Dateline: Manila, Philippines
As central banks continue to push the “Copy” button on their printers, and the world population continues to grow, I’ve become a bigger fan of agricultural land.
Experts from Jim Rogers on down have endorsed agricultural land as a way to benefit from the increasingly affluent consumer cultures in regions such as Southeast Asia, where I’m currently located.
As populations grow and people obtain more wealth, they begin to seek out small luxuries. The guy who used to put back one beer after work each week might go out to a local bar now and have a few. Asians will eat a little less rice and add more protein. Kids will buy a Coca-Cola on their way home from school.
We talk a lot about ways to benefit from these emerging market trends by being on the ground with businesses that address these rapidly growing economies.
Apart from businesses, however, one way of supplying the market with food is by owning agricultural land. In fact, it can be a better play for the passive investor or even a more active entrepreneur who wants to cash in.
And agriculture in the Philippines has been bandied about as one of the best opportunities in this part of the world.
After all, Asia is home to more than half the world’s population. And, despite its reduced role in GDP, nearly eighty percent of all Filipinos are employed in the agriculture sector in some way.
Nevertheless, while yields can be decent if you know what you’re doing, the internet is littered with stories of bitter — and just unlucky — expats who got into the agriculture business here in the Philippines… and lost their shirt.
The current state of agriculture in the Philippines
Laws on agricultural property are rather strict in the Philippines. Foreigners are prohibited from owning anything other than condominiums, and they certainly aren’t allowed to own land.
At a business meeting the other night, I spoke with several of Manila’s top real estate and legal experts. They generally told me that there is no reliable way to circumvent the laws on owning agricultural land in the Philippines unless you want to enter the “ag tourism” business.
Even locals can’t own more than five hectares (about 12.5 acres) without exceptions. That means you’ve got a lot of small family farms, some whose owners take up work on neighboring farms to supplement their low farming income.
The Philippines is a country where agricultural work is largely done by hand. It could take up to one hundred workers to harvest one hectare. Farms that could buy five machines are, instead, running crews of as many as two thousand workers.
It’s not that efficient. But farmworkers can be hired for as little as $75 a month, so small-scale operations have held off on improving their efficiency.
While the prospect of cheap agricultural land and dirt-cheap labor in the Philippines may sound appealing, consider what many OFWs (overseas foreign workers) have been doing with their money.
After years of Filipino workers in Singapore and the Middle East remitting cash home for their cousin’s jeepney business, or the family’s sari sari store, those workers are now putting their remittances into low-end real estate. However, issues with theft, misuse of money and incompetence are told, not only by expats who married Filipinos, but locals as well.
For instance, one former piggery owner I met with here in Manila says that she entrusted her ten-acre farm to her mother. One day, the mother called and informed her “all of the chickens died last night.”
Imagine fifty chickens all dying in one night. It turns out the mother had killed a few chickens to feed the “poor family” living nearby in the provinces far from Manila … and sold the rest under the table.
Personally, I believe that just because others fail at a business doesn’t mean that you can’t succeed. But agriculture in the Philippines is not a passive investment where you drop money and come back at harvest time to collect an envelope full of cash.
Agricultural business strategies that can succeed in the Philippines
I spoke with one expat here who has found a way to profit from the rich agricultural land of the Philippines without being bogged down by regulations, the lack of scale, or the hands-on nature of running a potentially profitable farm here.
He says he’s bullish on rice as a crop and that rice farmers suffer from some of the greatest inefficiencies in the Philippines. For example, an unmilled sack of rice can go for a small fraction of the price of processed rice ready to sell.
So he and his partners invested some decent money and offered an integrated service to farmers to mill their rice. In addition to profiting from the spread on the rice crop, he also offers cheap loans to rice farmers so they don’t have to take the “Bombay loans” that charge 60-80% annual interest, and sometimes result in their farm being taken over and a refining customer being lost.
The business philosophy is similar to that used by enterprising entrepreneurs during the California Gold Rush: sell shovels rather than pan for gold.
While the business of farming in the Philippines isn’t exactly overly competitive — there’s plenty of demand for food — it is one that is hard to scale.
And with the average farmer in the Philippines being 52 years old, the market for services like this looks like a good opportunity.
My connection has also opened a rendering plant to process leftover animal parts, from blood to feathers. In the United States, animal feathers would command a price from farmers who know their value. However, in the Philippines, farmers are literally paying to get rid of feathers. It’s a small, unsexy example of how to profit from discrepancies in a market, something we talk about here all the time.
If you’re looking for ultimate security in owning agricultural land, the Philippines is probably not the place for you. There are loopholes, but none of them add much security.
There’s talk that foreign ownership restrictions could be lifted, but that could be ten or more years away. It’s possible you could include a $1 option to buy land you’re leasing if the law changes, but for now, there’s no way to own agricultural land outright.
That’s where thinking creatively comes into play. I’ve seen examples throughout Southeast Asia of how serving businesses can provide someone with a larger investment greater scalability and a clearer marketing plan than serving consumers.
When you want to play agriculture in the Philippines, consider more peripheral ways to profit.