Posted by: fathersez | December 9, 2007

Agricultural investment, is it for you?

Most townfolks don’t list agriculture very highly in their list of “investment must haves”.  

We have one such an investment, though it did not happen quite the way we had originally planned. This is our tale.  

My wife and I have been interested in starting a goat and cow farm for a long time.  In line with this goal, we had been looking for relatively cheap agricultural land. And along came this opportunity to buy a 11 acre piece for, let’s just say, RM 1,000.  

(RM is the acronym for Ringgit Malaysia, the official currency of my country, Malaysia. Approximate value now is about RM3.50 to the USD. I am using 1,000 to represent the cost so that other related expenses can be expressed as a % easily. I am also a little shy about disclosing actual figures about my finances). 

We went to see the land (about an hour easy drive away), and it was fully covered with thick secondary undergrowth. The advantage was that it was roadside land. Though it appeared hilly, we decided to go ahead and buy anyway.  

Well, it turned out hilly alright. No way could the land be used as an animal farm.  So we decided to plant it with rubber.

See here and here for some background facts on rubber trees. 

The trees take about 5 – 6 years to mature and should start yielding rubber latex from the 5th year onwards. We got a contractor to clear the land, cut terraces and plant the seedlings. We appointed another contractor, to take care of upkeep and maintenance.  

The final costs from purchase of land to planting came to RM 1,285. Additional costs for maintenance and upkeep for the 5 years, till the trees start yielding would be RM240, bringing the total cost to RM1,525. 

We have estimated our earnings to be approximately RM105 – 220 per annum, net of all expenses, starting from year 6 onwards. (We have assumed that, when the time comes, we’ll appoint a contractor to tap the rubber. The present norm is to share the yield 50:50. The amounts represent our 50%). 

Is this a good investment? Let’s see.

Rate of Return Using the rule of 72.

This investment gives us a compounded annual return of 3.60% – 5.76%, depending on market prices for rubber. (I am taking current prices as the maximum).  

The inflation factor should be taken care off in the appreciation of the land.  

Liquidity – Nope. Land is usually considered as non liquid.  

Do I have any regrets? I have to answer an emphatic no. I would not normally participate in illiquid investments with this rate of returns. 

However, our entry cost was relatively low, and it has been an enjoyable experience overall. I love the countryside, anyway. 

There have been some good lessons learnt. 

i) The principal lesson would have been to make sure the land “was what we had in mind”.  (I need to learn this. Now you know the reason for my dismal investment skills.)

ii) During the course of this exercise of clearing and planting, etc., we found out, (too late for us,though) that there were people who would have done all the work for free, provided we allowed them to grow cash crops such as bananas for a period of 2 -3 years. As this does not bother the rubber trees at all, it is a great win-win situation.  

Now that we have the land planted, we do not intend to just wait. We are looking into inter planting with cash crops. Perhaps we can increase the rate of returns, after all.  

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