They can be as lucrative as they can be controversial. In some regions, their volatility and risk is not for the faint of heart. Agriculture investment is nothing new, but its interest among foreign investors has grown substantially over the years, and it is now one of the most talked about sectors in the world of FDI.
Speak to any government’s finance minister and attracting investment to their agriculture sector is usually one of the first things mentioned. Yet this growth has divided opinion. Some see these investments as ruthless 'land grabs' and a form of legitimised neo-colonisation, while others talk about benefits to the local population, technology transfer and the ability to feed more people.
One of the most infamous of these deals was between the former government of Madagascar and South Korean firm Daewoo Logistics, which reportedly wanted to lease close to half of the country’s arable land to grow corn for Korean consumption. The deal was so controversial that it is widely considered to have provided the impetus for the ousting of former president Marc Ravalomanana. Upon assuming office, the new president Andry Rajoelina immediately cancelled the deal, saying it offered nothing to the local population.
Talking up the positives
Yet frequently unmentioned in the press are the other stories, where this type of investment creates jobs, transfers technology, know-how and expertise, and helps alleviate the problems of hunger and the explosive demand on a global basis for more food.
Agriculture investment fund managers love to point to charts that show by 2050 the world’s population will grow by more than 50%, and the world’s food supply based on current trends will not be sufficient. Pathos is the most likely explanation for this, as less emphasised is the motivating possibility for lucrative returns, but this does not mean their charts and projections are inaccurate. A larger world population will need more of everything, and food will be a huge part of that.
Interest in agriculture among the investment community is certainly present, but such issues have not escaped them. Today’s agriculture investors have become much more image conscious. None of them wants their names appearing in national newspapers accusing them of land grabs. As such, there is a sizeable trend not necessarily towards more transparency and better governance, but rather, investors are moving their money away from the riskier and more frontier-style agriculture deals, and towards the more established markets of Europe, Australia, North America and even many parts of South America.
Of course, there remains great interest in Africa and south-east Asia, but investors are worried that weaker levels of governance and rule of law can damage both their potential returns and perhaps more importantly, their reputations.
Developed world dominates
David Hallam, director of trade and markets at the United Nations Food and Agriculture Organisation (UN FAO), says that while he has seen some progress made on governance in the less developed world, there is still a long way to go, and unsurprisingly more agriculture investment is flowing into the developed world. Unfortunately though, he believes that it is the less developed world that needs the investment the most. While overall he is positive about the direction the sector is headed, he acknowledges that there remain significant challenges.
He says: “We’ve been looking at these trends for about the past three years, and while our initial concerns over governance were valid, there was still a lot of other positive things going on. Our view is that agriculture investment has been neglected over a long period of time, and a lot of the problems you see today are due to a lack of investment.
Unlike some of the non-governmental organisations that say agriculture investment must be stopped, our angle is to ask if there is any way we can turn these investments into benefits for developing countries and do something good with the money. We wrote a set of principles for investment in this area and hopefully this will help.”
Investing in agriculture is not an exact science. There are several ways for the investor to seek profits, which range from the more real estate-style land value appreciation to selling produce on the open market. The process can be so complicated that many institutional investors are opting to put their money in a designated agriculture investment fund, usually run by a private equity group.
Frequently however, investors look at a formula whereby the return equals yield multiplied by price minus expenses and then divided by the total capital investment. While this presents a simple equation for a sector that is anything but, the idea is to isolate the various factors of the investment process. Part of the point behind this is to manage risks more effectively. When yields, prices, expenses and capital are viewed independently, investors say it gives them better control of their moves.
David Bryant, managing director at Rural Funds Management, says: “Operational results are much more volatile than anything we’ve invested in before. The challenge is to invest in something where the revenue streams can be better managed and less volatile.”
Where to go?
Without question it is widely agreed upon within the investment community that this is a highly risky area in which to put one’s money. In addition to trying to isolate the risk factors, investors also try to look for other sources of revenue and avoid other sources of risk that fall outside of the most basic equation. One investor jokes that the simplest way to avoid the majority of risks was to just buy the farms and rent them out.
