What is the rational behind investing in Avocados?

Avocado orchards have historically provided high risk-adjusted returns and an uncorrelated source of income. Avocado investment returns are generated through two components: income and capital appreciation. The sale of avocados can provide a double-digit uncorrelated source of income, while the underlying land prices provide robust downside protection under conditions of rising inflation.

Investments in avocado orchards resemble other real asset investments such as infrastructure and natural resources with high barriers to enter the market and inflation hedging properties.

Avocado investments in contrast to other agricultural investments have high margins, the average EBITDA margin of an avocado plantation is generally higher than 60%. This is higher than the EBITDA margin of the five largest companies in the S&P500 (AMZN 12%, GOOG 25%, AAPL 30%, MSFT 46%, FB 50%).

Margins of avocado orchards are protected by high barriers to enter the market. It takes four years until a farm gets its first crop and 15 year until it reaches its maximum production. Moreover, there is a limited supply, as there is scarcity for fertile places where avocados can grow. While the demand for avocados is growing, supply for avocados cannot increase at the same rate, which results in increasing prices.

The income derived from investments in avocado orchards has been resilient during the current COVID 19 crisis, as the sale from avocados has been less fragile to disruptions in supply chains. Moreover, it is likely that the income derived from avocado orchards will continue to be resilient during the current and future potential outbreaks, as governments view food security as a priority. The chart below compares WTI spot prices vs. avocado farmgate prices.

Investment HIGHLIGHTS

Downside protection: avocado investments provide a compelling risk return profile. The downside risk, i.e. the risk of a permanent loss of capital is limited by the land and the avocado trees. Avocados are permanent crops which are more tolerant to extreme weather conditions than raw crops. Moreover, consumer staples is a defensive sector, that is less sensitive to recessions.

Asymmetric upside: the limited supply and growing demand for avocados, creates scarcity and increases prices. The high margins and price spikes in avocados provide unlevered IRR in the ranges of 20-30%.

Capital preservation in real terms: preservation of capital is paramount to investing. Real assets like avocado orchards remain productive in perpetuity and provide an inflation hedge. Investments in natural resources have exhibited equity-like returns, positive correlations with commodity prices, and outperformance during periods of high inflation (Toczylowski, A. 2018).

Diversifying source of return: in terms of investing, there is nothing like free lunch. With avocado orchards, a true diversification from systematic risks is provided. The naive geographical diversification however is not effective when needed the most i.e. when volatility rises and correlations increase. Avocados are price inelastic products, consequently they are a stable source of income during recessions. Avocados like farmland in general exhibits low return correlation with other asset classes.

Superior Cash-flows: cash flows from avocado orchards result from the sale of avocados. Cash flows provide an additional layer of downside protection and are a relatively more stable way of determining expected returns.

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