Karen and I have talked a lot over the last few years about our Maslow’s Hierarchy of Needs Investment Strategies, our thesis being that everyone needs healthy food and affordable shelter, no matter the market conditions:
And also the reasons why Investing in agriculture gives us a great hedge against the volatile stock market.
But this Covid-19 Black Swan is challenging all investor assumptions at the present time. Nobody can predict how much Helicopter Money will be dished out to soften the blow of the economic shutdown or what that means for the shape of the economic recovery.
So we decided to delve a little into the actual investments we hold and discuss any early indications as to the impact of Covid-19 on our portfolio. In Part 1, I’m going to be discussing our Panama Golden Pineapple investment in Panama, Part 2 is our agriculture investments in Colombia and then Part 3 will be a focus on our Multifamily investments in the US.
Let’s get to it. Starting in Panama. What has happened and what have we learnt so far?
When the Covid-19 pandemic hit Europe, we were sending between 80 and 100 pallets of La Dona Pineapples per week via air shipments to customers in Italy, France, Spain, Germany, Switzerland et cetera.
Then on March 13th, 2020, the Panamanian Government declared a National Emergency pertaining to the Covid-19 pandemic and then on March 19th, announced the suspension of all international flights to contain the growing spread of the new coronavirus. This included the suspension of our Pineapple air freight given we transport our pallets in the cargo hold of passengers flights (generally cheaper rates for us and additional revenue for the airlines). Paul, who operates the farm in Panama, had 3 days to respond to passenger travel shutting down and he made sure to send the maximum pallets on the last passenger plane leaving Panama just before the suspension.
Given the uncertainty concerning air freight, Paul and Tom then arranged to send the rest of the picked fruit already in the warehouse by sea container to an Italian customer, which entails 14 days in the sea with 2 days of transfer between warehouses at the ports on both sides. For sea shipments, we sell our Pineapples for $7.50 per box (high-color versus $6.25 per box for green fruit) on average to our customers compared to $10.50 per box via air shipments. Just a marginal difference in price but we avoided any loss to the farm overall and importantly, avoided our amazing fruit going to waste.
UPDATE on Monday 13th April, 2020: Today's text from the Italian customer we sent the sea freight to 'Hi there, today we have received the high-colored pineapple by sea, and I would like to thank Paul for the great job done ! The pineapple received has a very good quality ! Thanks to Paul and to Thomas, (who always endures me even if I write to him 20,000 times a day. I now hear Thomas on the phone more than my wife). Have a good day !' :-)
The next task was to arrange quotes with the traditional air cargo carriers who were starting to smell blood in the air; they quickly increased their rates to $2.10 per kilo compared to $0.95 prior to the crisis. This was due to the limited number of planes now flying these routes, increasing competition against shipping things like medical supplies, and the general desire to price gouge customers (Uber surge pricing anyone?!).
Alongside the price gouging, the Cargo carriers also removed their 30-day credit policy for transport costs and started demanding cash within 7 days. This is standard credit tightening behavior during a downturn or crisis; we will start to see this play out across many businesses globally in the coming months. We also have a 45-day collection period for customer invoice payments. So now, as a business, there are additional costs involved in carrying air freight costs for 38 days.
A few days after the shutdown, some additional routes started opening up between Panama and Amsterdam and things finally settled down at around $1.57 per kilo which was cheapest air cargo price between Latin America and Europe. Competing fruit suppliers from Peru, Costa Rica, Ecuador, and Colombia ended up shipping their pineapples by air at more than $2 per kilo, a significant disadvantage given the price sensitivity of the customers.
All in all, we had disruption on the Panama side of our supply chain for about 2 weeks. But nothing catastrophic. Remember, food is a necessity and in fact, grocery stores had a run on goods and increased their sales as the pandemic hit. Investing in Maslow’s necessities anyone? And fortunately for us, many of our existing customers in Europe also agreed to absorb the additional increase in shipping costs.
On the customer side of our supply chain, things worked themselves out in a pretty similar fashion. First and foremost, our sea shipments arrive in Rotterdam, the largest seaport in Europe. Our air shipments arrive at Amsterdam’s Schiphol Airport. These locations are critical to Europe as goods can reach over 244 million consumers within 1,000 kilometers of these locations. Second, Holland prides itself on solid disaster preparedness due to the critical nature of their role in European supply chains. These critical ports and airports have remained fully open, especially as the Dutch government is experimenting with Covid-19 herd immunity.
The next stage of our Pineapple delivery supply chain is the distribution of our pallets by truck to wholesale and retail customers across Europe. Disruption was also minimized again because Covid-19 came to Europe in waves; each country saw an initial lockdown and strong reaction by governments followed by businesses then working out how to operate in the ‘new normal.’ Our 2 biggest markets for export are Italy and France. When Italy was hit first by the virus, the wholesale market collapsed for a while due to a lack of delivery capability – nobody was coming into the wholesale markets to buy. So we shifted more of our deliveries to our French customers. In the end, new delivery services started up in Italy and wholesalers are now delivering to both the home and grocery stores directly. Again, people and businesses adjusting to the new normal.