With the plethora of risks associated with agriculture, it is little surprise that many investors are now looking at the more developed and stable countries for their investments. Some of the hottest markets at the moment appear to be in Australia, eastern Europe and Brazil. Figures from greenfield investment monitor fDi Markets show that in the past three years, Russia, Romania, the UK and the US have seen consistently strong and growing investment project levels. Of the top 20 investment destinations since 2011, none are from Africa. The closest to a frontier investment type of destination would be Vietnam, Thailand or Malaysia, but these lag far behind the biggest destinations of the top 20.
On the list for the top 20, and perhaps creating the most noise in the European agriculture investment scene, are Russia and Ukraine. The latter, which was once known as the bread basket for the Soviet Union, has seen its production levels fall. There are similarities with Russia, and investors are monitoring the huge supply potential of both countries. Ulo Adamson, president of integrated soft commodities producer Trigon Agri, says that while there can be concerns over governance, the opportunities these countries represent is undeniable.
He says: “There is a huge supply potential and limited local consumption, so both can be significant exporters. Production costs are also very low.”
Yet challenges in these markets remain. Investors point to figures showing that 85% of Russia’s tractors are more than 10 years old. Laws can be very insecure, and skittish banks are reluctant to lend money for these projects over concerns of governance. Both countries are also frequently rated among the most corrupt in the world.
The Africa question
Regardless, it seems that these problems pale in comparison to those in Africa. It is not a coincidence that the continent with the most consistently low rankings in terms of governance and corruption has found it the subject of some of the worst press over agriculture investment.
This is not to say that opportunities do not exist. Far from it. Africa is home to some of the most fertile land on the planet, yet to date only a small percentage of that is being used. Considered a low-cost region that would help the expenditure factor of the equation, Chris Isaac, director of project development company AgDevCo, says that Africa tends to be an expensive place to do business because of what it lacks.
He says: “The main problem is not a lack of interest or finance. The main problem is that returns have been low. There is poor infrastructure, start-up costs are high, especially for greenfield investment, risks are higher, politics and demand are uncertain and there is a small opportunity set.”
However, he is keen to point out that it is not all doom and gloom on the continent, and that his company has remained active there. He says that there has been considerable progress in terms of governance in places such as Zambia, Tanzania and Mozambique.
Mr Hallam also mentions a few places in Africa where the UN FAO has seen progress, which also includes Zambia, but he is especially encouraged by measures taken by Senegal. He says that the Senegalese government came up with a list of projects it wanted to see happen, and then presented these to foreign investors who could match themselves up with the projects they felt best corresponded with their goals. While a simple step, he says it is a move in the right direction.
Unfortunately, however, Mr Hallam still believes that bad press and poor rule of law are preventing foreigners from getting involved. Recently he held a meeting with some officials from the Saudi Arabian government who said they would no longer be investing in African agriculture over fears that these deals would sour. This, says Mr Hallam, is bad news for Africa, as the Saudis have huge levels of demand for agriculture and plenty of money to finance these projects that will now lose out on their funding.
If there is an emerging market where foreign investors seem most comfortable, it would appear to be South America, and primarily Brazil. Governments in the continent are seen as less corrupt than many of those in Africa and south-east Asia, in addition to being more democratic. Property rights are more straightforward, and access is less of a problem.
Home to some of the hottest economies even throughout the financial crisis, the rich and fertile lands of Argentina and Brazil have seen the most interest from foreign agriculture investors. Interestingly, Brazil has some of the toughest and most protectionist laws regarding foreign ownership of land, particularly when used for agriculture. A large percentage of the country cannot be used for farming, but domestic developers in Brazil say there is already more than enough land that remains undeveloped.
While the demand for and interest in agriculture varies significantly from region to region, the growth of its importance over the next 40 years should be linear. If the world’s population continues to grow at its current rate, the global food supply will be put under even more pressure. It seems that foreign investors will not have any long-term problems with demand, but their main challenges will revolve around the logistics of one of the more alternative and complicated types of investment on offer.