Farmland Investment: Gaining Momentum

Rising demand for food grains in Asia owing to economic boom and growing demand for corn and ethanol worldwide has resulted in renewed interest in Farmland investment. Similar demand is witnessed in the Gulf countries which have benefited from the current Oil boom but are dealing with rising food insecurity. These countries have started scouting for agricultural investments in Afro-Asian region. This renewed interest in farmland is raising hopes of providing a solution to the global food crisis at a time when the global population is increasing and food production is stagnating.

The age of agriculture is back in trend, as the global food crisis is forcing people to take a fresh look at farming. Farmland is undergoing the biggest revival, as the growing demand for food grains and soybeans from Asia and for corn and ethanol worldwide are making food production procedure a very costly affair. The economic boom in the emerging economies is further driving up the prices of commodities to record highs. Over the next decade, China and India are expected to add around 3-5 million middle-class population each year. This total does not include the growing middle-class population in Latin America, the Middle East and Eastern Europe.

Demand for corn to feed livestock climbed 24% during the last decade as personal incomes and animal protein consumption in emerging economies increased considerably. Rice-bowl nations like China, India, Thailand and Indonesia have already curbed rice exports. Food riots are ravaging several Afro-Asian nations, leave alone oil prices.

In fact, the rising food prices are threatening to increase the possibility of adding another 100 million people to the 852 million who are already hungry. Jacques Diouf, Head, Food and Agriculture Organization (FAO), admitted that “food output must rise 50% by 2050 to meet the rising global demand. However, over the past 20 years, we have neglected investment.” According to FAO statistics, the total agriculture development aid to poor nations plummeted by more than half to $3.4 bn in the last two decades. During the same time, agriculture’s contribution towards development shrank from 17% to 3%. Recently, the World Bank has acknowledged that from 1991 to 2006, it allotted only 9% of its total lending to sub-Saharan farmers who depend on agriculture for their livelihood. As a result, many countries got out of the business of seed, fertilizer and grain marketing, and the unprepared private sector with too little access to financing failed to fill the gap. A growing number of economists are now convinced that the poor nations need a healthy farm sector for sustained economic development.

Gaining Global Demand

The Gulf region may be enjoying the current oil-boom, but it is a victim of food scarcity. Global food crisis has put the Middle East and Africa in a fix, as they are forced to choose between growing more crops to feed their ever-increasing population and at the same time conserving their already scant resources of water. In the Middle East, existing water sources are estimated to last for only 30 years, while population is expected to grow more than double the world average. Further, the region is crippled by a dry climate and shortage of agricultural land; as a result, most of the countries import 90% or more of their food grains. Against this, depending on food supplies from outside world is not only perilous but shortsighted, especially in an era of trade restrictions. 

To meet this increasing demand, many sovereign states are resorting to expensive schemes to secure food supplies for their people. Several Persian Gulf nations, including Saudi Arabia, have started scouting for farmland in the fertile Afro-Asian countries. The UAE and Yemen are pursuing deals worth billions of dollars with several private companies in Sudan and Pakistan for cultivating rice, wheat, sugarcane and fruits. Egypt, where a paucity of subsidized bread sparked civil unrest earlier this year, is aiming to grow wheat on two million acres along the border with Sudan.

South Korean and Chinese multinational firms, with help from their governments, are entering in a big way to invest in farmlands in Russia, Burma, Laos, the Philippines and Africa for growing rice, corn, sugarcane, cassava and rubber. According to the Lao Committee for Planning and Investment, China already has become the second largest agriculture investor in Laos and Burma. It is providing seeds, fertilizers, pesticides and farm machinery to the farmers in those nations. China, under pressure to feed its 1.3 billion population, wants to enforce high tariffs on food imports from developed countries. With food grain stocks exhausted and prices at an all-time high, the poor nations too are turning their back on the old ideas and opening doors to investors. This has encouraged businesses and investors to channelize billions of dollars into farmland and food production.

The prudence to foresee mounting demand for food has led to investments in facilities involving food production such as farmlands, fertilizer, grain elevators (buildings for storage and shipment of grains), barges (flat-bottomed boats built mainly for river and canal transport of heavy goods) and ships. Even though the equity markets have not completely come to terms with the enormity of this growing demand, private equity and hedge funds around the world are making huge investments in farmlands.

College endowments, pension funds and real estate fund managers are buying farmland, even as home construction companies are deserting thousands of undeveloped parcels in the US. They are aggressively placing bets on agricultural commodities like corn, wheat and soybeans. Fresh from the sting of the subprime catastrophe and the credit squeeze, banks and investment companies are also beginning to add farms to their more conventional investments. A majority of them believe that although the current surge in food prices is partly due to transitory factors like drought and biofuel subsidies, the demand for food is likely to rise in the long run, which presents a potential investment prospect. In fact, the value of farmland has been increasing at rates greater than the residential market growth over the past decade.

Untapped Potential

According to Agcapita GP Corp, a Canadian farmland investment partnership, in addition to providing a potential hedge against inflation, an investment in farmland provides returns with less volatility (approximately 60% less volatility) than stock and bond market returns. Investment funds have already started pouring in billions of dollars into frontier lands (land that has not yet been cultivated for production) in less developed nations in Eastern Europe, Southern America and Africa for cultivating commodities like wheat, corn and soybeans. Some have bought several ethanol plants and farmland in Canada and adequate storage space in the Midwest to keep millions of bushels of grain.

