A Plus for Ecuador Agriculture


Here is a plus for Ecuador agricultural land.

Ecuador farming ranges from big to small.

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Potato farming family near Otavalo.

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Dairy for organic cheese outside Cotacachi.

There is an unimaginable variety in Ecuador agriculture.

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Llamas for wool.

Ecuador corn

Corn is everywhere… huge farms and small concerns like this family nearby.

There is almost every type of vegetable… nut and fruit.

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Ecuador food market.

Amazing varieties of flowers.

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Ecuador tropical flowers.

A good case study for a specific and large Ecuador agri operation is the farming operation set up by Young Living Essential oils.

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After creating a marketing system for the oils and farming in the USA, Gary and his wife…

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moved to Ecuador… began a large farming operation as well as…

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production.

Yet Ecuador agricultural prices are still low… especially on the coast.  But don’t count on this lasting forever. The Chinese are on their way.

A February 1, 2012 Washington Post article entitled “China plants bitter seeds in South American farmland – Culture clash seen with wave of investments by Kelly Hearn says:  Few were surprised when Venezuela announced a deal with China last week to restore 1.4 million acres of unproductive farmland across the oil-rich but impoverished South American nation.

China increasingly is buying farmland and agricultural companies in South America to feed its ever-growing population, currently estimated to be 1.34 billion.
The most important aspect of China’s agricultural investment in Latin America is that “it is a part of the increasing physical footprint of the People’s Republic of China that is just beginning to occur,” said Evan Ellis, an assistant professor at National Defense University in Washington.

Central to China’s rising agricultural-industrial complex are soybeans from Brazil and Argentina, millions of tons of which the Chinese are importing to feed cows and pigs to meet a growing demand for meat.

From 2005 to 2011, China’s soybean demand nearly doubled to more than 70 million tons per year, while domestic production declined 10 percent to 14 million tons, according to SinoLatin Capital, a Shanghai-based investment firm focused on transactions between Latin America and China.

China is working to close that deficit by infusing cash into Latin American economies in exchange for allowing Chinese government-owned companies to set up shop and extract basic food goods:

• The Chongqing Grain Group has agreed to build an industrial complex for soybean processing in Brazil’s Bahia state, where it reportedly plans to invest up to $2.4 billion.

• The Hong Kong-based company Noble Group is steering $237 million to a similar project in Brazil’s Mato Grosso region.

• China’s Sanhe Hopeful Grain & Oil announced plans in April to put $7.5 billion into soybean processing facilities in the state of Goias in exchange for an annual supply of 6 million tons of the legumes from Brazil, a deal that reportedly includes building a railroad to move products out of the facility.

Mr. Ellis notes that the Chinese agricultural giant Helionjiang Beidahuang, the China National Agricultural Development Group Corp. and Chongqing Grain Group have made clear their intention to buy Brazilian land in coming years.

In Argentina last year, Beidahuang inked a deal with the provincial government of Rio Negro to help develop more than 800,000 acres of farmland and upgrade a port in exchange for soybean exports over the next 20 years.

Save $499 on agricultural tour.

Jean Marie began conducting four wheel drive agricultural tours last year.  Many readers wanted to attend this tour but also wanted to take real estate tours to see residential real estate.   So, Jean Marie came up with a great solution… any delegate on an ag expedition can attend a coastal real estate tour (normally $499) free.

Let me explain more about the agricultural expedition first than you can read about the coastal tours.

Here’s the note that Jean Marie recently sent me.

Ecuador Agriculture Business Summary

A- Introduction :

We were all taught that Investing is all about relationship between risk and reward.

But the most important point is, that we are always looking FIRST for the return of THE money (safety) before SECOND the return ON the money (yield)

When investing, we are asking ourselves these 3 questions :

–       How safe is the asset and how much does it yield ?

–       How liquid is the asset we are buying i.e. how quickly can we sell it for cash ?

–       What happens if the USD drops or goes up ?  (Ecuador is a dollarized country.)

We have been studying the Ecuadorian agriculture business for some time now and have found out good opportunities for making some nice returns.  Right now we are investing our money in Ecuadorian land as we have in the past invested in Ecuadorian real estate esp. in Bahia, which is the cheapest coast in the world.

We have assembled a team of experts in agriculture i.e. agri-engineers, business management, sales and marketing, accounting, legal areas, but most importantly we have setup a network of locals in many parts of Manabi, whom we call « spotters », that help us find the available properties at the best possible price.  These spotters live within the community and know the history, owner of each property.   They help us to sort out the deed issues and we get the also all the info :   good, bad, i.e. potential problems with water, neighbors, etc.

Our team allows us to minimize the risks associated with agri-business from knowing all about potential pest problems in an area to the date of last drought or flooding etc.

When buying an asset class, one has to ask also, how desirable that asset will be in the foreseable future.  Mankind just passed the 7 billion mark and arable land is decreasing every year.  China is buying all over the world big tracks of land to secure enough food production for their own people.  More and more land is allocated to making biofuel, which is one of the areas we are working also in Manabi.

Ecuador has still one of the best and cheapest land available in all South America.

What I have found in Ecuador is a nice RISK/REWARD combination:

–       land will never go down in price like housing has done in the past; no bubble yet

–       Ecuador law is pro-foreign ownership

–       land is still cheap : $500/hectare to $5,000/hectare depending on water availability.

–       Good labor : qualified and cheap

–       on site management by Ecuadorian experts supervised by a team of business people that have experience in managing businesses.

B- Profit potential in Ecuador Agriculture:

How much can you expect to make in Ecuador agri business ?

It depends on 3 factors :

–       price of the land

–       combination of crops

–       quality of management

We have our own team of experts  that work for us. These experts have their own farms and teach at agri-engineers schools.  For example, one of them was born in Israel (Israel knows how to grow food in the desert…) and has managed a 15,000 acre cacao farm in Ecuador.  He now manages his own farms….

Here are the 2 big questions we are always being asked : If the agri-business is so good, why are not more people getting into it and why are most Ecuadorian farmers so poor?

The answer to Question 1 is simple : It is not easy to find good available property, with deeds etc…. as Ecuadorian hold to their properties and do not sell easily. That is why I have setup a network of locals that roam the countryside where they live and where they are respected.

The answer to Question 2 is a bit more complex but has a lot to do with access to funding for poor Ecuadorian farmers, as well as business education of these farmers and mostly the famous « middlemen », that are one of the problems of Ecuadorian agriculture.

There are also a lot of rich Ecuadorian farmers….. and they are making a lot of money even by US standards.

When we talk about management :

•We choose to bring crops to the market at the ideal time of the year when prices are at the highest= timing of the planting.

•We choose crops where there is less competition and lots of demand.

•We choose crops that are ideal for the soil, water and sun.

•We choose crops that have clients ready to purchase before we plant.

•We choose crops that are least disease prone.

•We choose crops that are not too labor intensive.

•We choose crops that have big potential in the future.

•We select a combination of crops for each finca that will maximize income/cash flow and minimize risks.

•We think « outside the box » = Innovation!

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The net income per hectare is about $2,700 ; we plant a minimum of 4 ha in a specific area ;

Cost of acquisition of the land is about $3,000/ha

This shows that initial land cost will be paid back in about just over a year.

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Balsawood has a 4 year crop cycle. The wood is very much in demand worldwide as there only a few countries that can produce this kind of wood.

Acquisition cost per ha is about $2,500 on average  and can be a hilly type farm.

On a minimum 10 ha farm net income for 4 years is $139,000.

When acquisition cost of the land are deducted total cash flow on a typical 4 year period is : $114,000 and you still own the land.

For a typical $25,000 original land investment and a $17,120 investment in planting and growing (total $42,120) you will get $156,250 gross income fr the sale of the wood for a net cash flow of $114,000.

For the second 4 year cycle, the cash flow will be $139,000 as the land has aleady paid for itself.

We also can elect to farm other short cycle crops like Aji, (the red Pepper) that is sold exclusively to the Tabasco Company. Tabasco pre-buys the whole crop at a fixed price.

Cacao is another longer cycle crop as it takes 4 years to really start harvesting.  The Ecuadorian Cacao has a good reputation and sells well.

Papaya is also a very profitable short cycle crop.

An area that will see a big development is the bio-fuel and bio-diesel.  Ecuador produces already a lot of palm oil but pinon and linseed oil are extremely profitable crops as well.  The whole harvest is also pre-sold to companies that produce bio-fuel.  The price is a linked to the oil market price.

Bamboo production is also a good option on any farm and the Manabi climate is well suited for the constant growth of bamboo production.

3- Cash Flow Management:

In our development strategy, we aim to maximize regular cash flow i.e. combining on specific one fram short cycle crops like plantain or passion fruit and longer cycle crops like balsawood or cacao. This enables to minimize capital outlay to acquisition costs and first year production costs ; income from short term crops will pay for cost of longer cycle crops.

4- Management Package:

We offer a management package that we provide to our clients, who know nothing about agri-business.  It is all based on shared net revenues.

The client invests in a farm that he owns outright himself; minimum is $100,000 in order to have a nice size farm and operating cash flow.

5- Our Vision:

•Chemical free agriculture :

We only use organic and sustainable agriculture.  Organic pest control is a lot cheaper and healthier of course, the key being the ability to monetize the « organic » side of the business.

•Help the local economy and local communities in Ecuador.

6- FAQ:

Why are not more people investing in Ecuador agriculture ?

a) Ecuadorian campesinos are not business people.  They are not entrepreneurs as they lack basic skills outside their trade and they do not have easy access to cheap crédit to finance their production costs.  They often prefer a low income lifestyle than high stress work….

b) A lot of Ecuadorian farms are highly successful when run by smart educated people.

c) The big investors are just finding out about how cheap and how fertile Ecaudor land is.

What is the rate of return on the investment ?

On a 10 year average,  a good managed farm can produce between 20 and 30% return.  Cash flow is generated at the end of each crop cycle. This takes into account 2 bad years of production every 10 years, due to unpredictable weather pattern like a strong el niño.

What are you providing?

We provide the following services:

– Selection of the land: with pros and cons

– Selection of the crops for maximum cash flow and lowest risks

– Management of the farm including sales of the crops

What is our business model?

We only make money when our Client/Partner makes money. We take a percentage of gross sales payable only when money is received from the crop buyer.

Appendix 1 :Balsawood

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The balsa wood tree, scientifically named Ochroma lagopus, is a relatively fast growing plant found primarily in Central and South America. Balsa wood trees grow best under the conditions found in rainforests, ideally in mountainous terrain between rivers. The country of Ecuador is perhaps the largest exporter of balsa wood, although many local farmers consider the plant to be little more than a weed.

Balsa wood is one of the lightest varieties of wood available, but not the absolute lightest. It is remarkably strong for its weight, however. Originally, the US military sought out balsa wood as a substitute for cork during World War I, but it soon proved more useful as a lightweight construction material for gliders and shipping containers. Hobbyists also began to work with balsa wood because it could be carved easily with standard woodworking tools and bent into a number of shapes without sacrificing strength.

Balsa tree (Ochroma pyramidale, or O. lagopus) of the bombax family (Bombacaceae), native to tropical South America and noted for its extremely light wood, which resembles clear white pine or basswood. Because of its buoyancy (about twice that of cork), balsa has long been used for making floats for lifelines and life preservers. Its resilience makes it an excellent shock-absorbing packing material. Its insulating properties make it a good lining material for incubators, refrigerators, and cold-storage rooms. Because it combines lightness and high insulating power, it is a valuable construction material for transportation containers for dry ice (solidified carbon dioxide). It is also used in the construction of airplane passenger compartments and in model airplanes and boats.

The main farmers’ motivation to establish small balsa plantations (between 10 and 30 hectares) has been the demand by a local balsa handicrafts producer company that sells its products in the national and export market. On the other hand, the fast growth of the species allows obtaining economic benefits after approximately 4 – 5 years and also allows demonstrating its advantages to farmers, what is difficult to achieve in the case of species which require much longer time.

It is important to note that, to establish a plantation diminishing management costs the first year, farmers associate balsa with an agricultural crop (e.g. cassava, bananas, orito, and maize); they plant 625 to 830 balsa plants per hectare. An important point to considerer is that the plantation has to be near a road, or by a road, since this would facilitate exploitation activities and diminishes the operation’s costs, increasing in this way economic benefits.

The opportunity to supply the demand of a local market and the of crop’s quickness of returns are the features that make this case relevant. This is a practice that contributes to the development of a forestry culture with small initiatives such as those detailed in the case study.

It is very profitable business that tree is growing very fast, only 3 years old to maximum of 4 years old to be cut.

This year 2011 the domestic demand from balsa factories in Ecuador are very high, so the thousand of acres planted can not fill with the high demand from USA and China in particular. Of course the prices here have risen from $ 0.30 per bd.ft. as a balsa raw material but not dried or processed, up to $ 0.55 per bd.ft.: If before planting balsa trees was a good business, today is one of the best and fastest ways to make money with short-term forestry.

With the explosion of nuclear reactors in Japan, tendency will be for renewable energy and one of the most popular is eolic energy is applied, which are wind vanes fillings made of balsa, so expect a very large demand for this wood, where our country is world leader in quality, productivity, history and extraction techniques.

Jean Marie

See a report on Jean Marie’s last Ecuador agricultural tour here.

Jean Marie Butterlin has created a new agricultural property Expedition March 26-27-28, 2012.  This is for those of you who have asked to look at property for its potential in this field.

The Agri Business Expedition fee is $1,990/single $2,990 couple.

Attend the Agri Business Expedition and attend a coastal tour free. Save $499.

“China plants bitter seeds in South American farmland


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