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Contrarian? Or Damned Fool?
The next stone, the next acre and the long road ahead
Bill Bonner, reckoning today from Dublin, Ireland...
We’ve come up to Dublin for a few days to help take care of a grandchild.
Before leaving home, we decided to spend a couple of days working alongside Mick and Connie, the local stonemasons. They were building a wall on the side of our garden until Mick came down with COVID. Then, the project stalled for almost a year. Here, we’re helping them to pick it up again:
(Photo: Your editor - right - contemplates the next stone)
(Photo: Securing the perimeter)
We’ve done masonry work for 50 years… but very little stone masonry. Mick is a real old-time pro. We thought we might learn something from him.
“It’s not the stone you’re laying that you need to worry about,” he said. “It’s the next one that gives you trouble. “
Thus had Mick brought into focus the problem of all human life. Actions have consequences. Today is followed by tomorrow… which is when the troubles arrive.
Mick was merely pointing out that a poorly laid stone makes it difficult to pose the next one on top of it. But the principle is universal: problems always reveal themselves later.
It may be fun, for example, to have a fling with the hat-check girl. But then what?
Rob a liquor store? Same problem.
Try to goose up the US economy with artificially low interest rates (below zero in real terms) and printing press money? Yeah… there will be Hell to pay.
The Cost of Doing Business
But we are going to desist from our usual old-school, middle-American moralizing…
…instead, we take up a practical Dear Reader’s question.
Our reader has noticed that we own a lot of non-performing real estate. He guesses, correctly, that they must cost us money:
From following you all these years, I know that you own many properties around the world including several hundred thousand acres of land. Having been involved in the real estate business for 40 years, I know that without substantial rental income these properties become a drain. So my question is, does someone in your position think about the effects of negative cash flow or does it continue to be the cost of doing business?
Our reader puts it politely, but the gist of his question is: what kind of fool are you; what about the consequences?
Herewith… an explanation.
And we begin by taking the high road: not everything we do is intended to make money.
We have farms in France, the US, Nicaragua and Argentina. None were bought as serious farm investments (although… we had hopes!) We lose money on all of them.
Is this a good idea? Probably not. Each one makes us poorer. But, heck… we have no other expensive tastes or hobbies. No fast cars. No corporate jet. No art collections. No racy girlfriends. No yachts. We rarely travel for fun (besides, it’s not much fun anymore.) Our houses are modest. We drive a Ford F-150. We wear Lee blue jeans.
If we have a weakness, it’s property. We like owning it. We like fixing up old houses and restoring old fields, fences and gardens. And we tell ourselves: after all our improvements, maybe… when we finally shake the clods off of our boots… maybe the grandchildren will be able to sell them at a profit.
Or maybe not.
And since, as our reader points out, these properties produce ‘negative cash flow’ we have to be careful. Annual negativity could overwhelm the eventual positivity, such as it may be.
We’re also getting older. In the final innings of our career, we’re learning how to bunt and walk – how to cut costs… increase income… and invest in better land. And, overall, we’re almost at breakeven!
Yes, while we own a lot of ‘non-performing’ farmland, we are also buying performing farmland. And here is where our globe trotting gives us at least a broader perspective. We’ve become ‘contrarian farmers.’ No… we do not plant backwards to fool the crows. Instead, we are buying land in Argentina.
Here in Ireland, we were bidding on an adjoining farm. The bids went up and up… until the price was over $12,000 an acre. We gave up, figuring that the local bidder wanted it more than we did. At that price, it’s hard to see how it could ever be profitable. But like us, the Irish like owning land. Perhaps it brings a psychic benefit that doesn’t show up on an income statement.
Meanwhile, in France, in Poitou, land sells for only about $5,000 a hectare… or about $2,000 an acre. It was always poor land. Still is. And the rental income is running about $50 per acre/year – a rate of return of about 2.5%... not enough to cover the taxes and maintenance.
In the US, in the Upper Midwest, rental rates are running about $225 per acre. Iowa farmland is trading hands at about $7,000 an acre. So, the return on investment is only a bit better than in France.
Crop yields are heavy in the US. And prices are high. Farmers should be doing well. Trouble is, costs are rising sharply too. Potash, nitrogen and phosphates approximately doubled last year. Costs for fuel, pesticides, herbicides and seeds are also going up. Farming is no clear winner in an era of rising inflation.
Meanwhile, down in the Northwest corner of Argentina, there may be a unique opportunity. A terrible drought has wreaked havoc. And whatever damage nature leaves undone, the Argentine government fills the gaps. Effectively, farmers cannot sell their land to foreigners – substantially lowering market demand. And even if they could buy, non-Argentines would find that they couldn’t repatriate their profits except at the ‘official rate’… which would wipe out at least half the value of their earnings. The peso is getting cut in half each year. Shortages of machinery, fuel, and chemical products bedevil the hard-pressed gaucho farmers.
There is not yet any light visible at the end of this tunnel. And it’s rather amazing that there’s any market at all for Argentina farmland. But there is. And prime cereal land – good for wheat, soy, corn or other field crops – sells (up in Salta province) at about $1,200 per acre, an 80% discount from US prices.
Crop yields are lower than in the US. But so is the dependence on fertilizers and pesticides.
This leaves, we believe, the Argentines in a strong position among the world’s low-cost producers. And in recent years, returns to investors have been running between 5% and 10% (not counting farmland capital appreciation).
In any case, our goal is modest. We only seek to make enough to cover the losses on our other Argentine farming ventures. Then, we can leave the farms to our children with a clear conscience; at least, they won’t be a burden.
We’ll be heading back down to the pampas in March… to have a closer look – stay tuned for an update.
P.S. None of this should be taken as investment advice, by the way. Land is not fungible. Each situation is unique. Each requires management… and careful, detailed knowledge of the facts on the ground.
P.P.S. Readers interested in our high-altitude, Argentine wine should visit our webpage, here. It is sold in the US, but by subscription only.