How Cacao is Unlocking Value In Puerto Rico’s Farmland

By Stephen Inglis and Dickran Guerguerian

Our first inclination for our mountain retreat in Puerto Rico, was to buy a coffee hacienda. In January 2017, my partner Thanh and I, left New York for Puerto Rico in search of a farm. Through a listing on Sotheby’s, we found Hacienda Las Nubes in Adjuntas. A 6-acre coffee plantation growing single-origin coffee.

Following weeks of due diligence on Hacienda Las Nubes and the specialty coffee market it was apparent that growing coffee in Puerto Rico was not economically viable and that government policies propping up the coffee industry were not sustainable.

Continuing on our quest to acquire a farm, we ended up buying a mixed-use farm in Las Marias from an elderly farmer without a succession plan, who was anxious to retire. This was our realization of how to buy off-market farmland.

We named our starter farm Finca La Luna and began learning about farming and in particular about propagating cacao. Hurricane Maria came a few months later in September 2017. The devastation was immense flatting all of our coffee trees, but to our surprise, the mango and cacao trees stood up to the severe hurricane. On the cacao trees, the winds blew off the flowers setting production back six months. But the resilience of cacao trees to hurricanes allows production to resume. This being an important consideration in the selection of what crops to plant.

Puerto Rico’s agricultural sector has been in a seventy-year secular decline. In spite of having fertile land, and government incentives, 75% of the island’s farmland remains underutilized. While cultural issues are often sited for the Puerto Rican’s distain for farming and the jibaro way of life, it is economics that has made farming in Puerto Rico a non-starter. The average size of a producing farm in Puerto Rico is fifty-acres. After the land reform of the 1930’s laws were put in place to limit corporate ownership of farms to 500 acres to prevent corporate consolidation. Thus, Puerto Rico farms are for the most part small holders without economies of scale.

At La Luna, apart from the focus on planting cacao, we grow plantains, bananas, tangerines, breadfruit, mangos, coconuts, passion fruit, and coffee. Of all these crops, the only crop with a functioning market is plantains. While there are buyers for coffee, and plenty of government incentives, finding coffee pickers is nearly impossible, and as a result, at La Luna, like so many other small coffee farms, our coffee doesn’t get picked and now those trees just provide ornamental shade for the young cacao trees. This decision not to harvest coffee in the aggregate has resulted in a shortage of coffee for the local market thereby requiring the importation of cheaper semi-roasted beans from Mexico and The Dominican Republic further undermining the local growers.

In spite of legislation stemming from Puerto Rico’s Act 60, Chapter 8: Incentives for Agro-Industries that provides numerous tax exemptions and rebates, farming continues to be a challenge primarily due to labor shortages and low value crops. The incentives, however, have allowed farmers, and especially coffee farmers, to maintain their farm infrastructure. It is estimated that there are 60,000 acres of abandoned or otherwise neglected coffee farms in Puerto Rico. Much of this is a result of the lingering effects of Hurricane Maria, and apart from the few specialty growers, virtually all these coffee plantations are for sale at distressed prices.

In the world of alternative and uncorrelated investments, the proposition presented in this article is the case for acquiring distressed coffee farms and converting to cacao. The investment thesis for buying Puerto Rico farmland is predicated on i) plenty of cheap fertile land with existing road and water infrastructures, ii) a super profitable crop like cacao, and iii) a market for the crop. First and foremost, there are thousands of acres of abandoned or under-utilized farmland that can be purchased from $600 to $2500 per acre depending on usability. Land too steep for planting is pricing as low as $600/acre and raw flatter land easily planted is around the $2500/acre price range.

Secondly, cacao as an alternative to coffee is promoted in U.S. Department of Agriculture reports indicating that Puerto Rico’s climate mirrors some of the best cacao-growing regions in the Caribbean. The time to maturity for cacao trees has yields beginning after 3–5 years, with peak production at 7 years, which can continue for over fifty years. The U.S. fine chocolate industry is worth $27 billion, creating demand for single-origin, high-quality cacao. The USDA sites a yield potential of 1,000 pounds of dry cacao beans per acres, with premium prices ranging from $3.50 to $10 per pound. However, the USDA has not recognized that over the past ten years Hacienda Jeanmarie has developed a super strain of cacao trees (JM-03) capable of producing as much as 3,000 pounds of beans per acre, which are currently selling at $10 per pound or $20,000 per ton. Thus, a mature cacao forest of JM-03 trees can generate $30,000 per acre.

