Olivier Combastet is the founder and president of asset management company, Pergam Finances which oversees assets valued at 800 million Euros. He answers our questions on his company’s investments in South American farmlands.

Can you tell us more on your investment strategy in the agricultural field and more specifically what lead you towards this approach?

Since I am at the helm of an asset management company, I search for undervalued assets with medium to long term gain potential for my clients. The purchase of farmlands appeared to be a good investment from my perspective, most notably in South American countries, considering their production potential and much lower purchase prices compared to those in other regions of the world such as in France. Demographic growth, changing diets (especially in Asia) and climate issues are among the many factors that should push the price of farmlands upwards during the coming years.
Our acquisitions have started in 2006. The majority of farmlands purchased are located in Uruguay (35000 acres among which 40% are devoted to agriculture and 40% to livestock) and the others in Argentina with the equivalent of 10000 acres. Those purchases took place through our Uruguayan company Campos Orientales which 100% held by our investors. We are now among the biggest land owners and farmers of the country with around 100 employees who buy and restructure the farmlands which we revalue.

Isn’t it difficult to estimate the value of agricultural assets? How frequently to you carry this process out within your company?

Just like any other capital management company, we need to follow IFRS accounting standards. Consequently, our assets are estimated annually by independent experts in order to guarantee total accounting transparency in our financial statements for investors.

What is your investment term? How do you carry out acquisitions?

Our investments are meant to be sustainable. Consequently, we are focussed on the long term. Time and work are required for us to fully estimate our agricultural assets. Do not forget that we have started very recently with our first acquisition having taken place in 2006. With regard to this, I would like to specify that these purchases have been made through cash payments. We have only made limited use of debt. This policy has proved to be very useful during the crisis.

What was the performance of your agricultural investments? What was the impact of the financial crisis?

For first in investors, the latent gain is above 40%. In terms of performance, we have not been much impacted by the financial crisis. However, we have faced its consequences when it came to our second capital raise which took place in 2008. Investors have, indeed, become much more cautious in their investment decisions. But our performances speak for themselves. In addition, this type asset retains strong interest because the market is fundamentally sound and investor demand is very active.

Did you observe price inflation in farmlands following the massive purchase of lands by sovereign funds coming from such places as Asia and the Middle East? What are the favoured regions: South America, Eastern Europe, Africa?

It is useful to know that sovereign funds are not very active in South America with the exception of Brazil where they are making their presence felt. They are rather focussed on Africa. Farmland price inflation is not necessarily a reality contrary to what can be heard in several places. Moreover, if you take a country such as Argentina, farmland prices have remained quite stable during the recent years namely because of the country’s political instability.

What is the productivity of South American lands compared to those of Eastern Europe and namely those of Ukraine?

Farmlands, especially those of the Pampa in Argentina, are among the most productive lands in the world just as the Ukrainian black lands or those of Beauce and Brie in France. The differences in terms of return per acre can be mainly explained by the production means used and namely by the utilisation rates of various inputs. The latter are the different products brought to lands and cultivations such as fertilizers and “changing elements” (These are any element used to improve soil quality such as sand, peat, lime…). Regarding Ukraine, it is important to specify that it is impossible for a foreign operator to become a land owner. A “business model” such as ours based on asset estimation is not much interested by this type of operation.

Are the main risks surrounding this type of investment not social and political? What do you think of the conflict which opposed the Korean company Daewoo to Madagascar?

Obviously, risks exist just like in any type of investment. This can for example be linked to the fiscal and legal framework of the country in which you wish to invest. It is reason why we make this choice very carefully. In addition, to limit this risk to the fullest, we have decided to apply a diversification strategy in terms of geography and products on our assets. We are present on livestock but also on the production of rice, milk, wheat and several other cereals each of these products representing less than 10% of our revenue.

Coming back to Madagascar, it is important to specify that it is state which decided to lease lands. With regard to this, the lease of 1.3 million acres of land (approximately half of the available cultivable land) to Korean group Daewoo for a 99 year term has lead to revolts which have caused the impeachment of the president. It is quite surprising that Madagascar needs the Koreans to estimate the value of their land when they benefit aid coming from United Nations for agriculture and nutrition.

Do you believe in the future of biofuels as an alternative to oil? Is it relevant to produce biofuels out of food?

I my opinion, agricultural products should first serve the purpose of feeding humans. This is the primary function of agriculture. It is only when this purpose has been fulfilled that any surplus should be used to produce biofuels as an oil alternative. The question is whether we use existing farmlands to meet this new need or develop new ones.