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Per the FT’s recent insert on world food, “the prevalence of hunger in developing countries has fallen but is stuck at 16 percent, and there will not be enough time or money, according to many experts, to hit the 10 percent target by 2015.”  Solutions are as varied as they are complex, though for certain there is room for “improving agriculatural yields, especially in Africa, where the sector has lacked investment.  Only 4 percent of sub-Saharhan African cropland was irrigated in 2002, up from 2 percent in 1962, compared with almost 40 percent in South Asia.”  Analysts note that every step of the production process must be targeted–from farming techniques themselves that educate about pesticide use, cutting waste, and improving quality through using best practices such as better seeds, soil testing, and planting and harvesting techniques, to increasing access to customers not only be removing costly intermediaries, but also by improving substandard roads and communication networks that, coupled with increasingly volatile commodity market prices (due in part to climate change as well as protectionism abroad), is particularly devestating to the vert supply chains most abundant in poorer countries that tend also to be more reliant on vulnerable smallholders.  To that end, better access to credit and more transparent and credible land rights are crucial to production as well, experts note.  

Finally, an underlying issue may not just be sufficient production of quality food, but also sufficient variance in terms of quality of nutrition.  Per the UN’s Food and Agricultural Organization (FAO), for instance, ” at a global level, the world already has enough food . . . but if diets are not sufficiently varied, they may lack vitamin A, iron, zinc and iodine, causing infants and young children irreparable harm.”  Couple the need for properly diversified nutrition (which in turn is linked not only to fortification of staple foods, but also to sanitation and, most importantly, antenatal care and education of, and perhaps direct transfer-payments to mothers) with Nicholas Kristof’s latest piece in The New York Times on just how crucial the role of the uterine environment is to a given individual and thus, society’s welfare in the aggregate, and it is to easy to argue that the quality and supply of the global food chain is the single most important issue facing developing (and developed?) countries today in terms of their long-term evolution. 

That said, I continue to maintain that an even more basic issue–the supply and suitability of water–is even more crucial, in that it lays the groundwork essential to efficiently meeting demand.  Admittedly, the topic of usable water goes hand in hand with ‘best practice’ farming techniques and more pointedly, irrigation (agriculture accounts for roughly 70 percent of water consumption).  For example the FT cites Daniel Wild, an equity analyst with Sustainable Asset Management in Switzerland, who points out that “with conventional food irrigation, the efficiency level is often well below 50 percent, and important nutrients or corp protection agents are [thus] washed away in the process.”  This and other measures, such as horizontal ploughing and preventing farmers from tapping underground sources without limit (if usable water is a scarce commodity, isn’t there a moral hazard to not effectively pricing and treasting it as such?) may in turn boost crop yields by up to 150 percent or more.  The FT points out that several emerging market companies–most notably Jain Irrigation Systems in India amd Israel’s Netafim–are experiencing rapid growth in micro irrigation systems (MISs), which include drip systems, sprinklers, valves, water filters and plant tissue products and help to enhance the productivity of seeds and fertilizer while conserving water.  Additionally, said firms are exploring solar water pumps, a sort of leapfrog technology in a sense that could be used by farmers even in power-deficit states (of which they are plenty in frontier regions).  Ultimately, “[Jain] plans to enhance its distribution by adding new dealers and distributors to penetrate [frontier markets] in Africa and the Middle East,” per Anil Jain, its managing director.  Analysts and investors alike, including asset managers and private equity funds, would be wise to keep a watchful eye on this growing sub-sector of agribusiness.

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A relatively recent WSJ piece in June touted the virtues of acquiring and renting out farmland, an idea also touched upon in a Fortune article last summer:

“Land is scarce and will become scarcer as the world has to double food output to satisfy increased demand by 2050,” says Joachim von Braun, director general at the International Food Policy Research Institute. “With limited land and water resources, this will automatically lead to increased valuations of productive land. And it goes hand in hand with water. Water scarcity will probably increase even more than land.”

Improving diets in the developing world will also help drive up prices. As per capita incomes rise in China, India, and other parts of Asia, hundreds of millions of people will be adding meat to their daily fare. In the coming decades that will have a multiplier effect on demand because of the massive amounts of grain used to feed livestock. The USDA estimates that it takes seven pounds of grain to produce one pound of beef. Even with better crop yields from new seed technology, a supply crunch is looming. And the effects of climate change – rising sea levels, more droughts – could only amplify the problem.

“I’m convinced that farmland is going to be one of the best investments of our time,” says commodities guru Jim Rogers, who serves as an adviser to AgCapita. “Eventually, of course, food prices will get high enough that the market probably will be flooded with supply through development of new land or technology or both, and the bull market will end. But that’s a long ways away yet.”

While the best pure plays on farmland are still controlled by fund managers and private equity, there may be an increasing scattering of other ways for retail investors to gain some exposure.  Shonda Warner’s farmland-only real estate investment trust in the U.S. could be an idea that catches on, for example; but in the meantime, Buenos Aires-based ADR Cresud, Inc. has long been a personal favorite.

A recent study published by the International Institute for Environment and Development (IIED) at the request of UN Food and Agriculture Organization and International Fund for Agricultural Development (IFAD), confirms the fears of many critics that land deals in Africa and Asia may in practice be little more than “neocolonialism”.

The report found that many countries do not have sufficient mechanisms to protect local rights and take account of local interests, livelihoods and welfare. A lack of transparency and of checks and balances in contract negotiations can promote deals that do not maximize the public interest. Insecure local land rights, inaccessible registration procedures, vaguely defined productive use requirements, legislative gaps and other factors too often undermine the position of local people.

