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Cresud (CRESY:US)

Mkt Price:  USD 11.28

Mkt Cap:  USD 560.1 mio

Cresud is a leading Argentine agricultural company engaged in the production of basic agricultural commodities. It also has a growing presence in the Brazilian agricultural sector through its investment in BrasilAgro (AGRO3:BZ). Cresud is currently involved in a range of activities including crop production, beef cattle raising and milk production. The Company’s business model, which it seeks to roll out abroad, taking into account the specific conditions of each country, focuses on the acquisition, development and exploitation of properties having attractive prospects for agricultural production and/or value appreciation and the selective disposition of such properties where appreciation has been realized. Additionally, a majority of Cresud’s current market value is actually represented by the quoted value of its controlling stake in IRSA (IRSA:AR), Argentina’s leading listed real estate company. Cresud’s shares are listed on the Buenos Aires Stock Exchange and its ADSs are listed on NASDAQ.

Interestingly, the value of IRSA is supported in a similar fashion, with almost 40% of its current market value deriving from its stakes in Hersha Hospitality Trust (HT:US), a US hospitality REIT, and Banco Hipotecario (BHIP:AR), a leading mortgage bank in Argentina. Incidentally, it also owns 49% of New York’s Lipstick Building – which was never built or occupied by Avon, contrary to popular misconception – which they bought in July 2008, shortly before the building’s most famous tenant self destructed…yes, Bernie Madoff (with the money…!), soon to be played by Robert De Niro. If you’re in NYC, it’s worth a visit to view this iconic building and a perfect excuse to call in next door to one of my favourite NY saloons, P J Clarke’s (the original! – complete with hideaway restaurant, Sidecar, upstairs).

My interest in Cresud came about when I began i) seeking agricultural plays on the increasing global demand for protein as living standards improve around the world, which gradually evolved into also ii) identifying the most fertile farmland in the world, generally accepted to be the Black Earth region of Ukraine & Russia and the Pampas of Argentina (followed by the Canadian Prairies), and iii) the cheapest (but acceptably fertile) farmland globally. Investment theses ii) and iii) really came about as a way to leverage thesis i), but also because of my astonishment at the price of farmland in Europe.

Ireland, of course, is the worst example – despite everything that’s happened to date, the average price per acre of farmland is still at EUR 9,500 (USD 12,900). This compares with a USD 3,000-5,500 average in various parts of the US, for example, and I won’t even bother to compare with the rest of the world..! How on earth do farmers in Ireland, or even some other parts of Europe, expect to compete globally? Actually, that’s a completely rhetorical question, they just can’t! – and this is a pretty damning indictment of the EU CAP and parochial farming attitudes. The only viable future for farming is very large or very small – large is simply never going to happen in Ireland, while small (organic/intensive/horticultural) is now only dawning on some farmers, years behind the likes of the Netherlands (or even rooftop farmers in Brooklyn?!). It just looks like years/decades of reduced incomes/losses to come for farmers (and taxpayers) in Ireland & Europe. All in all, this is not meant to be a dig at farmers – if I had the time, I would visit every young farmer in Ireland on bended knee and plead with them to cash in when they still have this glorious opportunity (who cares if the average price used to be EUR 17 K per acre) – failing that, I wonder how I would do introducing them to the tricky concept of Arbitrage, using some very simple and practical global farmland price examples? But could they ever let go of ‘the land’…?

Anyway, I was pleasantly surprised that the most fertile farmland areas in the world coincide with some of the cheapest farmland globally, a happy accident of history I guess. I discarded Canada due to its slightly higher relative cost (and the lack of an investment opportunity – there are some listed grain ‘traders’, but the only farmland opportunity is really Sprott Resource Corp (SCP:CN, through their ownership of One Earth Farms) and that’s currently more of a commodity play), and I will discuss Russia and the Ukraine another day. This left me with Argentina, leading me very quickly to Cresud as a compelling investment vehicle to exploit my theses above. I will be sharing my Fair Valuation of Cresud very shortly.