Big Ag South of the Border: $CRESY, $LND $IRS

The Gold, Oil, Land Inflation Protection Strategy

The original version of this article contained a pretty serious data error. You have my apologies, I will endeavor to do better.

Welcome to the “Gold, Oil, Land Inflation Protection Strategy” series where I discuss businesses in the sectors that historically outperformed the last time that the US went through sustained inflation.  Although I try to avoid macro musings articles, for a quick review of my thoughts, you can find them here:

Today I am focusing on agricultural land; this is an area where there is a lot of interest from investors, but a dearth of publicly traded companies.  

Take a company like Farmland Partners (FPI), for a half a billion dollars, you can own a company that owns 171,000 acres of farmland and does modern day sharecropping.  At that price you get a five year average revenue of around $55 million, and five year average net income of around $8 million.  That’s right around 9x sales, and a backward looking price to earnings ratio of 60, maybe a forward looking price to earnings ratio of 30, and little growth to speak of.  That is an aggressive bidding up by investors who want exposure to publicly traded farmland.

Or, you could try Gladstone Land Corporation (LAND), a farmland REIT with 116,000 acres of farmland, and a similar market capitalization of right around half a billion dollars.  But this time you have negative net income for the last five years, growing revenue, but growing share count as they issue stock to make purchases.  Trailing twelve month revenue of $90 million versus 2020 revenue of $57 million; the growth shows some promise.  The 4% dividend yield is essentially a distribution of depreciation.  Again, aggressively bid up by investors eager to own the earth, and why not, God isn’t making any more of it, so the saying goes.  

But 30x earnings, or no earnings at all, aren’t really that attractive to a value degenerate.

But if you are willing to step outside of my US centric bias with me for a moment, there are opportunities to our South.  For almost the same price, $472 million market cap and $480 million market cap, you could own BrasilAgro - Companhia Brasileira de Propriedades Agrícolas (LND) or Cresud Sociedad Anónima, Comercial, Inmobiliaria, Financiera y Agropecuaria (CRESY) respectively.  I have always loved how the Iberians handle names, the longer the better.  BrasilAgro is a twenty-year-old Brazilian agricultural land development company with about 500,000 acres owned, and another 150,000 leased , and Cresud is a ninety-year-old Argentinian conglomerate with about 750,000 acres as well as a 55% ownership stake in 3.5 million square feet of commercial real estate. 

As a land development companies, both BrasilAgro and Cresud acquire rural properties, spend capex to convert them into farms, and sell about 3% of their finished farmland inventory each year for a profit. They also harvest the crops on their inventory in the meanwhile.  They are a bit like the DR Horton of soybeans.

As a conglomerate, Cresud owns 35% of LND as well as 55% of IRSA Inversiones y Representaciones Sociedad Anónima (IRS), a commercial real estate developer and landlord of the previously mentioned commercial real estate in Argentina including 15 shopping malls. IRSA owns 30% of Banco Hipotecario S.A. (BHIP.BA) making this a full on Japanese style keiretsu. Cresud also owns an agtech subsidiary Agrofy, and a commodity trader ()fyo but as these are privately held they are difficult to value.

Cresud property portfolio (includes BrasilAgro)

BrasilAgro source of revenues:

CRESY source of revenues:

For both LND and Cresud, the sale of approximately 3% of their farmland each year is a significant part of their revenue. As developers, they occasionally buy large tracts in more rural areas and develop new farms to replenish their inventory. But you can see from the price appreciation in Brazil below, that this separates them from the two US based farmland sharecropping companies, FPI and LAND.

Both LND and Cresud are level 2 ADRs, which means that they have agreed to submit more documentation to the SEC than is necessary to be a level 1 ADR, but not enough to be a level 3 ADR. Only a level 3 ADR can use the US stock market to raise capital.  As an investor, this might be the sweet spot, more disclosure and better GAAP accounting, but no risk of dilution from a seasoned equity offering on the New York stock exchange.  Of course they can dilute with their own stock markets, but changing share count much isn’t really in the corporate culture of South America. What is in their culture is only paying dividends once a year, and only when they can afford it.  Due to the variability in payout policy, LND and Cresud aren’t a part of the “Probably Not a Value Trap” series, even though LND has qualified since 2021.

Regarding incentive alignment of management, Cresud is 38% owned by Eduardo Sergio Elsztain, one of Argentina’s wealthiest businessmen and largest real estate developers.  And since LND is 35% owned by Cresud, they both share the same incentive alignment.

There are political risks in Brazil and Argentina, on the one hand you have Lula, and on the other, Milei. But the real threat to the agricultural business is the weather and agricultural cycles. We are currently in a down cycle for soybeans, partially due to the collapse in soybean oil for renewable diesel. The agricultural revenues of both LND and Cresud have been weak for the first part of 2024, and show no signs of reversing in the immediate future. If that means putting these stocks on a watchlist and waiting for a breakout, I wouldn’t consider that imprudent. If you have a longer term view, I wouldn’t fault anyone for buying them here. I have the filthy habit of catching falling knives, so I am starting to accumulate a position in Cresud.

Once again my apologies for the data error in the previous version of this article. But as fortune would have it, while I was digging further, I found another data error, this time one that paid subscribers can benefit from: