Cash & Liquidity ManagementInvestment & FundingInvestment ManagementSecure Profits For Argentina’s Soy Investment Funds

Secure Profits For Argentina's Soy Investment Funds

Argentina, historically an agricultural country, has found in the recent years a new prima donna: soy. With international commodities prices on the rise, Argentina has discovered in its present primary culture a brand new way to increase its profits.

But times change and with them the traditional business ways: small farmers have been replaced by investment funds (constituted into sowing pools, or “pooles de siembra”). These new financial groups congregate investors eager to place their capital in the Argentinean countryside and take advantage of the high-level profits soybeans generate at this time.

According to the Argentinean government’s statistics, these soybean sowing pools have displaced non-profit cooperatives of individual producers as primary soy producers and they are likely to hold over 80% of the soy market’s share.

Due to their ever-increasing funds, these sowing pools are able to negotiate better prices in order to maximise their profits. During recent years, they’ve obtained significant price reductions in land renting, agricultural machinery and inputs as seed and herbicides, etc. Moreover, investors also tend to seek out insurance against ‘natural’ risks (floods, hail, etc.) reducing the risk and profit loss that arise from investing in cultures that are regularly subjected to natural disasters.

As the ‘soy boom’ continues to expand in Latin America, the soybean has become a highly profitable business in Argentina, despite the high retention rate applied by the national government. Even though these days the negotiations between the countryside and the state are stalled due to lack of agreement on the rate and type of deductions, the figure retained by the government would exceed over 40% of the final price.

How Does a Soybean Sowing Pool Work?

Some of the most important sowing pools are headed by experts (who usually have fields themselves) who organise procedures, seek tenants to rent fields and prepare planting, spraying, harvesting and sales plans. Once the business plan is defined, they seek for external investors (private capital, whether from individuals or corporations) that agree to invest in return for a percentage share in the profits. Since they handle large planting areas and production volumes, these pools can negotiate better prices with suppliers of raw materials and services, thereby increasing the profit margin for investors.

The sowing pools usually offer investors closed operating systems, meaning that they can only withdraw their invested capital (plus earnings) once the crop is sold. The open system, where investors can withdraw their capital at any given time of the process, is not common in Argentina.

Soy Profits

The cultivation of soybeans produces statistically a net profit of approximately US$2.15 per US$1 invested (2006 statistics) whereas, comparatively, the net profit of corn culture is US$0.45 per US$1 invested.

During 2007, Argentina produced over 47 million metric tons (MMT) of soy. The turnover on exports of soybeans and its products during that year exceeded US$13,500m and contributed to the Argentinean state’s treasury with over US$4,300m by way of retentions (over 42% of the value of its exports), with a net profit for producers of over US$9bn (Source: National Institute of Statistics and Censuses – INDEC).

Despite recent freak weather events that can ruin crops and the high retention applied by the government, the earning level generated by the soybean crop has become one of the most profitable business in Argentina in recent years.

Foreign Capital in Soy Investment Funds

The three largest Argentinean sowing pools, Los Grobo (that holds over 395,000 acres), Adecoagro (a company that belongs to George Soros and has over 555,987 operative acres in Argentina, Uruguay and Brazil) and El Tejar (planting more than 370,000 acres in those countries), include in their portfolio local and foreign capitals. In recent years there has been a noticeable increase in foreign capital investment for soybean crops, seeking a fast and easy way to generate profits in a low-risk investment plan.

One of the latest and most interesting cases is that of the Brazilian investment fund ‘Investimento em Participacoes’, which in February 2008 invested over US$100m in Los Grobo. By this means they took control of a minority share of one of the most profitable companies in the region that has, among others, an ongoing contract with the Venezuelan’s government to produce 247,105 soy hectares in four years. In addition, with this new alliance, Los Grobo is trying to export its business model to Brazil, the world second largest soy exporter, in order to maximise the profits that arise from soy crops and expand their planting and business area.

Soybean Future

Almost 95% of the soybeans produced in Argentina are exported to countries like China, which due to its rapidly-growing economy is demanding more commodities and raw materials to meet the demand of its domestic market. The soybean is used primarily as fodder for livestock, necessary to meet the increasing overall meat demand.

Moreover, with technology development and the worldwide need to generate non-petroleum fuel options, soy biodiesel from soybean oil is becoming one of the most cost-effective alternatives and guarantees an escalating soy demand for the next years.

Furthermore, statistics show that, in recent years, the European Union and China have increased their soy demand and that the upward trend will continue over the coming years. This trend, combined with rising international prices for soybeans, will result in greater gains for soybean sowing pools investors.

Argentina’s Soy Numbers

  • In Argentina, the greatest soybean production booms were between 1999-2000 (when its production raised from 21.20 MMT to 27.80 MMT) and 2003-2007 (from 33 MMT to 47 MMT).
  • Almost 50% of grain production and 55% of arable land (approximately 10% of the Argentina’s total territory) is aimed towards soy.
  • According to the US Department of Agriculture (USDA), Argentina is the world’s third largest soy exporter and accounted during 2007 for 21% (47 MMT) of the total world soy production. The US (largest global exporter) is responsible for 32% of the market share (70.4 MMT), whereas the world’s second largest soy exporter, Brazil, produces over 61 MMT (23% of the market share).
  • Argentina is also the world’s major soy meal exporter: during 2007 it sold 29.3 MMT (51% of the market share), whereas Brazil (the second largest soy meal producer) only exported 12.9 MMT (22%), followed by the US with 7.9 MMT (14%). Soy meals refer mostly to soy products as soy oils and flours.

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