Buck: Welcome back to the show everyone. Today my guest on Wealth Formula Podcast is David Smith who is an Agricultural Advisor at Paraguay AG invest. David, welcome to Wealth Formula Podcast.
David: Well thank you very much, Buck. I appreciate the opportunity to share the information that I have with your listeners. Thank you very much
Buck: Good. So I’m gonna start out first of all you know obviously you’re not from South America. How did you get interested in the agricultural space and ultimately end up down in Paraguay?
David: Well initially I got involved in real estate sales and development in Latin America. At one time I lived in Nicaragua and I opened up the first Remax franchise in Nicaragua back in the early 2000s. So I had a previous career with Panasonic company the Japanese electronics company worldwide and after I decided I wanted to get out of the corporate world a little bit and do something different, I came to Latin America and very shortly I found myself involved in real estate.
Buck: So why real estate and outside of the US? Why real estate in Panama or Nicaragua or Paraguay?
David: Well you know that’s an interesting question because it wasn’t planned it just happened to be that you know when I went to Nicaragua which was the late 90s there were very few tourists there, basically a country that was ring from of course you know that sandinista wars with the Contras and so forth but it was beginning to open up slowly but surely. So over a period of time when tourism started becoming more popular I had primarily North American and Canadian tourists approaching me and saying hey David you know you don’t think about property here in Nicaragua and I’m looking for a beachfront lot or I’m looking for a colonial home you know and so it just evolved over a couple of years into a real estate franchise.
Buck: So how do you go from a real estate franchise to then getting involved in the agricultural business?
David: Well again it was a little bit unplanned but not actually because when I decided to move to Panama ten years ago, I also continued you know with my involvement in residential real estate, you know condominiums and things like that. But a very good friend of mine who’s a very savvy financial consultant and investor himself would remind me periodically that agriculture is a very good diversification and he said look you know you need to protect yourself a little bit from the markets you need to try to you know have a little alternative and you know portfolio in things that are not bubbled, which you know as we all know residential real estate and commercial real estate can be. And so I began to take his advice and then when I decided to liquidate my real estate holdings in Nicaragua I thought well that’s a good time to explore and look around and see what’s available and so initially I invested in an agricultural project here in Panama and that entails organic avocados and mangos and things like that and once I got involved in it and when I understood the business model you know of it being a basically a private placement with a hard asset I liked that. And so the company that I actually invested with asked me if I’d like to work with them because of my many years of involvement in real estate in Latin America.
Buck: Got it. So okay so if the listener has no experience or exposure to, let’s start with the general concept of agricultural investments you talked about you know I guess some lack of market correlation but what’s the case for investing in agriculture?
David: Well agriculture as we all know is the production of food. And that’s a basic human requirement and the demand is constantly increasing of course, you know due to the increase in the human population in the world. Other factors are the disappearing arable land that’s available around in most countries especially the most productive countries like the United States and from a financial point of view it’s a it’s a good hedge against inflation and actually as I mentioned before it doesn’t really have any correlation with the stock market or with bubbles involved in other types of real estate investments.
Buck: Right, although then it has its own inherent risks, right?
David: Well certainly you know there’s certainly you know there’s almost no investment as we know that doesn’t have a risk. I suppose at the end of the day there could be a massive price drop and food for for whatever reason you know I mean nothing’s impossible these days but I think that’s probably the most unlikely.
Buck: Let’s talk about some of the things other things that I think would be useful because this is a you know it’s it’s not a straightforward you know investment specifically now we’re talking about something that’s overseas which on its surface may sound you know might sound sexy to some people and but isn’t there some additional risk when you’re with countries outside of the US dealing with their laws dealing with their regulations?
David: Well certainly yes and I think that this is important part of the due diligence process. I think that anyone who’s seriously interested in making this kind of investment needs to ask the very questions like you know what are the laws, what are my rights, what are the risks, you know legally, besides the fact that there are obviously natural risk you know rain or hurricanes and different things like that but as far as investing in other countries, you you really need to do good homework and I think that whoever you talk to, whether it’s me or any other agricultural advisor, you need to ask specific questions about the country itself and what are the laws, what are my rights, what are the conditions for title and things like this. This is very important these are the same questions that I asked myself when I came to Nicaragua a long time ago.
