Mexico: the Sleeping Agro GiantBy Pablo Ricaud Arriola | Wed, 07/29/2020 - 13:04
Mexico’s climate conditions, low-cost labor and proximity to North American markets make it one of the most strategic locations for agricultural development in the world. Very few places with so much exploitable land are so close to the biggest markets while having productionable conditions all year round. For Mexicans, this is the kind of story that hits close to home: We have everything to be the best but are far from the best. Several countries with less land and sub-optimal conditions have multiple times the installed capacity and are way more technical.
A great example can be made with cut flowers. Eighty percent of cut flowers bought in the US are imported from Colombia and flown in by plane. There is no business reason why Mexico, with a very similar climate, and with far superior cost-efficiencies due to the fact that cut flowers can be sent to the US via freight and not by plane, is not seriously competing in this market. The only explanation is a lack of investment and sophistication – both can be attained. If far from ideal countries are leaders in these industries, Mexico could simply dominate.
We are not talking about the limitations poor governments have put on Mexico’s development. Everyone can agree things could be easier if we could just stop shooting ourselves in the foot every six years, but the potential remains. Mexico is still a free and capitalist country with strong institutions. The potential is there for smart, well-run companies to harvest it (pun intended). There are several examples of Mexican companies that are leaders in their markets. It is not about the roadblocks and challenges we have; it is about how we can rise above them. It can be done and is being done as we speak. There is no better case against negativity instigators than those people in the exact same position who are already achieving.
For agriculture, recent world developments (aka. COVID-19), have mounted an already great opportunity. Like we have said in the past, essential industries now have a valuable premium and investors will look to allocate more capital to them in order to safeguard against unexpected non-essential downturns. Moreover, there is climate change. Climate change is single handedly the biggest threat to our existence in the long run, there is no doubt about it, and recent studies have shown that the way humans eat has a huge impact on carbon emissions.
Beef is the highest contributor to carbon emissions. Even though governments must create policies that promote sustainable food consumption, the food industry is consumer-driven. Consumers need to reduce red meat consumption, among other things, to unburden the planet and take ourselves away from the precipice. Technology is not yet developed enough to reduce the environmental footprint of food production so in the meantime, reduction and substitution of red meat with plant-based options is crucial. The world is already taking meaningful strides toward this stance.
So: Perfect climate all year round, massive amounts of exploitable land, proximity to the biggest markets, low cost labor, AND being an essential industry plus contributing to the urgency of climate change. I cannot fathom a better opportunity, place or timing right now.
The crisis has a silver lining. It will bring diversity and investment to other asset classes in Mexico, and agriculture stands to benefit. To this day, real estate has dominated the allocation of capital in Mexico, leaving the other sectors dry. This has not been good for entrepreneurs nor the country’s development, as institutional money rarely goes to nontraditional asset classes. The unexpected hit from the pandemic will hopefully lead investors to take higher risks for the sake of diversification. Even if you are married to real estate, there are other interesting alternatives to explore aside from apartment buildings and malls, like greenhouses for example. Good old real estate but within an essential industry.
Rising Farms, the company I co-founded, is betting on this opportunity. What we see across the country are mid to high-tech agricultural operations, especially greenhouses, that have been left out or have closed their doors (60 percent of Mexico’s protected agriculture is not operating). What we do is leverage the gap and take control of these assets via a lease model, and then operate them ourselves by providing sophistication in the form of capital, know-how, technology, talent and proper planning. We are already working on partnering with institutional real estate investors looking to diversify into different asset classes for them to lease Rising Farms’ built-to-suit facilities to operate. Operating a greenhouse with a lease model instead of building it from scratch requires 1/7th of the capital, giving way to much better IRRs and the ability to have long-term leases at better-than-market cap rates.
What we are essentially doing is separating two different businesses with very different incentives that have always come together in Mexico. On one side is the management of an agricultural operation and on the other is the real estate side of it (land and/or facilities). By separating them, you can align incentives and attract different kinds of investors. Real estate investors used to its risk and returns can fund and retain that side, while operators can exploit and not be burdened by the CAPEX. Win-win.
The challenge is again, sophistication. Mexican businesses, including our own, need to prove they can have the high standards and practices necessary to be a market leader. Not doing so is what made real estate the only palatable investment in the first place. We need to stop with the family-business mentality that only looks to support a namesake handsomely and look at the bigger picture – investing in talent development, technology and new ideas that can only get back to you in the long run. Other countries know this by heart, and until we learn the same, the country will be stuck in the “developing” phase forever. The good news is that we’re seeing a trend of a new generation of Mexican entrepreneurs and investors who are willing to take risks for the sake of growth and innovation. With a concentrated effort, we can use this unparalleled opportunity and rise up to our potential.
I sometimes see bumper stickers on people’s cars that read: “God, please save Mexico.” As long as we think our future lies in someone else’s control, be it God, the government, our whomever, we’ll be stuck. Save it yourself.