Below is a summary of the program:
Moraes: In brick funds, the investor is used to analyzing whether the properties are good and well located. I believe the same is true for a land fund. But what are the parameters of a good farm?
Each region has a characteristic of topography and soil type, which makes it more suitable for a particular culture. Corn, for example, depends on altitude. So, there are several Brazils in agribusiness.
But basically a good farm has to be easy to grow in order to have good cash generation. This means being located, for example, in a region that usually rains, in order to have a well-adjusted production cycle and good logistics. A good service infrastructure also counts, with the presence of trading companies, multinationals, chemical products, large machine dealers, which make it possible to have all the tools available. These characteristics are not easy to identify, but they are not difficult for someone in the field.
There are those that are located in a good climate but do not have a good topography, which is essential for large-scale mechanization. But all these characteristics are usually in the land sale.
Land pricing changes according to the region and agricultural development of each specific pole. It is as if there were also a Faria Lima and other consolidated regions and other segments in agribusiness, with different characteristics and demands. In a certain region, the productive cash flow may be higher, but another region has a greater appreciation due to the demand from the nearby city.
And what kind of culture? How does it affect the price?
Mato Grosso is the Faria Lima of agribusiness. The state practically represents an Argentina of production and has been developing a lot. These are municipalities such as Nova Mutum, Sapezal, Campo Novo do Parecis, where cotton can be planted as a second crop. Cities in Goiás, such as Cristalina and Rio Verde, also stand out.
So far we don’t have anything in the background in the South and Southeast, but we are always looking for it. Ribeirão Preto, in São Paulo, is also a consolidated region. Sorriso has a land price similar to that of Ribeirão and the dispute for land there is great. But the big problem in these regions is the type of culture. There are many lands of perennial culture in São Paulo, which is more difficult for the REIT market.
Sugarcane, coffee and orange crops are good, but the investment in land is significant to implement them, and the owner will only start to have a return in the third or fourth year. If there is a default in the period, we have problems removing the tenant from the land. So, we prefer annual crops, which do not require investments.
Nor are we currently looking for land for produce. Crop volatility is very high. Today it may be worth R$ 10 and R$ 50 tomorrow. In addition, it has a high production cost, so much so that it is difficult to have large producers of this culture. It is necessary to have a large financial reserve.
Pricing for produce land is also complex. As it needs to be close to cities, it can soon enhance and become an urban area. Also, the product is perishable.
Explain the repurchase structure used by the fund.
Today we buy agricultural land and give the owner the opportunity to buy it back. We are more of a financial structure than equity. We carried out an inversion of the credit logic. It is a credit structure through equity. We make a discount on the purchase as if we had to execute it, but we don’t have it because the property belongs to the fund: the producer repurchases over time. The value of land close to the producer’s activity is relevant. I can give him a grace period, so that he starts buying back in 3 years. So, the result of the fund comes from this lease.
Income is the interest paid by the producer on the loan. Today, land lease is around 3% a year because real estate valuation is very high. The investor looks at the valuation plus the annual flow. If you discount the lease appreciation, 3% remains.
We raised 500 million in our first issue and we already have more than 1 billion reais in land. Many investors may think of us as an alternative, high-yield fund. But actually we are a safe fund. The land is worth twice what we pay and if there is any problem we have high liquidity to sell.
We generally give the producer the option to buy back 10% of the land each year in cash. If he doesn’t exercise the option, he loses the ones in front. This cannot be done with corporate slabs, which have only one registration. But these lands are gigantic, they have several registrations. If they don’t, just dismember them.
In 10 years of contract, it is difficult to reach a stage where there is a depression of commodities to the point that it prevents planting. That’s why we prefer the annual crop. Has the price of a crop gone up? Plant another and destock until the price returns.
And the list of arable land and permanent preservation areas (APP)?
