Agricultural Outsourcing

Courtesy of The Casual Truth, a look at the the reach and impact of the trend towards investing in overseas farmland.  As the article notes:

“…Many are saying food is becoming the new oil. In the past two years there has been a remarkable increase in purchases of large-scale farmland by foreigners throughout Africa, Latin America, Central Asia, and Southeast Asia.

There are several reasons. Recent estimates suggest the global human population could reach 9.1 billion by 2050. In the coming years alone, worldwide demand for food is expected to rise by 50 percent.

And this, in part, fuels the more immediate problem. Food importing nations are growing increasingly concerned about the volatile price of food.

The 2008 bubble in food prices – driven by financial speculators, biofuels, and restrictions on food exports – marked a turning point for countries dependent on imported foods.

So with many governments alerted to what might lie ahead, some net food importers are now foregoing imports altogether and instead investing in foreign farmland and exporting the food to themselves.

In 2008 the head of the UN Food and Agriculture Organisation, Jacques Diouf, warned that the controversial rise in land deals could create a new form of colonialism, with poor countries producing food for wealthy countries at the expense of their own people.

But contrary to past trends, developing countries are initiating much of this investment.

China is considered a leader, particularly in Africa. The Persian Gulf states (who severely lack fertile land of their own), including Saudi Arabia, Bahrain, Kuwait, Oman, Qatar and the United Arab Emirates, are also investing in Africa, as well as Asia, and Eastern and Central Europe.

Recent purchases include land in Sudan where the government has leased 1.5 million hectares of prime farmland to the Gulf States, Egypt, and South Korea for 99 years.

Ironically, Sudan also happens to be one of the world’s largest recipients of foreign aid, with 5.6 million of its citizens critically dependent on foreign food deliveries.

Other examples include Kuwait who has leased 130,000 hectares of rice fields from Cambodia, while Egypt is planning to grow wheat and corn on 840,000 hectares in Uganda.

While concerns over food security represent the predominant driving force, land deals are also being driven by investment opportunities. And although governments are encouraging the trend, acquisitions are generally being made by companies.

In addition to agribusiness corporations and food traders, investment banks and private equity funds have jumped at the opportunity.

Globally, the unsustainable combination of more people and less land makes food a safe investment with annual returns of up to 20-30 percent, rare numbers in the current economic climate.

However, with arable land scarce and expensive in Europe and the United States, the only option is to develop new land in Africa, Asia, and South America.

In Zambia, for example, foreign land funds pay $US350-500 per hectare ($US140-200 per acre) – around a tenth of the price of land in the United States. And investors suggest that with a little fertiliser and additional irrigation, harvests and profits could quadruple.

As a result, investment firms and other wealthy private enterprises are quietly making significant land purchases across the developing world.

US investment management company Blackrock has established a $200 million agricultural fund, and has allocated $30 million for the acquisition of farmland. Renaissance Capital, a Russian investment company, has acquired more than 100,000 hectares in Ukraine.

Deutsch Bank and Goldman Sachs have invested money in pig breeding operations and chicken farms in China – putting China at both ends of the deals.

What is unique about this new manner of colonialism is that countries such as Pakistan, Sudan, Mongolia, Indonesia, Laos and the Philippines are readily allowing themselves to be ‘conquered’.

Most of these countries are heavily dependent on food aid and are desperate for agricultural investment.

For countries lacking investment and with little except mining resources to offer the world market, these land deals represent an extremely attractive proposition.

The Ethiopian Prime Minister said that his government is “eager” to provide access to hundreds of thousands of hectares of farmland. The Turkish Agriculture Minister simply said, “Choose and take what you want.”

Even in the midst of war with the Taliban, the Pakistani Government staged a road show in Dubai, seeking to entice sheikhs with tax breaks and exemptions from labour laws. The Pakistani Government has even offered a 100,000 strong security force dedicated to protecting such investments.

Should these investments prove profitable, it is hoped that they can achieve what development agencies have been unable to do over the past few decades. Namely, to reduce the global hunger that now affects more than one billion people worldwide.”

And in a second article, the author continues:

“…Many countries in the world are concerned about their food supply. So they’ve decided to negotiate with poor countries to let them grow their food there.

It seems like a win-win transaction. But dig a little deeper and the hidden costs begin to reveal themselves.

There are serious concerns that the agreements may harm the host country in the long-term. Many locals fear they are not only losing their land, but considerable control of their country’s destiny as well.

Such feeling has perhaps been best illustrated by Daewoo Logistics Corporation’s attempt to acquire 1.3 million hectares of agricultural land in Madagascar.

A 99-year lease signed in late 2008 by President Marc Ravalomana awarded Daewoo, a South Korean firm, roughly half of Madagascar’s arable land, including an area home to the majority of its rare rainforests.

On it, the South Korean industrial giant had sought to produce corn and palm oil. It was one of the biggest deals involving foreign firms seeking to secure African farmland since food prices skyrocketed earlier that year.

The deal was heavily criticised on the grounds that it failed to recognise the customary land use by the local population, and threatened to consume vast areas of cropland in a country that produces barely enough food to feed itself.

The plan fuelled popular anger and violent protests against the democratically-elected president. He was forced to resign by the army in March 2009 and was replaced by his rival, Andry Rajoelina, the mayor of Madagascar’s capital.

Although one of Rajoelina’s first measures was to revoke the deal, Daewoo continues to hold 218,000 hectares of cropland there.

Paying the long-term price

Because of their politically-sensitive nature, the intricate details surrounding land agreements are often a closely-held secret between the investors and the host countries’ leaders.

In some cases, such as in Laos and Cambodia, provincial governors have independently auctioned off land to the highest bidder. In these situations, even the national governments are unsure of how much of their territory they still own.

Indeed, foreign purchases of farmland can work against the interests of poor countries in a variety of ways.

The investing party can take advantage of the murkiness of local land-laws to word the terms and conditions of the transactions in their favour.

Often contracts that account for hundreds of thousands of hectares of land are barely three pages long.

These loose agreements may stipulate what food is to be cultivated, the location, and the price of the purchase or lease. But they fail to impose any manner of environmental standards and obligations.

They can also fail to offer any compensation or new jobs to the local farmers who are being displaced.

Sometimes, as an extra carrot, investors will often agree to provide funding for community infrastructure such as schools and paved roads.

But this is countered by the long-term harm caused by over-fertilising, deforestation, over-consumption of water, reduction of ecological diversity and a significant loss of local species.

The problem is that there’s a disincentive to care. In order to maximize harvests and achieve annual returns of 20 percent or more, foreign investors must operate their farms on an industrial scale.

This means once the soil is depleted, many investors simply move on. Land in these regions is often so cheap that they don’t need to sustain it for future use.

Instead forests are torn down to accommodate the need for large cultivation areas. Investors use heavy machinery, pesticides, fertilisers, and other fossil-fuel-based technologies.

Deep plowing and heavy water use degrades the land and taxes natural resources. Such environmentally-destructive agriculture differs markedly from the organic forms of farming now gaining popularity in the developed world.

Unfortunately, the lure of going elsewhere for wealthy investors means host governments are often too scared to force them to pollute less.

This is evident in Cambodia where the government has made special rules to get around forest protection so foreign firms can convert them into large-scale plantations.

In response, various local and international organisations have demanded that traditional land laws be modified to put an end to these potentially unfair and dangerous transactions.

The World Bank and others are now developing a code of conduct for investors. The UN Special Rapportuer on the Right to Food has developed a set of core principles and measures to address the human rights issues.

A declaration of intent had been planned for the July G-8 summit (8 wealthiest nations) in L’Aquilla, Italy, but as yet no common rules have been agreed upon.

Meanwhile, the practice is still going ahead as a win-win transaction in the short-term.

However, if it’s not to become a win-lose situation in the long term, local politicians need to give more consideration to the genuinely harmful consequences they’re signing into their countries’ future.”

This entry was posted on Saturday, March 13th, 2010 at 8:10 am and is filed under Uncategorized.  You can follow any responses to this entry through the RSS 2.0 feed.  You can leave a response, or trackback from your own site. 

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About This Blog And Its Author
Seeds Of A Revolution is committed to defining the disruptive geopolitics of the global Farms Race.  Due to the convergence of a growing world population, increased water scarcity, and a decrease in arable land & nutrient-rich soil, a spike of international investment interest in agricultural is inevitable and apt to bring a heretofore domestic industry into a truly global realm.  Whether this transition involves global land leases or acquisitions, the fundamental need for food & the protectionist feelings this need can give rise to is highly likely to cause such transactions to move quickly into the geopolitical realm.  It is this disruptive change, and the potential for a global farms race, that Seeds Of A Revolution tracks, analyzes, and forecasts.

Educated at Yale University (Bachelor of Arts - History) and Harvard (Master in Public Policy - International Development), Monty Simus has long held a keen interest in natural resource policy and the geopolitical implications of anticipated stresses in the areas of freshwater scarcity, biodiversity reserves & parks, and farm land.  Monty has lived, worked, and traveled in more than forty countries spanning Africa, China, western Europe, the Middle East, South America, and Southeast & Central Asia, and his personal interests comprise economic development, policy, investment, technology, natural resources, and the environment, with a particular focus on globalization’s impact upon these subject areas.  Monty writes about freshwater scarcity issues at and frontier investment markets at