Price spikes in 2007 and 2008 in seed, fertiliser, fuel, commodities and food came as something of a shock to a world used to a period of sustained low prices. Between January 2007 and March 2008, the GSCI Agricultural Index, a composite of prices, rose by 64%. Not surprisingly, this increase in basic costs led to widespread social and political instability. Such sharp price movements have, on the whole, settled for now, but the sharp rally in sugar and tea serve as a reminder that prices remain vulnerable to the whims of the weather, and to changing consumption patterns. Continuing concerns over climate change and the impact this will have on future harvests mean that food security is now a permanent fixture on both developing and developed countries’ agendas.

 One solution to what many believe is an impending food supply crisis has been for cash-rich governments to strike a deal with land-rich governments, exchanging investment and infrastructure development in return for land and crops. Countries attempting to secure their food supplies in this way include Saudi Arabia, the United Arab Emirates, China, India, Libya, Egypt and South Korea. Several European companies have also leased land during the past two years to grow crops for food. Indeed, the International Food Policy Research Institute, a Washington-based think-tank, says that since 2006, 15 million to 20 million hectares of land in poor countries was sold or was under negotiations for sale to foreign buyers.

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 Actively encouraged by largely Western governments, private agribusiness, food traders, investment banks and private equity funds have also become part of the farmland investment bandwagon. While some believe that more cash in the hands of food producers (whether from public or private sources) will increase the overall supply of food and therefore enhance price and political stability, others are less sure. They question how the involvement of private enterprise in ventures of this kind supports governments’ aims to counteract the commercial and international commodity market price pressures that gave rise to concerns over food security in the first place.

A two-sided coin

 Most of the land deals that have been made thus far are characterised by asymmetric power relations. Farmers in cash-poor countries such as Sudan, Ethiopia, Madagascar, Zimbabwe and Pakistan have no political voice or organised means of protest, making them vulnerable to exploitation. In some cases the deals that have been struck have led to political unrest or violence – with the entirely unintended consequence of making increased food security a distant prospect both for the investing country and the host.

 The relationship between Madagascar and South Korea is a case in point. In 2008, South Korea’s Daewoo Logistics announced that it had negotiated a 99-year lease on 1.3 million hectares of farmland in Madagascar. Although Daewoo planned to invest $6bn over 20 years in building the infrastructure necessary to support its agribusiness there, which would have created thousands of jobs for Madagascar’s unemployed, the proposals caused public outrage and triggered the resignation of the president and his replacement by opposition leader Andry Rajoelina, who cancelled the plan on the grounds that the people had not been consulted.

 China has faced similar difficulties in its attempts to improve its food security. With 1.3 billion people, China has about 20% of the world’s population – and less than 10% of the world’s arable land. As a result, it led the trend of farmland investment in recent years. In fact, with more than 1.5 million hectares of farmland leased in countries including Kazakhstan, Laos, Australia, the Philippines, Mexico, Mozambique, Zimbabwe and Tanzania, China is second only to South Korea in deals of this kind.

 Reacting to unrest in Mozambique and other countries, however, it announced a surprise policy change at the meeting of G-8 leaders this summer, stating that it could no longer rely on investments in other countries for its food security. “We have to depend on ourselves,” said Niu Dun, China’s deputy agriculture minister, who also stated that China would henceforth aim to become self-sufficient in grain.

Learning from past mistakes

 The more progressive approach applied by Saudi Arabia right from the outset may prove to be a better model for this type of deal longer term.

 During the period of high food prices in 2008, Saudi Arabia, Kuwait, Bahrain and other Gulf states were badly hit. Their currencies are pegged to the dollar, whose falling value exacerbated rising import prices, further fuelling domestic food price inflation. They also felt particularly vulnerable as their own efforts to grow crops in the desert had proved costly and inefficient.

 The result is a land acquisition strategy to prevent this happening again in future. Saudi Arabia, after abandoning its attempt to be self-sufficient because of worries over water scarcity, has sought to secure deals, particularly in fellow Islamic countries, under which it will supply investment, technology and oil in exchange for the right to export produce to back home. In one example, Saudi investors launched agricultural projects in Indonesia worth $1.3bn in 2008, while another company, Hadco, has plans to farm 100,000 hectares in countries as diverse as Sudan, Turkey and Kazakhstan. Saudi Arabia is said also to be working on bilateral relationships with up to 20 countries that will ultimately be recommended to the private sector for investment.

 It should be noted that such a policy approach, however far-sighted, failed to head off the Asian Peasant Coalition’s ‘caravan’ against global land grabbing. This began in Sri Lanka in July and will progress through a range of countries including the Philippines, Bangladesh, Nepal, Mongolia, Indonesia, Malaysia, Pakistan and Thailand before concluding in India in December under the banner of “Stop global land grabbing”.

Focus on frameworks

 Responding to the change in mood, international organisations are starting to take a lead in encouraging practical steps to promote best practice in these types of investment.

 In July, the G-8 leaders meeting in Italy called for a code of conduct in international agricultural investments. They said in a statement they would “work with partner countries and international organisations to develop a joint proposal on principles and best practices” in the face of rising investments in foreign land.

 In August, the World Bank likewise reiterated plans to publish a code of conduct for investing in overseas farmland in 2009. It wants such a code to have the power of enforcement and some suggest it should be modelled on the EU’s code of conduct on bribery.

 In parallel with these announcements, the African Union also ratified its own land sales policy, promoting equality of access to the land as well as recommendations that new investors should help with infrastructure (such as health facilities), pay local taxation, and look at ways to get more involved on the food-processing side (which would create local jobs).

Balance is key

 While agricultural commodity traders and, indeed, the World Trade Organisation, continue to argue that more international trade, not less, is the answer and that international trade has been responsible for lower food prices over the years, experience shows that when commodity prices rise, and higher oil prices push those prices even further, the likelihood of civil unrest and political interference in producer countries will rise.

 This is particularly true where deals have been done in such a way that there is insufficient alignment of interests and a lack of transparency that means local interests are not appropriately protected. As food security and large-scale farmland investment come to dominate the political agenda, it is a policy area that needs handling with care.

 Governments need to encourage and facilitate investment by the private sector by setting policy objectives and negotiating investment frameworks with host countries.

 The private sector that supports them must recognise these objectives and understand that the commercial imperative of making money from supplying food into the international marketplace may require an element of compromise.

 Private investors will need to proceed with extreme caution and consider all of the risks associated with fulfilling the policy objectives of their own governments as well as the commercial and development goals of resource-rich host countries.

 They will be able to find support in the insurance market when it comes to financing and protecting such projects, provided deals are transparent and well-structured, that local interests are protected and that the broader political risks have been actively considered. Existing political risk products can mitigate many of the risks, but can also be readily tailored to meet the specific needs of investors, in particular with regard to the specific type of assets involved and the need for broader coverage against actions of the investor’s government.

 In the future it seems most likely that improved food security will be achieved through a combination of farmland investment, the traditional free flow of trade in agricultural commodities and food products, and insurance market support to underwrite all of these activities.