Buck: Well yeah and to that point I mean part of what I’m trying to get at is you know you just mentioned coming to Nicaragua a long time ago, you also have to look at you know political stability of a country right I just know the regulations and laws today doesn’t mean they’re gonna be the same tomorrow, that’s another issue. And how about in terms of you know the what specific sort of types of things does a US investor need to know when it comes to things like you know taxes any sort of tariffs or whatever you know special forms that would need to be filled out if you own or invest outside of the US and Paraguay. I mean are those types of things you know where they fairly straightforward what kinds of things that people deal with?
David: Well in in many cases about they are straightforward a lot of it depends on what exactly is the motivation of the investor. And what I mean by that some investors if they buy say they buy a lot of oranges from me they may very well title that lot in their own name. However there are other investors one might say a little more sophisticated that use entities such as offshore LLC’s, perhaps they use an LLC in the United States you know Delaware and things like that and in that case it becomes just a little bit more complicated because they have to create the entity and then they need to decide how they want to receive any disbursements. Now regarding taxes in the United States it’s pretty straightforward, for example we create a financial statement at the end of the year and we provide our clients with that especially our North American clients generally early January so that they have that information for their tax accountant to to do their taxes in April. Now the the format that we’ve been seeing is that it’s actually surprisingly the requirement by the IRS is pretty simple at face value. You declare the income that you’ve made from this investment overseas, you also declare how much tax you’ve paid and then the IRS will calculate what taxes they would charge on this kind of income and for example if you’re paying, in Paraguay, the income tax is 10% on income. So if the IRS is charging 15% on this type type of income then you would get a credit on the ten and you would pay the five to the IRS. This has been sort of the standard procedure for IRS. So presumably we’re talking about ordinary income here you know ordinary income there’s no significant tax benefits to this kind of investment is that right like in with other types of real estate.
David: No there’s not.
Buck: Okay, got it. So let’s talk about the specific opportunities you have. One of them involves some oranges. You want to talk about, tell us a little bit sort of the you know high-level on how that works?
David: Well, you know we have a very interesting business plan with regards to what we grow and what we sell. What I mean by that is most of the other agricultural projects that I know of in Latin America are primarily focused on the export market. With regards to my mangoes and avocados here in Panama the vast majority of them are exported. However in Paraguay mr. Carsten Pfau who is the owner of Agri Terra AG and has lived in Paraguay for about 30 years. He has basically focused on the import markets in Paraguay. And that means in Paraguay, about 85 percent of all of the orange products that are consumed in the country are imported, okay.
Buck: You mean people who are consuming oranges within Paraguay?
David: They’re primarily imported, not grown in Paraguay. That’s what I mean. I mean there there are some plantations, we being one of them, but the vast majority of the produce whether it’s orange juice or whole oranges or pulp and things like that, it’s all imported. So Carsten has focused on competing against the imports in Paraguay. So after after the best study of what it takes to to implement this kind of program he realized that okay this is a long-term type of investment because Paraguay you know most people some people know that Paraguay is a big agricultural powerhouse in Latin America. But the power of the agriculture in Paraguay lies in two sectors. One is cattle, and the other is row crops such as soybean things like that. They don’t really focus on citrus and things, they import all that mostly, from Brazil if you will.
Buck: Why don’t they grow it there? Is there something about the land that makes it less I mean, is it just not naturally grown there?
David: Well it’s grown there, but it’s more than anything it’s just a matter of tradition. It’s just traditionally been that because I mean they have massive farms there I think Paraguay is maybe the fourth or fifth largest exporter of soybean in the world and corn and chia, wheat and things like that you know and these are products that you know the turnover once you plant them is within five to six months. But in the case of an orange tree you need to invest in the trees and all of the crop care for four years before you get a return. So this is a different process so traditionally in Paraguay this has not been done because the restaurants and the supermarkets and things like that they buy them mainly from Brazil. So Carsen’s idea was how can I compete and make money against the imported produce? And he’s put together a pretty good system which is based upon of course lower land cost, lower electricity, labor cost and he can compete quite well against them.