Then Covid-19 shifted quickly to Spain and then finally to France and Germany. We were able to move our supply of fruit between different customers in different countries as the waves occurred; amazing work by Tom and Marine on the La Dona sales team. During these weeks of uncertainty, Tom also opened up a new customer in Spain we’d been talking to for over a year.
Paul also saw an opportunity to create a new channel locally in Panama for 500 pineapples per week delivered to people’s homes in packs of 2. Quickly creating a new box for this delivery channel. The first order for 2 pallets was sold out in 3 days, the 2nd order took 2 days. Paul is getting the same price for Pineapples locally as our original air shipments but without the overseas transport costs!
This was Paul and Edna's first reaction to retrofit the packhouse to find a new channel in case Europe shut down completely. At the same time as retrofitting the pack house for ‘Covid-19 safety requirements’ from the Panamanian government.
Edna and Paul training the staff on 'Covid-19 Safe Working Practices' above. By implementing these measures quickly with PPE (Personal Protective Equipment) being used at the farm and packhouse, Paul was pleased to let me know that we have not had a single case of Covid-19 across our workforce. This is a major accomplishment as other packhouses and processing facilities have had to close due to outbreaks - now that is what we call true leadership in a crisis!
In the case of France, the Rungis Wholesale Markets in Paris shut down for a couple of days briefly when France went into lockdown. After formulating a plan to work around the lockdown restrictions (stringent stay-at-home policy unless purchasing groceries, critical worker travel, or obtaining medical care), the market quickly opened back up for only 4-5 hours per day. And instead of allowing buyers to stroll through the markets, the authorities stipulated that the wholesalers can no longer display their fruit for purchase. Buyers now purchase by phone and collect goods on the dock at the back of each market store. Minimizing human interaction as much as possible.
That was when we started seeing the shock wave coming to an end in Italy and Spain. After a couple of weeks, our Italian customers came back and said, “Please send me 30 pallets next week.” Italy is now a strong market for us again, they want 25 pallets a week which is higher than before Covid-19. But back at the farm, given the uncertainty in the markets, Paul stopped maturing fruit for the 7-10 days it takes to get the high-color premium-quality Pineapples. The farm went back to producing green fruit as it has a much longer shelf life and can be exported by sea. Now Italy was back and the markets adjusted to the new normal, there was a delay to start things back up at the farm. In fact, a 7 to 10-day delay to start maturing fruit again for export. In the end, France had a similar 2-week shock in supply chains. Demand is now back up to 30 pallets a week. Germany is starting coming back as I write this post.
Overall, the wholesale fruit markets suffered shock waves across Europe at different times and they are now back to 75% of levels before Covid-19. We expect things to return to normal by the end of April.
So our problem now is quickly bringing production back up at the farm to 90 pallets per week. And it is hard to buck nature and turn things back on quickly. So we are aiming for 10 pallets a week to increase our high-color fruit production. We are at 40 pallets per week today, so should be back to 70 pallets by the end of April and full production will be back in May. Hopefully as lock-down restrictions are starting to get released and flattening of the curve gets us over the apex in many of our European markets.
May and June are generally peak months for Costa Rica for green fruit production shipped by sea container. Which causes a decrease in Pineapple prices for us due to higher competition. But retailers have been cancelling big planned orders due to the recent crisis. That might create an opportunity for us to maintain prices during the peak season for Costa Rica. What the large suppliers are doing in Costa Rica right now is still mostly unknown.
From a business perspective, our Panama Golden Pineapple business has suffered minimally from Covid-19. Paul, Tom, Marine and the entire team did an amazing job responding to these unprecedented changes to our global economy. All of the workers in the field, our shipping partners, our wholesale partners, all of the packhouse employees, everyone has made a major contribution to keep the business stable - especially given the short workdays mandated by the government during lock-down. It takes an entire team to deliver such excellence.
Farming is a long-term business investment and it was pointed out to me last week that if you close either the Rotterdam Port or Amsterdam Airport, you restrict goods, services and food supply for hundreds of millions of people in Europe. That is why we should always aim to use critical shipping and transport channels for our products and services. Finally, it is also worth noting that if we had known that Air Freight costs were going to normalize so quickly at $1.57/kilo, we never would have slowed down our farm production at all.
So our thesis for Maslow's investing is holding true from a food perspective. Although we also realize the impact from Covid-19 isn't over yet from a global economy perspective. But for food shipments, many of the suppliers and buyers have adjusted to the new normal. And we feel confident in our agriculture investments given the need for high-quality food, no matter the crisis surrounding us. And more importantly, the Farmfolio team has again shown their ability (and agility!) to respond to emergency situations such as a pandemic with flying colors.
Like many of our Alliance members, we have consistently built a stable portfolio of asset-backed cash-producing assets that can whether this downturn. And we'd like to invite you to learn how to invest in Real Estate and Agriculture so you can retain your wealth outside of the volatile stock market during future storms. If you are interested, please click here to schedule a call
Peter & Karen