Today, we're bringing you an intriguing investment opportunity inspired by last week’s Sunday Edition, where we took an in-depth look at the ​vertical farming industry​.

AGRI Developments, an alternative asset management firm focused on agriculture, is offering investors the chance to purchase ​avocado trees in the Philippines​.

They’ve already done the hard work of securing the land, building the development, and getting the necessary government approval. Now they’re inviting investors to participate in one of the fastest-growing agricultural markets in the world.

In this issue, we'll take a closer look at the ​deal​, including:

• Why avocado demand is growing so quickly

• Why avocado supply might be unprepared to meet that demand

• How regional price differences create profit opportunities

• And an in-depth IRR study of AGRI's investment plan

Note: This issue is sponsored by ​AGRI​, but the due diligence research was done by Alts, with some terrific help from Alts community member ​Tigran Kalaydzhyan, PhD​. As always we think you'll find it very informative and fair.

Let’s go👇

Asia loves avos

Avocado demand is picking up, and one region in particular is driving this growth — Asia.

An astounding number of Asians are becoming middle class:

In fact, ​according to academic definitions​, 2024 is expected to be the year in which a majority of Asia goes from the “poor” to the “consumer” class.

And, in line with the fruit’s reputation, these newly minted members of the middle class are developing a taste for the avocado.

Between 2014 and 2019, avocado imports to Asia climbed by about 48% annually, far ahead of the global average.

China has been a key driver of this growth. Last year, ​China overtook Japan​ as Asia’s leading avocado import market last year.

And this is a trend with an extraordinarily high ceiling. Avocado consumption per person in Asia is still a fraction of Western averages.

If similar growth continues, Asian avocado consumption could exceed the combined consumption of the US & Mexico by 2030.

As avocado demand skyrockets, though, something else is starting to falter – avocado supply.

Avocado supply can’t keep up

Avocado trees thrive in humid, subtropical weather – and there just aren’t many places with that type of climate.

The result is that the vast majority of avocados are grown in a few pockets of the world.

Overall avocado exports amounted to about ​3 billion kgs​ in 2021. Of this amount, more than 65% came from just 4 countries – Mexico, Chile, Colombia, and Peru.

But there are some big problems in creating supply.

The result is that avocado prices are significantly higher in Asia than in Europe and the Americas.

For enterprising investors, this situation looks ripe for disruption.

The trade is simple — grow avocados in Asia and sell them for premium prices while saving a ton of money on expensive shipping costs from Latin America.

But pulling this off is tricky. There are only a few countries in Asia that currently produce avocados at a commercial scale, most notably ​Indonesia and Vietnam​.

And even this is a bit misleading, since Asian avocado cultivation tends to differ from Latin America.

In Indonesia, for instance, which produced more than ​600,000 tons of avocados​ in 2020, most cultivation is for local Bambang or Bahagia varieties.

That contrasts with Latin America, which focuses on the globally popular (and highly lucrative) Hass variety.

In fact, just one specific region in Asia has historically been capable of producing Hass avocados at scale — ​a small mountainous section​ of the Vietnam highlands.

But a few years ago, that all changed with the development of Hass avocados in the Philippines – opening up an intriguing new avenue to feed Asia’s growing avo appetite.

Growing avocados in the Philippines

As we discussed last year, ​the Philippines is experiencing a foreign direct investment boom​, with annual inflows climbing from less than $2 billion annually a decade ago to about $10 billion today.

A chunk of that change is going to modernize and grow the country’s agricultural sector — and back in 2019, Dole spotted an opportunity to do just that.

At the time, the Philippines had a small avocado industry focused on local varieties. After evaluating the climate and land, though, Dole wanted to try Hass cultivation in the country.

After proving the fruit’s viability, Dole quickly ​secured governmental approval​ to export the Hass variety to China. Previously, the Chinese government had not approved Filipino avocado varieties for import.

As a result, Dole had an effective monopoly over the Hass avocado trade in the Philippines for years.

But that monopoly didn’t last long. A few years ago, ​AGRI Developments​ secured their own plot of land in the region for avocado development – joining Dole in the lucrative business of satisfying Asia’s Hass avocado demand with locally grown produce.

What is AGRI Developments?

Unlike Dole, AGRI Developments isn’t an end-to-end agricultural company – you won’t find the AGRI brand on any avocados you buy at the store.

Instead, AGRI is an alternative asset management company specifically focused on the agricultural sector.

How the process works:

1. AGRI identifies attractive opportunities in the international agricultural market, partnering with independent experts and industry professionals to diligence deals.

2. Once an opportunity has been evaluated, AGRI secures funding to back the deal through a mix of self-financing (the firm’s own capital) and investor financing (individuals, family offices, hedge funds, etc.)

3. AGRI partners with local agricultural professionals to manage the developments on a day-to-day basis.

4. When developments are ready to be harvested, AGRI sells the produce to retail partners, providing investors with cash repayment over time.

In the past, the AGRI team has worked on development opportunities for bamboo, durian, guava, and more.

But one of their most recent projects could also be one of their most lucrative — ​Hass avocados in the Philippines​.

The AGRI avocado project

AGRI has ​185 acres of land​ in the Bayawan region of the Philippines, located on the island just north of the Dole development.