Buck: So in this scenario the market that you’re after to sell these oranges is local.
David: It’s all local.
Buck: Do people pay as much for an orange in Paraguay as they do in the US or other countries that you that you would otherwise possibly export to?
David: I think they pay more in the United States but there’s no way that a small operation like ours could compete with Brazil for example. Brazil is the largest grower of citrus in the world.
Buck: So how big is your operation or how small? How many people involved?
David: Well currently right now we have a little over 1,400 acres of orange and different citrus trees.
Buck: Yes that’s pretty small right so 1,400 total?
David: 1,400 acres yeah we’ve got others I mean we have more land that we’ve already purchased. We will never stop planting orange trees we will never stop doing that so it’s a question of and this is an operation that’s only been in business for four years the knowing just paid out our first returns you know just this year so it’s an ongoing process. I mean Carsten is constantly buying more land to keep growing. It’s a long-term investment but now we’ve got you know we’ve got about a hundred and fifteen thousand threes in the ground by year’s end prop all not years in early the first quarter of 2020 we’ll have about two hundred and five thousand trees in the ground.
Buck: So the model that you have for potential investor is as I understand it to buy real estate, buy these parcels of land with orange trees on them is that right?
David: Yes the business model is comprised of two parts. The first part is a simple real estate transaction. So that means you purchase the land and the land is titled in your name, fee simple title with all the rights that you’d have in the United States or here in Panama where I live. The second part is the farming service agreement. And basically what you do as an investor you make an agreement with the farming company to manage your investment your and your treats for the term of the contract in that case and with oranges is 25 years okay. So basically once this agreement has been signed and the investment has been funded, then begins the implementation saplings and the trees and they basically do everything including harvesting and selling, you pay the tax at the end of the year and the net profit then is returned to the investor.
Buck: So this company or this operator that does that, that relationship how do you know that that relationship is stable for 25 years? I guess I’m I’m looking at this as an investor you know and these are the kinds of questions that come in my head it seems like there’s this moving part of this relationship that’s required with an operator overseas. Can you kind of describe the nature of their relationship?
David: Well Agri Terra SA which is the South American company of Agri Terra KG which happens to be a German company, they are the operator
Buck: How long have they been around?
David: As long as Carsen’s been there they’ve been around 25 years. So they’ve done other projects while different types of things but the farming company is part of Agri Terra KG that’s why the agreement is basically signed and the agreement is under jurisdiction of German law because it’s a German company. So in order for for Carsten to offer this kind of investment in Germany the jurisdiction must be in Germany and an added feature which I think is very important to mention which is which provides a high level of security for the investor is the fact that because of the German jurisdiction and the requirements in Germany, the company the Agri Terra KG in Germany must provide insurance on the investment so the investment has ensured two ways: one against financial embezzlement and number two against natural disaster. So this is this is really a very important element in what we offer there because I can assure you I don’t know of any other agricultural investment where it’s insured against these types of issues.
Buck: Right and and that’s so the German coverage insurance coverage would extend to US investors.
David: That’s right to everyone that’s correct.
Buck: Now and and presumably that operator relationship is is basically some kind of percentage of production is that right?
David: That’s correct yeah. But going back to your original question about 25 years if I may address that. You see the actual farming company because Carsen is the owner of the farming company, it is a family owned business and they themselves own approximately 40 percent of all of the orange trees and all of the land themselves. So their idea, in order to become really big you have to buy scale, invite a lot of people to come in and invest in orange in the orange plantation so that you can plant the trees quickly. So what I mean by that is Carsen has a lot of personal equity in the projects. This is not all just investors’ money. A large portion of it belongs to Carsen and his brother who are the owners of the company.
