Fair returns

A study commissioned by the OECD last year estimated that global private sector investment in agriculture hit $14bn in 2010. That figure could triple in the next five years. The World Bank estimates that 45 million hectares worth of large-scale farmland deals were announced in 2009, more than 10 times the annual average expansion of agricultural land in the decade to 2008. “Demand for land acquisition continues and may even be increasing,” the World Bank said in its report, which asked whether the rush for land can “yield sustainable and equitable benefits.”

When fast-growing countries in the Middle East and  Asia began buying land in Africa four years ago, there were cries of land grab and exploitation. Now hedge funds, pension funds, multinational corporations, farmer cooperatives and other investors are piling in as well, bringing new ideas and more professional management.

But the land rush still poses plenty of dangers: for both the countries targeted for their rich, under-exploited land and for anyone sinking money into a farm halfway around the world. The World Bank calls the new risks “immense…at the same time, these risks correspond to equally large opportunities.”

Brazil is a case in point. Tens of thousands of investors poured $26bn in FDI into the country in 2010. But anyone interested in buying up Brazilian land may find it tough. In August last year, with pragmatic leftist Luiz Inacio Lula da Silva still president, the office of Brazil’s Attorney General issued a new interpretation of a 1971 law on foreign control of Brazilian land. The effect has been to cap at 12,350 acres the amount of land that can be bought by a foreigner or a company that’s more than 50 percent foreign-owned.

Rolando Viera Jr, a Special Advisor in the Brazilian Attorney General’s office, says the change was triggered by 2008’s global food shortage, the need to secure land to produce biofuels and the growing realisation that foreigners were buying up “significant parts of the national territory”. Just as other countries define certain industries or assets – ports and airports,communication systems – as strategic, Brazil has decided its land is “a fundamental strategic asset,” Viera told reporters. 

Land grab?
Uncertainty in Brazil could push more investors towards its neighbour or to Africa. Philippe de Laperouse, managing director of global food, agribusiness and biofuels at consulting firm HighQuest Partners, estimates that until the foreign ownership decision, as much as 45 percent of investment capital targeting opportunities in farmland had been focused on Brazil. Now that interest “has abated and may be shifting to other regions.”

If it does, there are plenty of potential problems – for both investors and for the countries they’re moving into.

Many experts worry that the rush for land will hurt locals. Africa’s vast lands are already the focus of intense attention. From private Western investment funds wanting to farm organic beans in southern Africa to Qatar, which is looking at projects in Sudan, Ethiopia and Eritrea, an eclectic array of investors are lining up to sink hundreds of millions of dollars into the continent.

But the World Bank says countries in Africa with weak governance, including many with the most sought-after land, are unable to cope with the land rush. “As a result, land acquisition often deprived local people, in particular the vulnerable, of their rights without providing appropriate compensation”. Environmental group Friends of the Earth says the rising demand for biofuel is driving a new “land grab” in Africa.

Such concerns flared in 2008 when a lease by South Korea’s Daewoo for nearly half of the arable land in Madagascar triggered a wave of protests that eventually ousted President Marc Ravalomanana. Last October, a code of principles for “responsible agricultural investment” proposed by the World Bank and UN agencies failed to win backing. As corporations and private funds sink billions into land, the risk of exploitation remains, activists say. “We are demanding… a moratorium on large transactions (over 50,000ha) which involve foreign investments in farmland in developing countries until there’s adequate, legally binding regulation,” says Soren Ambrose, international policy manager for ActionAid, a charity.

But some in the industry say things are already improving. “Corporate agriculture is lifting management standards on governance and sustainability in agricultural investments,” says  Tim Hornibrook, division director at Macquarie Agricultural Funds Management, which manages 3.2 million hectares of Australian farmland on behalf of investors and is considering expanding into other regions. “Corporates cannot afford to do the wrong thing from an environmental and community perspective because of the greater headline risk they carry.”

Reputational risk, says HighQuest Partners’ de Laperouse, “is very important to funds investing due to their investor base. They’re sensitive to being viewed as investors who are transparent and whose activity is a positive development, not a negative one.” That’s one reason why some land investment funds sign up to existing sustainability schemes and certification codes including EUREGAP certification, FAO practices and International Finance Corporation environmental and social standards.

Industry players say better transparency will help local communities and investors alike. Africa is a large, fragmented market and it’s difficult for many investors to grasp what’s happening. We believe the more transparency you can get in these markets the more investors will understand the opportunities,” says Neil Crowder, managing partner of private equity firm Chayton Capital, which has recently acquired farmland in  Zambia.

Done right, the opportunities are huge. Susan Payne, CEO of  Emergent Asset Management, a UK-based private equity and hedge fund, runs the largest agricultural fund focused on  Africa. The fund targets annual returns of 25 percent from its farmland yields and land appreciation. The continent, Payne says, “will be the most strategic territory on the planet in the near future.”

Emergent owns or leases some 100,000ha of farmland in five countries – Mozambique, South Africa, Swaziland, Zambia and Zimbabwe – across southern Africa. It farms more than 20 commodities – grains, livestock, fruits, vegetables, tea, nuts and biofuels – and sells more than 90 percent of the  food it grows locally. By modernising farm methods, it says it can treble crop yields on its farms. It also says it tries to make sure locals benefit. On one project in Mozambique, it sponsors an orphanage, has built two boreholes, connected a town to  electricity and cleared land so local people can ultimately produce their own food. “Our projects are always in partnership with local communities and consensual,” says Payne. “If you’re on the ground locally where there are  food scarcity issues and you can alleviate these directly and empower local communities in so doing, it is a win-win situation for all involved.”

Barcodes on trees
That’s a mantra that is heard more and more in Africa. James Howard, manager of the Futuregrowth Agri-Fund, is a recent convert. “We realised that good agricultural land, with water rights and everything else, wherever in the world you look, has – over time – outperformed CPI inflation,” he says. “It’s a far better return. All of a sudden the world is waking up and saying, wow, emerging markets,  food security… this asset class is going to really perform in the medium term – the next 8-20 years.”

Howard’s fund, run by Cape Town-based Futuregrowth Asset Management, itself owned by Anglo-South African insurer Old Mutual, was launched late last year and plans to spend about $900m – the cash has already been committed by international investors in Britain, China,  the Netherlands, and the US – on land split evenly between South Africa and the rest of the continent. The South Africa part of the fund completed its first deal on Christmas Eve – a large farm 150km northeast of Johannesburg that will be run by an established agri-business firm looking to sell oranges internationally.

It’s an increasingly common setup. An investor buys land which is then leased to a  large operator – typically a public or private food/agri-business firm – who runs it, processes the produce, and exports it. Part of the reason the model works is that agri-operators are under consumer pressure to account for the provenance of all their fruit, meat and other produce, but don’t want the hassle of land assets clogging up their balance sheets.

Howard says his fund will maintain tight oversight via a proprietary IT system that monitors every aspect of how the farm is run. “We’ve got agronomers and guys on the ground, and they look at the budgets and see what is spent and when it is spent,” he explains.

The farm has computerised irrigation, and every section of every row is bar-coded so that each orange can be traced from the moment it is picked to the moment it goes on sale in China a couple of weeks later.

“You can buy an orange in Beijing, and as long as you can see the box, you can trace it right back to this row of trees here,” says  Nelus Potgieter, manager of the farm as he walks through the lush aisles of his citrus plantation. “That’s pretty impressive.” •