The UK-based Braemar Group was the first to spot an opportunity in the potential of farmland investment. Europe is under pressure to increase biofuel production, and the farmland close to the northeastern England will be the first source of supply of ethanol.

BlackRock, a company partly-owned by Merrill Lynch, is planning to invest in farmland in sub-Saharan Africa to the English countryside. In 2007, the London branch of BlackRock launched the BlackRock Agriculture Fund, seeking to raise $200 mn to invest in fertilizer production, timberland and biofuels. Presently, it stands at more than $450 mn. Calyx Agro, a group of Louis Dreyfus Commodities, is purchasing vast stretches of farmland in Brazil in a big way with help from large institutional investors like AIG Investments. Emergent Asset Management, a UK-based, award-winning investment management firm, is raising $450 mn to $750 mn to invest in farmland in sub-Saharan Africa. The fund has chosen Africa because of inexpensive land values and accessible labor compared to other agro-based economies. Moreover, Africa’s micro-climates are conducive for cultivating a wide range of crops. These investors are getting positive response from institutional investors like insurance firms and some Sovereign Wealth Funds.

Speculative Investments?

The long-term implications of the sudden surge in farmland investments are not clear. Some conventional players in the farm economy and others who actively involved in agriculture policy believe that the new breed of investors will focus on returns above all else, and are not committed to staying with farming through good times and bad.

The cycle of entering in and out of farmland investment will be very volatile and could become subject to speculative bubbles. Mark Lapolla, Adviser to institutional investors, says, “It is important to ask whether these financial investors want to actually operate the means of production or simply want to have a direct link into the physical supply of commodities and thereby reduce the risk of their speculation.”

However, the proponents of farmland investment dismiss the criticism that the investors will control the supply-demand mechanism artificially by holding back inventory to move prices to their benefit. They argue that the investments will be advantageous to farming community and, finally, to consumers. When food grain prices become volatile, grain elevator operators have to dig deep into their pockets to lock in future prices. It is here the financial investors come to the rescue of grain elevator operators by providing the money they need to endure the unpredictable commodity markets. Maintaining these important services helps bring down costs to the farmers and negates the price increases for crops.

Furthermore, new investments will bring in the latest technology and accelerate the development of infrastructure, and the consumer will benefit because there will be more supply. The investors aim to combine small plots of farmland into more productive assets and modernize grain elevators and fertilizer supply depots, so that they can increase production and reap profits.

A Win-Win Approach

The present surge in farmland investment is a result of skyrocketing commodity prices, increasing demand for ethanol, and the continuous decrease in the area of arable agricultural land globally. Against this backdrop, farmland investment is the best long-term approach to agricultural development, taken up by entrepreneurs who sense opportunities when others see gloom. Some analysts see the potential for significant and lasting benefits to both parties. For instance, even though investment is meant to benefit the investors, foreign investment helps poor nations in Afro-Asian region which lack the resources to make their own agricultural land productive by improving infrastructure and irrigation. If poor nations can lay emphasis on local agriculture by opening thousands of new acres to food grain cultivation, they can save enough money on imports and divert it for economic growth within a short span of time. It is significant to note that these investment funds are using their own money. If they are successful they will realize significant profit, the world supply of food will increase, and in the process food grain prices may stabilize.

  Countries Investing in Farmland Away from Home

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Sovereign State               Have Already Bought/Expressed Interest In

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Abu Dhabi                          Sudan

Bahrain                              Philippines

China                                 Africa and South America (Brazil)

India                                  Paraguay and Uruguay

Libya                                 Ukraine

Saudi Arabia                      Thailand and South Africa

UAE                                  Pakistan, Sudan, Egypt and Yemen

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Source: www.seekingalpha.com

Indian Scenario

Agriculture in India has transformed significantly over the past few decades. However, lack of agri-infrastructural facilities as well as field-level operational flexibility has hampered the agricultural growth story. Even though the government plays an important role in providing essential inputs like fertilizer, water and energy, the importance of the private sector cannot be ignored. Private sector provides additional investments, brings greater efficiencies and ensures superior service to the end consumer at an affordable price. The possibility of joint ventures with international investors and training institutes to provide training to farming community to use latest technology is to be explored. Therefore, there is a need to devise a long-term strategy like integrating the private sector with agriculture, which will avert the vulnerability of the farming community and step up agricultural growth.

If farmers are exposed to market signals, they can become more productive and competitive. In the absence of such an environment, it is vital to have policies targeted to tackle specific issues - such as environmental, animal welfare and other concerns - that are unbiased and more efficient than market interventions. Reliable initiatives and investments are the need of the hour to put farming back on a growth trajectory.

Harriet Friedmann, Professor, University of Toronto, suggests, “Farmland and farmers are a public good and need to be both protected and encouraged through public policies to engage in sustainable food production in tandem with managing natural resources for the whole society, particularly soil, water, energy and carbon sequestration. It follows that speculative pressures to maximize revenues in the short-term deepen existing problems; fundamental changes in land use management are needed instead.” With increased investments in farmland and the resultant increase in food production output, food prices may begin to head southwards in the coming years. Jeff Conrad, President of John Hancock’s Ag Investment Group, which has invested more than $800 mn in farmland, tells investors, “Farmland is not a quick buy and flip type of thing. It takes time to work a return—periods of 7 to 10 years to hold the investment.”

N Janardhan Rao, Lead Economist.