Buck: Got it and but as I understood it though that this this particular project was only there for about four years so the 25 years is referring to how long the operator has been doing this kind of thing but not necessarily in Paraguay, is that right?
David: Yes they’ve been doing it primarily in Paraguay the actual farming company although Agri Terra SA has been involved in in many things in Paraguay for 25 years residential commercial construction and things like that.
Buck: Got it so you mentioned a period of time I think four years here by plot of land and you’re effectively you’re not going to make anything for four years?
David: That’s correct. Three and a half or four years.
Buck: And then after that four years then what?
David: Well what happens then is you see when you when you invest initially and a lot if I can I can give you just an overview numbers, if you buy our smallest lot which is six tenths of an acre that investment is nineteen thousand five hundred dollars. That includes not only the purchase of the land but also all of the expenses for crop care and operating costs through the time of the three and a half years up until you can actually receive a harvest and receive an income, you see because there’s a lot of things to be done to citrus fruit all the time. Now once after four years once you begin to actually produce the oranges and receive your ROI then the investment becomes, it basically pays for all the costs going forward. So there’s no more there’s what I’m saying is the initial investment is the only investment that you need to make, they will then pay for itself it’ll pay for all the operating costs and everything going forward.
Buck: Understood and and you know the whole period presumably you could sell presumably at some point but let’s talk looking is gonna start making money at around four years do you have some kind of a projection presumably like on a ten-year pro forma or something like that? What kinds of yields are you projecting for people who buy this stuff or if you I don’t know if you do those I presume you do.
David: Oh yeah of course we do I mean in all of our brochures we have ROI spreadsheets that are set up for 25 years that outlines all of the costs going forward, you know such as the well actually we can forecast how much fruit will be harvested on the lot. It starts there. And then you have your operating cost and then the management fee which is which is quite reasonable which is only 5%, and then you have your pre-tax harvest proceeds, your tax and then the net ROI payment to the investor. To give you an idea of the annual ROIs in year four when you first receive a small harvest, the return’s about 11 percent. Now up and because you have to understand that the trees are growing and basically citrus trees they grow in a curve of maximum production and this the curve starts going down okay. So we’re starting from 11 and we’re peaking in year 13 14 and 15 there you’re up around 26/27 percent annual ROI. Then at that point it’ll go down to 23 20 20 19 and then ultimately in year 24 about 16 percent. And so and then what happens is in year 25 all of the trees are removed, they’re cut down and they’re sold for very valuable firewood in Paraguay because of the forestation controls there and then you begin the whole process over again. So it’s a generational investment.
Buck: Yeah. So when you calculate that you have like an IRR?
David: Sure, we have an IRR as well. The IRR over the term is almost 15 percent
Buck: Got it. Let’s talk a little bit about the other project while I have you I want to make sure we at least touch on it, the greenhouse project can you give us sort of a high level on that as well?
David: Well the greenhouse this is also very interesting because again it’s focused on the local market. Everything that we grow in these greenhouses which happen to be cucumbers, tomatoes, red and yellow peppers is sold on the Paraguay market. The main reason for that is obviously these are some of the ingredients that are used in almost every meal in Paraguay. Now in a case of vegetables the climate in Paraguay is not conducive to growing these types of vegetables mm-hmm they are done it is sold but very low level demand very low end product and again the supermarket’s, the restaurants many of the food distributors, they import these products from Argentina. So they’re imported and they’re quite expensive as well. So this is another focus on competing against the importers, which we can do quite well. Now in the case of the greenhouses this is a much more straightforward investment in terms of returns and what I mean by that is the greenhouse is a substantial investment. If you want to own an entire greenhouse and the land it’s three hundred and twenty thousand dollars, okay? The land is approximately one point two three acres and the greenhouse is half that size. The return on that is within twelve months of funding the investment. So what that means is once the investor funds, we place the order, we receive the greenhouse in about two months to two and a half months, we build it, we plant it and within five months after that you have the first return.
Buck: Do you have a sense again of sort of a pro forma type thing in there as well?
