Land Calculations

I just received a personal reply to the e-mail that I sent to the consul after our May 17 lunch. The e-mail contained details about the man's company, so I was able to find him with a Bing search. From what I could gather, he may well be Mr Cork himself. Compared to him, I'm a very small fish indeed, so it's more than a little flattering to receive a personal reply on my e-mail.

My acquaintance with the consul makes him the third person of his calibre in my circle of friends and family, and I'm again struck by the personal qualities that such people possess. They have a fantastic ability to tone things down and make everybody relaxed in their company. Conversations focus on interests and passions, and there's never any bragging. They want to learn about other people, and you know they are sincere because they will remember you next time you meet, and they will ask about things that were brought up on previous occasions.

Another distinguishing feature is the lack of public information on these people. They keep a low profile in most things. So much so that I wasn't able to find Mr Cork by searching his name alone. I had to add the name of his company to find him. My other two acquaintances are equally hard to find.

All of this appears to be part of an unwritten codex designed to deflect unwanted attention and at the same time attract the likeminded. They want company that is entertaining and informative, and they detest people that immediately want something from them beyond good company and free for all information. I was therefore spot on when I asked for information regarding the cork business in a friendly and sincere manner. My goal is not to make money off of the man, but to make money together with him, all be it on a very much smaller scale than he's operating.

Finally, the e-mail I received is typical of these people. They are busy men and do not waste time on what's merely a business inquiry. His mail reads like a power point presentation. However, every point contains useful information for a novice like me. Combined with what I've already learned about cork oaks from Wikipedia, I can make some general observations and calculations. 

Land for cork trees come in two broad price categories. Land with fully grown trees costs about 7000 euros per hectare, with 1 hectare = 100x100 metres. Land with good conditions but no trees costs about 3500 euros per hectare.

It takes about 25 years for cork trees to reach fully grown size, which means that there's a 100% inflation adjusted return on investment in that period, provided the current price of land is reasonable. However, on asking Mr Cork point blank over lunch about the current price of land, he considered it to be above fair price at the moment. There will be better prices in the not too distant future.

Harvesting happens every nine years, which implies a return of about 10% per year in terms of value, given that the land is bought at fair value. The reasoning here is that the land is appreciating in line with inflation and therefore not a drain on the capital.

Land is opportunity cost in the same way that money is opportunity cost. Purchased below fair value, the land becomes a good investment in itself, in the same way gold becomes a good investment, provided it too is purchased below fair value. Timing is important. There's no point in trading gold for land as long as gold is appreciating faster than land. However, once the trade makes sense, the 10% annual appreciation of cork in the forests can be converted into a corresponding cash flow of 10%.

The 10% cash flow will in turn have to be divided into three, per Cantillon's formula, with one third going to taxes and another third going to labour, leaving us with 3.3% real inflation adjusted return on our investment. Interestingly, this corresponds to a compound interest of 125% over 25 years, meaning that buying land and growing trees from seeds is roughly as profitable as buying fully grown forest.

The long timespans involved in this business means that we have to look at it from a heritage perspective. However, this is not a problem. My investment strategy is focused on mega-cycles anyway, and my investments are not entirely tied to me personally. They're going to be handed over to my son together with my instructions on how to deal with this kind of investments.

Cork oak forest

By Berrocal1950 - Own work, CC BY-SA 4.0, Link