Investmentanalysis as of 13.03.2019

Agri Terra KG Orange Returns Offer

Agri Terra has been established in cattle farming in Paraguay for years. Since 2015, orange plantations have been developed that enable small-scale investments in a highly-lucrative market. Thanks to the parallel interests of suppliers and customers, optimal synergies result. The conservative concept is a real base-investment for experienced investors.

The issuer

Agri Terra KG, Grasbrunn near Munich, was founded in December 2012 in Bielefeld (registered in April 2013) and moved to Grasbrunn in 2017. To date, no balance sheets have been deposited publicly. For investors, however, this is relatively irrelevant, since they act as land buyers with direct ownership. The Pfau brothers are the persons responsible for the issuer – which is part of a group of companies, consisting, according to their own declaration, of 19 companies in different parts of the world. Carsten and Michael Pfau follow a family tradition of entrepreneurship. The first land-lots were apparently acquired in their parents' generation. The brothers themselves have been invested in cattle and real estate in Paraguay since their studies, i. e. for about 25 years now. The Pfau family (together with around 200 investors) is now one of the largest cattle farmers in Paraguay, with around 142,000 cattle farms registered in the country. For about 5 years, the Pfau brothers have also been investing in orange cultivation in southeastern Paraguay. After two completed plantations, the third plantation is currently being prepared for planting and the fourth plantation is to be acquired. Parallel to the Pfau family, investors have been able to invest in orange growing since the end of 2015 via the purchase of land-lots. The complete purchase and the plantation operation is carried out by subsidiaries of the Pfau Group. As of today, a volume of USD 10 million has been realised through the Pfau family. Around 250 investors from Germany, Switzerland and Austria have invested, as well as investors from the US and Central America. There is now rapidly increasing demand from the USA and China.

Agri Terra KG employs 7 people in Grasbrunn and is managed by Michael Pfau. Carsten Pfau is mainly responsible for management “on the front line“ in Paraguay and other locations. Over the entire company network currently 45 employees are employed.

The financial motivation for the Pfau brothers to allow additional investors to participate in the very lucrative investment consists in minimizing costs through higher capital sums, an interim profit in the land resale, and a 5 % profit share in the net harvest yield. In addition, the Pfau brothers move large volumes in land development (see below).

The provider responded to questions in the analysis-process very promptly with all relevant documents.

Strenghts – The provider has been active in Paraguay for around 25 years, and the orange plantations have now yielded the first significant harvest after 5 years.

The investment

Paraguay is larger than Germany with a population of around 6 million. The country is sparsely populated, and thanks to the climate, abundance of water (Paraguay means “running from water to water“) and soil quality it is very well suited for agriculture. In the past, the focus was on production of cotton. This has given rise to a long tradition of hard-working and reliable farm workers. One of the main agricultural pillars is soybean cultivation (for biofuel).

According to the World Bank, Paraguay is on a stable economic (and social) growth course. Above all, the strengthening of international trade in goods is one of the stated goals of the government. According to an internet research, the agricultural land in Paraguay is primarily used for agriculture, soy, cassava, cotton, sugarcane and grain. Cultivation of citrus fruits is a niche – around 85 % of demand is imported.

This is where the Agri Terra concept comes in: The company seeks, inspects and acquires large-scale (200 to 300 ha per plantation area) high-altitude land that is destined for citrus cultivation. The lots are subdiveded and surrounded by protective plants. After acquisition of the land by the investor, 160 orange trees per 1/4 ha are planted. Specially processed fruit varieties are used; Agri Terra is currently planting 11 varieties to harvest all year round. For optimum flower quality, bee colonies are kept on the lots. The area in southeastern Paraguay is apparently perfect for growing citrus fruits, thanks to the wet and hot summer months with 2 cooler winter months. In addition, a stream runs through the plantations, providing enough water for irrigation. The first planting took place in late 2016 and early 2017. Currently there are around 80,000 trees, which corresponds to an area of 125 hectares planted.

Agri Terra actually operates as a comprehensive land developer: Plantation 3 (220 ha) is part of a 300 ha land area. On one part, there will be a juice factory, which will optimise future yields for the lot-owners. In addition to the actual plantation, a 70 ha forest is being developed into a green recreation area for weekend stays (“country club“). The parcels (around 1,000 square meters) are sold primarily to Paraguayans for leisure. The return potential for the developer here is enormous and possible from the synergy through the partial parcel sale to other investors.