Today we pay for the production area and APP is included in the set. There may be areas that do not have APP. but every area has an estimated APP for that biome. In order to have 100% of the productive land, we need to have fully preserved APP, if it was an open and deforested area before 2008. In the Cerrado, this percentage varies between 20% and 25%, depending on the region. In the Amazon, the requirement can be equivalent to 80% of the cultivated land. So the producer needs to buy land, make it a legal reserve and protect it. Many people criticize the environmental part of Brazilian culture, but every producer carries this liability. Nowhere else in the world does this happen.
Judicially, the tenant is responsible for this. But the fund doesn’t want to have a problem. So we maintain the law. As we usually work with large groups there are no problems in this area.
Explain the importance of the activities for the fund and for the investor. Does the fund have any share in the farmer’s income?
Real estate is tied to commodities. Nobody prices land in Sorriso with sugarcane, but soy. In the fund’s standard contracts, we operate in reais per hectare, not in dollars. This prevents further gains but we also do not suffer when agricultural margins are tight.
We are in an excellent moment for agricultural commodities, but this is also cyclical. What happens to the fund when the price of these products falls?
We usually say that the commodity goes up a ladder and down an elevator. In agribusiness this is no different. Soybeans, corn and cotton are at historic prices in reais, pulled by the dollar, impacting bags in reais.
But it’s a time to be careful. We have a robust pipeline, signed memorandums for volume and leasing offer. If you buy land today at a high price, when the market goes down it will be higher. We need to understand that we are in a moment of euphoria
So, let’s buy, because the important thing is to price well. When we do this, regardless of the moment, we will have a way out later. We’ve already bought at a fairly large discount. So the possibility of the owner not repurchasing land is low. And even if we buy back, we have large fat, as the land increases in value over time.
Are cultures very specific? For example, can a farm used for planting sugarcane be able to grow soybeans tomorrow?
off-season issue is land use issue. brazil empowers because of its climatic advantage. we have a regime of rain starting in september and ending rains in april beginning may. over time we developed soybeans that shortened the cycle. today it has a 90-day cycle of soybeans. to plant soybeans, harvest, plant corn and have corn. it has stretched areas, such as thatch, a smile – it starts to rain in September and into May. used to make soybeans and cotton, with high added value.
will continue to grow off-season
And the lease? What is the difference between renting and renting? Are there guarantees in the contract (such as insurance, surety, etc.)? Who is, for example, obliged to maintain the farm and its facilities?
We have a portion of land equity, in which I surf the appreciation of the land and there is no lease. The return comes in the future. So, if there were only funds in this model, it would not be attractive. We then opted for a composition.
The fund pays in cash and generally the land deal is not made in cash. This gives us purchasing power. In buy to lease, the sale can happen in a very short period, but it can also take a while. Before buying the land for this we make a strong strong analysis. We have to be very comfortable that we are buying well below market value because there is no owner repurchasing, I need the real estate charge. There’s a lot of farm to buy.
A land can have multiple owners. In addition to analyzing them, we also check the predecessors to identify if at any time there is a risk of legal issues against both. We also analyze the tax, civil and labor aspects. It’s almost an M&A. We have a legal advisor who does this, but also a good idea. We hardly analyze a business for 10, 15 days and then lose. The chance of having problems is already minimal. The problems are usually in the border areas
Purchasing a farm requires passing all contracts to the fund’s name. These bureaucracies usually take a month, requiring a service provider to stay in the city where the good is located. It’s a reasonable demand.
With the creation of FIAGRO, what about the model of funds like Terrax?
As the fund has already been launched, we will continue with the same structure. But if we were to create a new fund, we would do it for Fiagro. The CVM will have to regulate the new modality exhaustively, because it opened up many fronts. It can be classified as an agro private equity, and has the potential to be a much larger market than FIIs. Agribusiness is now bigger in Brazil than the real estate sector: it is estimated at 600 billion reais a year, which is currently in the hands of large banks. Little comes to market. In the next five years, it’s something that should explode.