SLC Agricola: The way to run a farm in the 21st century
SLC Agricola is poised to become a key player in the agricultural world thanks to its leading farming position in Brazil and premier operational efficiency
SLC Agricola (“SLC”) is a Brazilian agricultural producer and one of the world’s first companies in the grain producing sector to IPO in a stock exchange. In the world of soft commodities (i.e. corn, wheat, soybeans), SLC is one of the purest real-assets players in agriculture and one of the most fascinating and effective operational stories in large-scale farming.
Business model
SLC’s core business is grain production backed by a land management business that combines a real estate strategy focused on ownership, leasing and conversion of agricultural land. The grain producing side of the business enables SLC to generate the cash flows (liquidity) needed to grow the business by expanding the cropping area (buy/lease/develop more farms). The real estate portion allows SLC to reinvest its profits in an uncorrelated asset that better weathers the volatility in commodities markets when combined with a hedging strategy designed to smoothen fluctuations in row crop prices.
SLC captures value not only by selling and hedging the crops it produces, but also by converting non-productive land into high-yielding cropland. Many of SLC’s farms were originally used for non-intensive cattle grazing, which SLC acquired and converted into productive agricultural land by investing non-trivial amounts of capital. Before SLC’s inception, the size of the initial investment required to develop cattle fields into crop producing land had been a key barrier to entry for agricultural businesses. SLC overcame this obstacle by converting land in a cost efficient manner following its standardized development model. The size of the capital expenditures that SLC requires to develop land are lower than the spreads between the prices at which non-productive and productive land trade in these regions. SLC has been able to arbitrage this mispricing unlike any other agricultural player in Latin America. Thus, the fast value creation that SLC’s conversion process unlocked signaled the sizable investment opportunity in the agricultural space in Latin America. SLC’s success opened the door for a plethora of new players in the sector (i.e. Soros-backed Adecoagro).
Operating model
SLC’s success is explained by its unrivaled operational excellence. Farming businesses utilize a variety of operational benchmarks, but production yield is probably the most relevant metric in the industry. SLC’s agricultural yields (Kg/ha) stand out across all the crops it produces—particularly when they are compared against those of other global players. This incredible accomplishment is not a product of luck. SLC’s team of engineers has perfected the selection process of seed varieties (sizable R&D expense), developed careful planting and input allocation strategies, and most importantly mastered the science of finding the most agriculturally suitable soil types available in Brazil.
The operational prowess of SLC’s team is backed by a carefully laid out standardization effort to streamline agricultural practices. These practices have allowed SLC to better capitalize cost-efficiencies attained through large-scale production. Furthermore, the operating model maximizes margins by combining cost controls with price maximizing strategies (i.e. storage units to capture higher prices after the high supply harvest-cycle). Thus, SLC is not only “chasing” yield, but also producing crops at the lowest cost per kg.
To further illustrate the incredible yields reached by SLC, one must compare SLC’s premier farm to the Brazilian and American average yields. For corn, SLC outperforms Brazil by 99% and the US by 4%. For soybeans, SLC outperforms Brazil and the US by 29%. For cotton, SLC outperforms Brazil by 18% and the US by 85%.
Symbiosis
SLC’s business and operational models are seamlessly intertwined and support each other. The company’s operating model allows it to create competitive advantages through: standardization of agricultural processes, cost-efficiencies enabled by economies of scale, land bank management and inventory controls. Furthermore, the real estate portion of the business allows SLC to access better credit terms due to the strong collateral that land represents for lenders. The alignment of these features facilitates the formation of a symbiotic relationship between both models. Ultimately, what makes SLC standout is the execution of a vision that has amalgamated a robust operational capability with a simple yet thorough agribusiness value proposition. In the next century, efficient producers like SLC are much needed to accommodate the anticipated population growth and demand for food. Land is a finite good and the world needs companies to produce more output with less resources—SLC might be one of those beacons of hope.
Sources:
http://www.slcagricola.com.br/
http://www.v-agro.com.br/vanguardaagro/web/default_pt.asp?idioma=0&conta=28
https://www.tiaa-cref.org/public/assetmanagement/strategies/alternatives/agriculture
http://www.brookfield.com/content/private_funds/sustainable_resources-35299.html
Great post, thank you.
My concern in in regards to the investment in land. In the post you mention these investments can be a hedge of sorts (given they are uncorrelated with the grain production business). Maybe you can share a little more in regards to SLCs strategy in regards to land purchases (what drives the buy vs lease decision) and what are price appreciation expectations – and probably more importantly what is expected to drive that appreciation. I would imagine that land values for the lands SLC acquires are highly dependent on commodity cycles and therefore might not be entirely uncorrelated. Answering these questions would also give us a better sense of risk related to land depreciation.
Excellent post!
I totally agree with the idea that SLC’s approach to agriculture is needed to maintain the current population growth rate. Furthermore, it may actually be the only way in which agriculture can nowadays be profitable in many parts of the world, stagnant revenues and rising costs make agriculture not attractive for small farmers any more.
My main concern is about whether the soil can maintain such a high yields, it seems that they have been in business for a few decades now so they may have faced the problem of soil exhaustion. I would be interested in knowing more about how they keep yields so high; whether they make intensive use of fertilizers, crop rotation or some other techniques.
Interesting that SLC took a hedged approach to their own business by having complementary but diversified branches of the business. SLC sounds like it’s done a terrific job of using science to maximize utilization and output of the agricultural land in Brazil, which certainly has significant international implications as populations continue to grow and certain areas struggle with food supply and diversity. As Alberto mentions above, I’m also interested in learning more about how soil quality is maintained over time; do you think that competitors will be able to replicate their land value arbitrage via similar soil remediation techniques, or will the upfront capex investment deter them?