David: Oh yes yeah and we also base the forecast on current information that we receive from the Ministry of Agriculture in Paraguay that gives us wholesale pricing curves so we know exactly what we’re projecting, however Carsten tends to lean toward the conservative side mm-hmm so I would say on our on our orange projections he could be anywhere between 30 and 20 percent a little more conservative than the numbers that are actually out there, in the case of the vegetables, he’s a little bit closer he’s about 5 to 10 percent below what these numbers indicate. So if you look at year 1, the net income to the investor is 16.11 percent and in dollars that’s about a little over 51,000 dollars the first year. How long did how long does the green house last?
David: Well the green house structurally can last if it’s maintained properly 30 or 40 years if it’s maintained. One important note though when I mentioned this first year number on the ROI you will notice that there’s no income tax for the first four years of income. And the reason for that is the government of Paraguay has offered an incentive for people to invest in green houses.
Buck: So there’s no income tax in Paraguay but there’s you know I’m sure the United States. So all you’re doing there is replacing the US income tax the Paraguay income test correct
David: So that’s what they’re doing they’re on their rate apparently yeah and then the term of the contract on the greenhouses is ten years okay and there’s a very good reason for that. In a greenhouse operation this is not a hydroponic greenhouse or anything like that, it’s a regular organic type greenhouse. The components that are used heavily used in a greenhouse like this happen to be cooling compressors, the irrigation system lighting and things like that. And so what has to happen then after the end of ten years we bring in an evaluation team from the basically an Israeli company located in Brazil. They come in and make an evaluation on what components need to be replaced. And we’ve determined that the amount that you would spend after 10 years on renovating the greenhouse is somewhere between 45 and 50 thousand dollars to get it back up to spec okay. So once that is completed then we will sign another 10-year contract.
Buck: So the the cost when you’re giving projections in terms of the income that’s coming out for those is that included the costs of the greenhouse I mean is that net operating income that’s coming off or is that gross income
David: That’s net. Now we do not, we do not forecast the the renovation cost or anything like that, that’s basically left up to the investor. However, what’s very important to note here about the greenhouse it is if at the end of ten years for some reason the investor decides not to proceed with the renovation, then he must sell the greenhouse. We cannot have in an operative greenhouse sitting there, because we have we have 50 of these. It’s very important.
Buck: Got it so. All right well good is there what else what else do you think we need to know before we we close this out I want to make sure you have an opportunity to tell us anything else you might have missed.
David: Well I think it’s important to note that you know investors are looking for I think more security in the times that we’re living in right now you know I think the stock market is going to be severely tested here shortly and I think that people understand that you know real estate markets go up and down this is nothing new and if you would like to diversify your portfolio, I think agriculture is a very, very important part of that. We feel that if you do good diligence do really good due diligence, many of the people come to Paraguay we offer tours from time to time we offer private tour sometimes we we advertise them, I suggest come down and see it for yourself you know meet the company meet the operators you know and what usually happens is this. If someone wants to go they will meet me here in Panama City where I live and then I will accompany them down to Paraguay okay we will spend two or three days there and they can see the entire operation, they can they can meet you know Carsten Phau who is the owner of the company and I think they’ll be very impressed with the professionalism of the operation and I think once that they understand what we’re doing and they see what we’re doing, they’ll realize that it’s a pretty secure investment it really is.
Buck: Great. Well listen how can we learn more?
David: You can go to our website which is paraguayaginvest.com and there you will see many videos, photos there’s a lot of information, we got a lot of testimonials there about our current investors, there’s a lot of information on our website and you can download the brochures and then if you would like to have you know consultation with me, just send me an email at [email protected] and we usually respond within a day or two and yeah and then we can also provide you with other information like the insurance coverage, we can also send an executive summary as well, if you will so there’s a lot of information available.
Buck: Excellent. David thank you thanks very much for being on Wealth Formula Podcast.
David: Well great. Thank you so much, Buck I really appreciate the opportunity to speak with you and I want to thank Michael Flight for making this possible.
Buck: You bet. All right, we’ll be right back.