The pro forma 200-acre cacao forest presented here is from an actual project to convert a coffee farm in the Lares area. For this project, a conservative long-term price of $11,000 per ton is assumed with an aggressive yield of 1.75 tons of beans per acre after seven years. The recurring $3,850,000 revenue with a $3,000,000 operating profit netting out the 80 acres of plantains. Valuing the 200-acre cacao operation in 2032 can be made using a cap rate just as you would with a commercial income property. This is especially appropriate for cacao given the long-term profit horizon, whereas coffee, avocados, and citrus trees typically don’t produce more than twenty years. Using a cap rate of 5% would value the 260-acre cacao farm at $60,000,000 while a 15% cap rate would value the farm at $20,000,000. Determining what the cap rate would be after the seven year investment horizon would be a function of: i) strength in pricing and the global demand for fine flavored cacao, ii) supply of high quality cacao, impacted by disease as in West Africa, or import restrictions into the Euro-zone for beans with cadmium and other heavy metals, iii) the ability to bring in guest workers on A-2 Visas, iv) general interest rate levels to finance the operations, and v) the availability of fertile land. Puerto Rico is a small island and the ability to purchase land at current prices will not last long.

Since the purchase of La Luna in 2017 we have acquired several other large farms and have been implementing the conversion to cacao. The bottleneck to planting the millions of cacao trees to achieve a billion-dollar cacao industry in Puerto Rico is the supply of the JM-03 trees with outstanding genetics. To solve this supply constraint a mega-nursery, Cuerdas Verde Cacao Nurseries, has been established in Mayaguez capable of shipping 50,000 trees per month.

As is the case with most alternative investments, liquidity is an important consideration. Currently, it is the absolute lack of liquidity that has the price of farmland so low. We have seen beautiful farms that have been on the market for years. An important factor to be aware of when buying farmland from a retiring farmer without a succession plan, is to close while the seller is still alive. As is often the case, once the property is being sold as an estate sale in probate, you then have to deal with all the heirs who have to agree on terms and pricing, another reason why properties remain unsold.

The liquidity thesis for cacao farms, is that once a farm is established and is in production with cash-flow, the secondary market will emerge. Standardization is also a factor. By planting the same JM-03 genetics trees, using our established best practices for propagation techniques, the pricing becomes standardized in relation to the prevailing cap rate for commercial real estate in Puerto Rico. As well, larger farms, 100 acres plus can be subdivided and resold through syndications.

These are still early days in the development of the fine flavored cacao industry in Puerto Rico where all the critical components are in alignment. Lots of excellent, fertile, low-cost land, an 8% CAGR in global demand for fine flavored cacao, and access to the finest cacao genetics for yields in excess of 1.5 tons per acre. Apart from the cacao play, Puerto Rico farmland is not an attractive investment.

To learn more about investment opportunities in PR cacao please visit https://www.cbx.market/

Citations & References

USDA Rural Development Puerto Rico Fact Sheet - Investment and Economic Impact
URL: https://www.rd.usda.gov/media/file/download/usdardpuertoricofactsheet-07-2024.pdf
Farming Economics & Investment Feasibility
Puerto Rico Specialty Coffee Industry Analysis (USDA Reports on Coffee Production)
URL: https://www.nass.usda.gov/Statistics_by_State/Puerto_Rico/index.php
University of Puerto Rico – Coffee Industry Recovery & Economic Feasibility Studies
URL: https://upr.edu/agricultural-research/
Cacao Farming in Puerto Rico – Economic Viability
USDA Report on Cacao Production Feasibility in Puerto Rico URL: https://www.usda.gov/topics/farming/cocoa-and-chocolate

Stephen Inglis
Co-Founder
FASPR - Financial Analysts’ Society of Puerto Rico

Dickran Guerguerian
Chief Financial Officer
Minimise USA LLC / Philanthropist

The Financial Analysts’ Society of Puerto Rico is a San Juan based society for financial professionals to network and attend presentations on topical financial matters. The Society’s mission statement is “Altruism for Ethics and the Advancement of Financial Analysis” and to this end hosts the CFA Ethics Challenge for universities in Puerto Rico. Please visit https://www.faspr.org/ to learn more.