“With all productive assets, there is a relationship between their value and their ability to generate income, and ‘land is no exception,’ says Caputi. The value of farmland is closely linked to its ability to generate income; therefore, if the income rises, the value of the farmland will also rise in the medium term.”
“Leases, then, are directly linked to a farm’s productive capacity. That is, to the dollars it can generate. And the dollars a farm can generate depend directly on the quantities it can produce and the prices at which that production is sold,” notes Caputi. If a farm increases its productivity or the price of what it produces, it increases its revenue generation, the value of the lease, and the value of the farm in a chain reaction. All of this, provided the changes are lasting and not merely temporary.”
According to the professor, the reality of the Uruguayan countryside does not reflect a significant change in its productive capacity over the past year, but rather a significant change in the value of the goods produced, both agricultural and livestock. As a point of reference, the country’s main agricultural crop—soybeans—has seen price increases of up to 30% compared to the previous year, and a similar trend is observed in livestock values. And this factor of rising prices, sooner or later,“affects market participants’ expectations, then lease rates, and ultimately land values.”
In short: the value of farmland rises because the value of the lease increases, which in turn rises because income from production increases, which increases (in this particular year) because the price of the product rises. But why does the price of the product rise?
“Because Uruguay is a price-taker on the international market,”explains Caputi. Prices for the country’s products are closely tied to global developments; upward price movements are driven by shifts in international markets. The factors contributing to these increases in costs and prices are diverse, wide-ranging, and complex, but the professor summarizes them as follows:
> expansionary monetary policy at the international level due to COVID-19 and the resulting inflation in U.S. dollars,
> disruptions in supply chains caused by shutdowns and fluctuations in demand during the COVID-19 pandemic,
> recovery in demand following the pandemic,
> specific factors driving demand in China for Uruguayan products (other competing countries have faced challenges, which has created an opening for Uruguay),
> supply factors (poor harvests in the rest of South America),
> war between Russia and Ukraine.
However, beyond the factors that are a response to international developments, there are also domestic factors that may have contributed (albeit to a lesser extent), such as the promotion of investment in agriculture and the prospect of free trade agreements, among others.
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Given this favorable outlook for Uruguay’s agricultural sector, has interest in investing in agriculture increased?
“Naturally, when returns in a sector increase, it is to be expected that investor interest will grow, as investors seek profitability across various sectors,” and agribusiness is no exception. Caputi asserts that the current state of the sector (primarily agriculture and livestock) is very good and that the medium-term outlook “looks promising,” at a time when financial markets also appear unstable and volatile, leading investors to place greater value on the merits of “real assets.”
And what about the record for winter crops?
In winter, the crops planted in Uruguay are mainly wheat and barley, and the decision to plant them or not is closely tied to their market value; this is particularly true in less productive fields: if the price of the crop is high, it makes sense to plant it, whereas if it is low, it does not.
“When crop prices are high, the area under cultivation tends to expand. This year, in addition to the structural factors mentioned earlier (monetary policy, supply factors, recovery from the pandemic, etc.), we had the war between Ukraine and Russia, two major wheat producers whose output was in doubt, which sent prices soaring on international markets at the beginning of the year, when planting decisions are generally made,” Caputi noted. This situation may have contributed to the winter planting area being larger than in previous years.
However, that was a one-off occurrence, and the value of the crop fell again; therefore, the professor believes it is still too early to assess the economic outcomes, especially since some marginal areas that decided to plant based on April/June prices did not hedge their contracts to mitigate price risk.