population increase which leads to a decrease of arable land
    • Competition with USA and Brazil

Exports to Europe have declined

This meeting set the foundation for what we covered the rest of the day. They even talked about marginal costs, diversification and some other economic concepts. We were beginning to wonder if we would ever use these terms in real life!

Our next visit took use to Schutter Argentina ( You ever wonder who inspects all the vessels to make sure the grain quality and quantity in the ship matches what the contract states? Well this is one of those groups. They work in countries all over the world to make sure certain standards are met. Without this group who knows what would be shipped?

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Another meeting we would like to shine light on was our visit to the Argentine Congress and Senate Chambers.  We learned how their voting process works, visited each chamber, and learned about the various artworks displayed throughout the building.  One type of art that was throughout the building in various rooms was stain glass pieces.  However, rather than being windows as we commonly see in America, the Argentine Congress presented the stain glass as sky lights.

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Lastly, we visited with the Comision Unicameral de Agricultura. This group is tasked with evaluating the impact of potential policies that might be passed. Let’s put it this way…they have their work cut out for them given the volatility in the Argentina political system.

To finish off the night we went to a dinner and tango show which was a blast!  We had a three course meal that ranged from tomato crème brulee or a Caesar salad as the starter and finishing off with rice pudding, flam with dulce de leche, or even just ice cream.  Below is our group photo we received after the show!



The adventure begins…

Almost everyone has arrived in Buenos Aires by 11:50 pm, Sunday, March 13 Buenos Aires time.  For those arriving by 1 pm, we enjoyed a traditional Argentine beef meal of steak, salad, various breads, and French fries. This was a great way to introduce everyone to Argentina. Megan, Dante, Stefan, and Zach we hated to eat without you, but don’t worry we will have more opportunities!!

After the wonderful meal, we started to explore the city. We started out in Puerto Madero, the old port of the city that was renovated in the early 1990’s into a residential and business neighborhood. We learned about the city’s history and the importance of agricultural exports in funding economic growth in the late 1800’s and early 1900’s that made Argentina as wealthy as the US prior to WWI. This bustling area is also a great place for other tourist and families to take a walk and enjoy the weather on this amazing fall afternoon!

Along the way, the group took several photos of the city and each other. Including a couple performing the country’s famous dance – the tango. We will explore the tango more Monday night by attending a Tango Show.

day 1 tango stree
Tango in the street by the Puerto Madero!

We then strolled through the San Telmo neighborhood which is known for the weekend flea market that attract several tourists and Buenos Aires residents (known as Portenos).  This market specializes in antiques and several items of interest to parents and grandparents were found but not purchased. Included in the market were local vendors selling fruits and vegetables as a throwback to the years before multi-national supermarkets invested in Argentina which eliminated the need for these local markets.

Of course we stopped and enjoyed another Argentina favorite – helado (gelato ice cream). This hit the spot after a long afternoon stroll under the 75 degree sunny weather. Long stroll, try 9 miles today, I hope everyone brought their walking shoes!!

After a chance to rest in the hotel, the group had a lighter supper as many were still full from their first experience with Argentine beef. For dinner we went to 36 Los Billares which has been around Buenos Aires since 1894. The pizza and empanadas were amazing and the weather walking home was perfect (above right).

Monday’s class gets an early start with an 8 am meeting with the largest domestic crusher / exporter – AGD.

Stay tuned..


UK Students Arriving in Argentina. In related news, Argentina to import cattle for the first time in almost twenty years

By Todd D. Davis

The class is starting to arrive in Buenos Aires. In an effort to find the cheapest flights, our first student, Logan Howard, arrived on Saturday, March 12 with the majority arriving from 4 am to 9 pm on March 13. Our last student, Megan Harper, will arrive on Tuesday, March 15, after participating in the Houston Livestock show judging contest.

In the Sunday meetings in preparation for this class, we discussed agriculture and economic policies in the U.S. and in Argentina and the fact that most policies have unintended consequences. One striking unintended consequence is the need for Argentina to import cattle in a country once known for the largest per capital consumption of beef and the third largest beef exporter.

Given the depreciation of the peso against the dollar, there will be many opportunities for this group to consume mass quantities of beef in a two-week period.  While we will do our best to surpass the Argentinian per capita consumption of 97 lbs./year, we might come up short. Clearly the University of Kentucky is not responsible for Argentina’s beef shortage.

What caused this beef shortage? As we meet with farmers, agribusiness, farm organizations and government officials, we will learn more about the effect of policies designed to provide cheap beef and bread and the resulting profitability signals to the grains and beef sectors. Policy makers tend to think policy is static. In reality, consumers and producers live in a dynamic world and respond to policy and economic signals. Hence, the policies have resulted in unintended consequences in the commodity markets.

As Argentina removes currency and trade barriers, the demand for beef will be met through imported cattle. While this is an embarrassment for domestic cattle producers, the market will provide greater supply and cheaper beef for the consumers. If policies remain constant, the economic profitability signals to expand the cattle inventory will provide.

We will learn more about the Argentina beef value chains by visiting the Liniers cattle market near Buenos Aires (left) and see feedlots out west near Mendoza.  The changing economic and agricultural policies are providing a real-time learning opportunity for this class. This hands-on experience includes a great opportunity to consume some first-class beef.


Is This Heaven?

Is This Heaven?

Is this heaven? No, it’s Iowa and perhaps Argentina.

The 1989 movie “Field of Dreams” has a moment where Kevin Costner is asked if this baseball park in the middle of a corn field is heaven. Mr. Costner replies that it isn’t heaven – it is Iowa.  Based on general appearances it could also be Argentina.

Dr. Todd Davis, co-director, has had the pleasure of getting to know Argentina’s agriculture, agribusiness and policy makers over the last fourteen years.  As a native Iowan, he has always been amazed at the similarities of the Argentine pampas with the rich, prairie soils of Iowa. Consider the photos of two soybean fields – one is from Argentina and the other from the family’s farm in Iowa. Can you identify which field is in either country?

At the farm-level, Iowa and Argentina are almost perfectly interchangeable. You see that both have flat, prairie soils. Both have adopted a no-till or minimum till glyphosate resistant soybean production system. Both have very similar yield potential. Both farms have access to the same seed companies, chemical companies and machinery companies.

Beyond the farm gate is where the similarities end. While in Argentina, we will visit with farmers, agribusiness and policy-makers to understand the factors that support US agriculture and those factors which limit or punish Argentinian agriculture.  The study of supply chains will help us understand the importance of a low-cost and efficient transportation and logistics channel to keep exports competitive in global markets.

We will also talk with farmers to learn more about how they manage their farm business. How do they finance their production? How do they manage yield risk and price risk? Are their supporting institutions like the Land Grant University system to help farmers with applied research and Extension information? How effective are commodity organizations or farm organizations in lobbying the Argentine government on behalf of the farmers?

This will be the fourth time he has taken students to Argentina. The personal and intellectual growth in both the students and instructors continues to amaze him. He is excited to once again share this learning experience with future leaders in American agriculture.

By the way, the photo on the left is from Argentina and the photo on the right is from Iowa.