The land acquisition is registered on the basis of a notarised purchase contract in the land register in Paraguay. Thus comprehensive property protection is a given fact. The profitability of the trees is parabolic: The profitable phase begins after 4 years and the peak is in the years 8 to 12. Then the yield decreases; after 25 years, the trees should be cut as planned and sold as wood. The management contract runs over 25 years. In principle, an extension after 25 years would be possible, as well as another use. One of the special attractions of the offer is the yield potential from the land value. Since the land is actively cultivated, the value increases; how the possible situation might by after 25 years, i. e. one generation, is not predictable.

The plantation lots – the minimum is 1/4 ha for the buyer – are accurately measured and labeled using 5 GPS measurement points, thus the parcels can be assigned individually. In fact, the yield on 1 ha of land will naturally vary, so one parcel owner may receive a higher price than his neighbour two parcels away. Pooling the total return of the crop yield is, however, not permitted by the authorities; otherwise a direct investment would turn into a fund.

Strenghts – Comprehensive property protection. Short transport routes thanks to national market. Constantly increasing demand for crop yield.

The expertise

The Pfau brothers, Carsten and Michael Pfau, have proven to be very experienced investors in livestock and, for several years, in the field of land development for plantations. With around 6 million inhabitants and a small elite of economically and politically important people, Paraguay is small enough for them to have an excellent network after around 25 years of actively investing there.

Expertise in the selection, purchase, preparation of land and planting and care of seedlings, management and harvesting comes from a sister company in the business group, which is managed by the Pfau brothers and qualified senior executives. Permanent employees are employed for this purpose (2 directors, 1 plantation manager, about 30 agricultural workers), which should ensure a very high level of loyalty and work motivation of the employees in a country with pronounced poverty, especially among the rural population.

Thanks to the planting of currently 11 different types of oranges, the harvest runs throughout the year, so the workers and their families on the ground actually have work, which results in closer ties to the plantations and a higher work ethic. The Pfau brothers have made substantial upfront payments, which is already quite evident by the existing fleet of agricultural machinery.

Strenghts – High conceptual expertise thanks to many years of experience. Highly qualified staff for plantation care. Carsten Pfau lives in Paraguay for most of the year and is on site.

The concept

With his capital, the (Swiss) investor acquires land parcels in Paraguay, on which orange trees are grown, maintained and harvested, based on a management contract. With a useful life of around 21 years (years 4 to 25), the landowner, according to the brochure, should expect an average annual profit of well over 10 to 20 % p. a. The yield (IRR) is 14.7 % p. a.; the break-even point would be reached in year 9. In fact, the forecasts are conservative, as the 112.5 kg/tree harvest is as low as the retail price of EUR 0.25/kg. As the market is a demand market both nationally and globally, rising prices are more than likely. The juice factory planned on the land of the third plantation also allows a fixed purchase at a higher price.

For German-speaking private investors, such profits sound utopian, especially after the investment scandals of recent years. In fact, such yields are quite common in agriculture, for example with wine- or hops-farmers. It is no coincidence that institutional investors, private banks and, traditionally, wealthy families (from the nobility) invest in forestry and agriculture. The main risk of such systems is the dependence on the weather – which is hardly an issue here – and the issue of pests – which is manageable thanks to the enclosure and ongoing monitoring – and the market. The market environment is excellent, and the demand is secured for years, so an investor cannot do much wrong here.

Strenghts – Interesting market environment. Convincing quality of work, which is constantly monitored. Concept works demonstrably.

The target group

Investments in plantations are more likely to appeal to conservative investors. The concept is basically designed for investors worldwide. Since the buyer actually acquires a parcel of land and is registered as the owner, ownership is transparent. In addition, from today's perspective, there is a predictable, stable national demand for the crop yield. Thus an investment presents itself as highly-lucrative but at the same time conservative. In any case, an investor should visit the plantations on site, which is also encouraged by the brothers Pfau.

All summed up

I regard the offer "Orange Returns" by Agri Terra KG, Grasbrunn near Munich, to be superior. While other issuers of forestry-investments are content to offer only the trees itselves, a customer can actually become a partner here and participate in almost the entire value chain. Thanks to land ownership, there is also very long-term earning potential. In my opinion, the concept earns a rating of "superior" (1).