Pongamia projects provide compelling investment opportunity

By United Country Real Estate | July 16, 2012

A California company has come up with a compelling twist on farmland investing for private clients and institutional investors focusing on real assets. This farmland investment model, however, is considerably more proactive in driving total returns than traditional "buy and hold" models. Since 2009, TerViva Inc. has been establishing acreage in Texas, Florida, Arizona and Hawaii in the tree crop pongamia.

Pongamia is an ancient tree that is native to Australia and India. It is frost tolerant, but not freeze-proof. It is also happens to be a legume, which is at the heart of what makes the business model so interesting. The tree yields a generous annual nut crop that is harvested with conventional shakers, such as those used by almond and other nut growers. The shelled nut contains a large seed pod resembling a lima bean. That seed has approximately a 40 percent oil content that can be easily refined into high-grade biodiesel, biojet fuel, or even other high-demand biochemicals like oleic acid. The remaining seedcake can then be used as a high-protein animal feed or a high-nitrogen fertilizer. And because the tree is a legume, it is fixing nitrogen so the soils are improved and pasture grasses can even be intercropped for cattle grazing. The tree has a productive life of well over 50 years.

Pongamia yields about 400 gallons of oil per acre. The twist in the conventional farmland investing model is that this tree can thrive not only on marginal soils (as in its native homeland) where food crops struggle for yield, but it can also be a perfect replacement crop for the thousands of acres of abandoned Florida citrus land.

TerViva has approached Mason & Morse Farmland Group regarding investor interest in pongamia projects. TerViva's minimum project size is 500 acres and will assist in a practically turnkey project. TerViva can supply the projects with their elite genetics as well as secure the offtake at harvest. Two of the largest citrus growers in Florida are available to act as to project's operator for planting, maintenance and harvesting. Mason & Morse Farmland Group will source the Florida land for investors interested in a diversification like this.

Because this is a tree crop, yields will not be commercially harvestable until at least the fourth year. However, converting barren acre of land to an acre planted in pongamia with irrigation improvements could arguably double the valuation of that acre in the first year. So even though there is no current income in those early years, this crop can have a very powerful additive effect to the performance of an overall traditional agricultural portfolio. TerViva's pro forma projections suggest a 10-year IRR close between 18 to 22 percent depending on the land costs and conservatively assuming present day prices for fuel, feed and fertilizer.

The formula for success in these projects is elegant in its simplicity: cheap land plus high-income crop equals Farmland Investing 2.0.

If you would like more information, please call Tom Schenk at (509) 251-2565.

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