And this isn’t just a random parcel of land. The AGRI team specifically chose this for three main reasons:

• Close proximity to export. The Bayawan development is just 90 minutes from a major airport and seaport.

• Ideal agricultural conditions. Bayawan is already a hub of Filipino agriculture, with up to 80% of land in the region already being cultivated.

• Heavy rainfall. Avocados are a water-heavy crop, which is partially why Latin America is struggling to increase production. Bayawan has about 30% more rainfall than traditional avocado-producing regions with 90 inches of rainfall per year.

In order to accelerate the speed of development and take full advantage of the current market imbalance, AGRI is now accepting outside investors to participate in the Bayawan opportunity.

This is not a standard debt or equity investment offering — if you participate, you’ll be a full-fledged owner of ​specific avocado trees​ on the site. (You can even come visit and camp out next to them!)

Let’s take a look at how the numbers shake out…

Investing in the AGRI avocado development

We can’t analyze an agricultural investment like this the same way as a traditional offering.

Like many agricultural opportunities, the AGRI development investment is a fixed term investment (25 years) with no principal returned at the end.

If you take a look at the ​AGRI documents​, you’ll find return figures ranging from 18-27%. Crucially, though, these figures are average annual yields.

Since principal isn’t getting repaid, yield doesn’t tell a full story of the return profile.

Here’s what we mean by that: imagine you invest in two bonds, each with a 10% annual return. While the first bond repays principal at maturity, the second does not.

Despite both having the same yield (10%), they don’t have the same internal rate of return (IRR, in bond terms a ‘yield to maturity’).

In the same vein, to fully understand the AGRI deal, we’ll need to conduct an IRR analysis, not just rely on yield!

Before we do so, here are the basic terms:

• Total term: Expires in 2045, no extension

• Initial investment: $13,620 (for a minimum 10-tree package)

• Mgmt. fee: Flat $25 annual management fee per tree,

• Harvest fee: 5% of produce sale price

• Tree survival: 100% (AGRI will replace any trees that don’t survive with similarly aged ones from their inventory)

But other variables in our analysis are a lot more uncertain.

The sale price per avocado, for instance, will vary with market conditions.

AGRI has a minimum price guarantee in place of $2.75/kg, or about 55 cents per avocado assuming a 200-gram average fruit.

But that’s almost certainly lower than what the realized sale price will be. Wholesale prices are generally about half of retail prices, which can easily exceed $10/kg in Asia.

Realistically, sale prices could be closer to $5/kg, or $1 per avocado.

The annual fruit per tree is also a highly uncertain (and unstable) figure. AGRI’s brochures assume that yields scale from 50 avocados per tree in year 4 to a terminal yield of 600.

Is this reasonable? It’s hard to say, since Hass cultivation in the Philippines is so recent – but here’s some data from other regions:

• ​One academic study​ of 3,000 California Hass avocado trees registered a mean yield of 51kg/year, or about 255 average-size fruit. The same study also determined that the median yield was about 28kg, or 140 fruit – indicating that the mean is skewed by some super-productive trees.

• ​A US government guide​ to avocado farming in Tanzania lists Hass terminal yields of 800 fruits per tree at year 8.

• Similarly, ​a USDA report​ on avocado farming in Mexico notes trees yielding up to 160kg/year or 800 fruits per tree, although whether this is typical or exceptional isn’t mentioned.

Overall, AGRI’s terminal yield of 600 seems reasonable – but given the uncertainty, skewing conservative is smart.

Alts community member ​Tigran Kalaydzhyan​ put together this excellent ​spreadsheet​ that allows you to vary input parameters from the AGRI deal to come up with an expected IRR figure.

Based on that spreadsheet, here’s what the expected stream of cash flows looks like for the 22 years remaining on the AGRI term, with assumptions detailed below the table.

Based on these assumptions, we come up with a pre-tax projected IRR of 16.85% - not bad, though not quite the same as the yield figures.

Note that this IRR is sensitive to the assumptions we made. For instance:

• If we assume the terminal yield caps out at 250 fruits per tree, IRR drops to 11.99%.

• If you use the fruits per tree assumption that AGRI provides, IRR jumps to 17.91%.

• If you assume the original yields and a price per avocado of $0.55 (the minimum guarantee), IRR falls to 9.42%.

Clearly, there’s room for nuance here depending on your assumptions – but even with conservative pricing and lower yields, the IRR does look promising.

Want to learn more and follow up with the AGRI team? Click below to start.

That's it for today. Reply with comments, we read everything.

See you next time,
Brian

Disclosures

• This issue was sponsored by ​AGRI​

• This deal was due diligenced by Brian Flaherty, Stefan von Imhof, and Tigran Kalaydzhyan, PhD

• Neither the author, nor the ALTS 1 Fund, nor Altea holds any interest in AGRI

• This issue contains no affiliate links

This issue is a sponsored deep dive, meaning Alts has been paid to write an independent analysis of AGRI. AGRI has agreed to offer an unconstrained look at its business, offerings, and operations. AGRI is also a sponsor of Alts, but our research is neutral and unbiased. This should not be considered financial, legal, tax, or investment advice, but rather an independent analysis to help readers make their own investment decisions. All opinions expressed here are ours, and ours alone. We hope you find it informative and fair.