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brazilian agriculture diversification as it acquires underperforming, over-levered smaller producers that are not sufficiently diversified. The Brazilian venture is mostly coffee and sugar focused, says Leonardo Berridi, Land Banks Eye Markets director of Adecoagro’s Brazil operations. It The Radar and Calyx approach is similar to purchased the up-and-running Usina Monte BrasilAgro’s business plan, which was all Alegre in Minas Gerias in 2006 and has the São Paulo-based developer had when it three greenfield mills planned for Mato raised $276 million in an April 2006 IPO. It Grosso do Sul. In addition to crushing more has since bought eight farms in Brazil’s northeast, center-west and southeast. Some than 3.5 million tons of sugar cane per year, are small – two to five hectare farms it is eyeing 14 gigawatts of bagasse-fired generation by 2020, competing with the bought on the cheap from distressed likes of Cosan and SLC in government owners – while others are 20-40 hectare capacity auctions. tracts of virgin land. Adecoagro has relied on private funds In July, BrasilAgro sold the Engenho from American and Argentine investors, but farm in Maracaju, Mato Grosso do Sul, in Berridi admits this will the first small test of its eventually have to change. “We business plan, netting 21 Brazilian Agriculture Stocks always work with an IPO on the million reais, an IRR of 64% Underperforming the Bovespa horizon,” he says, adding that according to Itaú, which when market conditions viewed the sale as a positive 50 70,000 improve Adecoagro would use step. With only the one sale in two 45 60,000 both the Bovespa and foreign years of operation, BrasilAgro also 40 needed to have an external markets to go public. 50,000 35 evaluation to accurately asses its Adecoagro will have to raise total value. In July Deloitte & funds in some manner by mid30 40,000 2009, even if market conditions Touche valued its seven farms at 25 are such that this means 670 million reais. 30,000 20 BrasilAgro Cosan Bovespa another private round. The The Engenho sale does not 15 20,000 company uses bank credit from provide a real test for the plan, as 10 time to time, but like it was a smaller farm that was 10,000 5 competitors, carries very little bought from a distressed seller debt. and quickly flipped with almost 0 0 Oct-2006Jan-2007 Apr-2007 Jul-2007 Oct-2007Jan-2008 Apr-2008 Jul-2008 Sep-2008 Berridi says sales of its land nothing in capex or management or renting out farms are also spent. Still, the sale and Source: Economatica possible. Of the two sides to its evaluation pave the way for a business – production and land appreciation hectares, and the company plans a 50% second capital raising. – Adecoagro remains focused on the former, increase by next year. Aguiar sees “We will, depending on conditions, where it is most experienced. Although likely approach the market in the next 12- competition increasing over the next five 18 months looking for more resources,” years, and a big hike in land value in Brazil ethanol poses challenges to entry, being a Aguiar says, adding that it is especially as that happens. At the moment, he says more complicated production process, there is enough land for at least 10 other Berridi says there is plenty of room for important to attract new investors. He competition among growers in Brazil. estimates that BrasilAgro could raise 200- similar companies. The main difficulty for agricultural 300 million reais from such a sale. There developers is convincing the investing is no immediate hole to fill, Aguiar says, Waiting on the Markets public to grant them funds needed to but capital would be needed to continue BrasilAgro attempts to straddle the line continue to expand into Brazil’s more than the BrasilAgro growth plan at the between being a true land bank operator, 50 million hectares of potential farmland. planned pace. like Brascan or Projeto Radar and being a The first to tap equity markets next year will “There are a lot of options with the pure grower. The growers are meanwhile face memories of cancelled real estate IPOs development banks for long term getting bigger and diversifying. financing that is sub-Libor,” he says. Argentina’s Adecoagro produces grains, like Summer and Global 4, as well as of the Borrowing from commercial banks for sugar, coffee, beef and dairy products and smaller farmers, such as Caramuru and acquisitions is expensive at the moment. Grupo Maggi, that did not even make it to recently moved into Brazil. It too is The firm will hold out to raise equity consolidating operations and buying larger the gate last year. Developers who wait too long, however, may find that the market is blocks of farmland in Argentina, Uruguay capital as long as possible. overly crowded. LF and Brazil, seeking economies of scale and The key for the developer founded by possibly sell farmland in Brazil, Argentina, Uruguay and Paraguay. Hinsch says an IPO is about three years away, after additional rounds of private fundraising. Argentine grower Cresud, alternative asset manager Tarpon Investment and billionaire Cyrela chairman Elie Horn is making the scale work, says Aguiar, noting that his shop can hedge better than most rural producers. Geographic diversity in the portfolio offers climate insurance. A platform that allows farms to rotate between soy, sugar, timber and even cattle provides additional protection against price fluctuations, as do derivative hedges on prices and foreign exchange rates in Chicago and São Paulo. The goal is not to produce, although BrasilAgro is content to do so as long as necessary, focusing on exit value rather than exit date. The operational portion of the plots is about 13% to 14% or 22,000 October 2008 LATINFINANCE 39

Latin Finance - October 2008

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