A Favorite Yield-Generating Hard Asset
One theme at the Wealth Retreat I hosted in Panama last week was yield-generating hard assets—specifically, rental properties, condo hotels, and agricultural land.
Argentine developer and economist Steve Rosberg, one of the speakers participating in last week’s program, focuses his business on hard assets. Specifically, Steve has undertaken dozens of investment projects in Argentina and neighboring Uruguay over the last 10 years, from small development projects to a boutique hotel in Buenos Aires and timber plantations. One of Steve’s current projects is a vineyard in Mendoza. Of all the efforts Steve has been involved with over the years I’ve known him, this one is, for me, perhaps the most interesting.
As I’m sure you’re aware, Argentina is going through tough economic times, thanks to its politicians, especially its chief politician, President Cristina Kirchner. Ongoing political shenanigans notwithstanding, Argentines are continuing on, as they have long experience at doing. In fact, one of the country’s main industries, wine, is doing well.
Argentina’s premier wine-growing region, Mendoza, is also Latin America’s first. In this part of this country, you find row next to row of vines, neat, orderly, tidy, stretching on as far as you can see in all directions. In all, there are more than 350,000 planted acres and 500 wineries in Mendoza province, which accounts for at least two-thirds (some sources say 80%) of total wine production for the entire country.
You’ve likely heard of San Rafael and San Martin, but you may not know the Valle de Uco, this province’s valley most recently given over to the production of grapes intended for the vintner’s vat. Vines were first planted in this part of Mendoza in 1994. Before then, the Uco Valley was high desert, dusty and scrubby. Irrigation and investment since mean that, today, the grapes being grown here (malbec, tempranillo, cabernet sauvignon, chardonnay) are in growing demand.
Which Are The Best Seasons To Invest In Wine
The region has the four distinct seasons required for quality grapes for wine. The mild winters are cold enough to make the vines go dormant but not cold enough freeze to cause damage. And the high desert setting turns the requirement to irrigate into an opportunity to manage the amount of water received by the vines season by season.
It is in this Valle de Uco region where Steve has focused his efforts. His vineyard here has been planted with different varietals of grapes in stages over the last four years. As Steve explained to the Wealth Retreat group last week, one important reason to plant in stages is because most of the grapes grown in Mendoza are still picked by hand. With different varietals, you get different harvest times. If all the grapes matured at the same time, there wouldn’t be enough labor to pick the grapes when they needed to be picked.
Planting different varietals also helps diversify the vineyard in case some grapes have an off year due to the weather or other variables.
The grapes harvested from Steve’s vineyard are picked and shipped off to various wine makers including some of Argentina’s biggest names, including Clos de Siete and Chandon. One interesting part of this process (at least for me) is how the price of the grapes is agreed.
Grapes are harvested March through April. The harvest weight for each type of grape is recorded and then the grapes are shipped to the wineries. The wineries begin work immediately to turn the harvested grapes into wine. Then, sometime in May, the vineyard owners sit down with the winery owners and start negotiating price.
How To Buy Wine
It seems counter intuitive to be negotiating price after the buyer has already used the product, but who are we to question a generations-old tradition? Certainly, global wine markets have evolved and thrived in the face of it. As Steve explained, each side has a vested interest in playing nice with the other side. The wineries will need more grapes next year just as much as the vineyards will need to sell next year’s harvest. If either side walks away from these negotiations feeling taken advantage of, the other side runs the risk of losing next year’s business and all business forever thereafter.
Once the price is agreed, then the winery makes some payment to the vineyard; however, full payment comes over time. The wineries generally make 10 monthly payments to each vineyard from which they purchase, meaning they’re paying straight up until the next harvest season.
I found these inner workings of the vineyard industry interesting, as I said. More interesting, though, is the cash flow the entire process can result in for an investor.
At Steve’s vineyard in Valle de Uco, the cash flow has begun, with grapes harvested last year and this. That said, the vines won’t reach maturity for a couple of more years. That’s when the full potential of the vineyard will be reached and the investor yields will increase.
Steve began selling investor units in the vineyard a few years ago; today, a handful remain available. With the development risk out of the way (as the vineyard is both fully planted and already producing), the overall risk associated with this investment has decreased considerably, making this a very appealing opportunity to get into a fully managed agricultural investment.
Of course, you still have production risk, price risk, and country risk.
I’ve been paying close attention to Argentina for almost 20 years. Yes, things can and do go wrong, sometimes spectacularly wrong in this country. On the other hand, the Argentines always finds a way to correct their course.
The expectation is that the coming presidential election in 2015 will bring positive change. No matter. Argentine politics aside, Argentine wines will continue to be sought-after in the international marketplace, as they are high quality at an excellent price.
If you’d like to speak with Steve about the particulars of his vineyard investment opportunity,you can inquire here. It offers several levels of diversification while allowing you to enjoy wine from the grapes you’ve invested in!