Both The Economist and the Financial Times have weighed in on the issue, underlining the social and economic concerns such deals raise for local farmers, but also highlighting the tangible benefits that domestic markets, habitually lacking in capital and technological prowess, stand to gain long-term.

It would be graceless to write off in advance foreign investment in some of the most miserable places on earth. The potential benefits of new seeds, drip-feed irrigation and farm credit are vast. Most other things seem to have failed African agriculture—domestic investment, foreign aid, international loans—so it is worth trying something new. Bear in mind, too, that worldwide economic efficiency will rise if (as is happening) Saudi Arabia abandons mind-bogglingly expensive wheat farms in the desert and buys up land in east Africa.

The muddled conclusions are, in my opinion, a testament to the fact that such deals are theoretically virtuous but all too often inefficient and probably harmful in practice. Per the Economist, for instance:

Most deals are shrouded in mystery—rarely a good sign, especially in countries riddled with corruption. One politician in Cambodia complains that a contract to lease thousands of acres of rice contains fewer details than you would find in a house-rental agreement. Secrecy makes it impossible to know whether farms are really getting more efficient or whether the deals are done mainly to line politicians’ pockets.

Richard Ferguson, formerly of Nomura Holdings in London, succinctly notes that we must examine the motives underlying the deal to fully appreciate what its effects will likely be:

To decide whether the acquisition of farmland in emerging economies can be categorised as “beneficial foreign investment” or a form of “neo-colonialism” we need to distinguish between the underlying motives which drive much of the current investment across the industry. The biggest supply issue in farming is not the availability of land; instead it is the limited supply of competent managements who can manage increasingly complex industrial farms. Long-term investors in the sector understand these complexities and, consequently, make their investments with a view to upgrading infrastructure, enhancing staff skills, introducing capital and so on over an extended period. In this case a long-term approach to investment returns is the norm given the unpredictability and volatility which will always characterise the industry. A less measured approach, which could fall under the “neo-colonialism” banner, is where investment is made in a haphazard manner with little thought to the long-term management of the business. It remains to be seen whether Chinese and Gulf state investment in the sector falls into this category.

Yet regardless, land deals or “grabs” are not going to go away, for the simple reason that their emergence is a natural, inevitable consequence and response to market inefficiencies, notably the world’s food-market turmoil of the 2007-2008, when the index of food prices rose 78% and food stocks slumped. Throw in trade bans and other protectionist policy imposed by grain exporters to keep food prices from rising locally, and it is no wonder that many nations with the means felt obliged to take matters (i.e., the land and means of food production itself) into their own hands). More power to them.

The “solution”, therefore, ought to lie not in the overarching condemnation or the abolishment of the entire concept of food and land outsourcing, but rather in the adoption of greater transparency through stricter standards or even codes of conduct of deal making. Simply put, it is the interests of both the seller/lessee-government (see Madagascar) and the buyer/lessor nations, corporations and sovereign wealth funds (SWF) to negotiate more synergistic deals that unequivocally reflect not only the true costs involved, but also entrench what short and long-term benefits are to be realized, and by whom. Accordingly, enforcement mechanisms must be in place such that aggrieved parties may pursue appropriate remedies.

So, in broad terms, how can such land deals be improved upon?

  1. Fairer terms for “smallholders”: This is not simply out of largesse or equity, however–there is a practical incentive for lessors as well–poor terms often lead to local opposition so fierce that some deals cannot be implemented. Economist notes the Saudi Binladin Group had to put on hold a $4.3 billion project to grow rice on 500,000 hectares of Indonesia, while China found itself postponing a 1.2m hectare deal in the Philippines for similar reasons. Such delays impinge on returns and also reflect badly;
  2. Benefits should be shared among locals: This involves not only lessors utilizing at least a percentage of local workers, but also lessees creating appreciable social safety nets for displaced farmers or adversely affected communities;
  3. Abide by national trade policies: In other words, exports are put on hold or severely limited if the host country is suffering a famine or natural disaster. Such events could be hedged by lessors through insurance or contingent deals with other exporters;
  4. Enshrine the technological commitments and know-how that foreign firms must transfer: Too often it is just assumed that the benefits of new seeds and farming techniques will be automatically transferred in such deals. But given human nature, and moreover the business sense and proprietary instinct of the companies involved, there is nothing natural about just giving something away. Thus, checks and balances must be in place such that local farming industries can immediately realize the benefit of foreign expertise, capital and equipment;
  5. Mandate organic farming? It has been suggested by some that if proper care is taken, then outsourcing of farmland can improve not just its efficiency but can also provide livelihood and better wages to hundreds of thousands of poor agricultural laborers in these third world countries like Sudan.

The Economist notes this week that Kuwait’s foray into Cambodian farmland (its purported compensation for $546m to finance a dam on the Stueng Sen river for irrigation and hydropower and to build a road to the Thai border) can surely be a win-win, even if historically such deals haven’t always worked out and local rice farmers are cautious, worried they will be left in the cold.

The government insists the deal would be good for the country and for economic growth. Cheam Yeap, the chairman of the parliamentary economics and finance committee, says that “somehow we have to attract investors for national development.” He argues that land conflict is the fault of farmers as well as the government and that farmers have to be realistic.

This is not merely self-serving. Cambodia’s rice yields are about half those in neighbouring Thailand and Vietnam. Many people—not just the Kuwaitis—are seeking to modernise farming, which is the largest employer in Cambodia.

International donors are hoping to improve the lot of small-scale farmers by helping them take advantage of world markets by investing in productivity, food processing and transport infrastructure. Other international businessmen, including some from Israel, are seeking to bring foreign technology and capital into Cambodia’s fledgling agri-business sector.

So the question is not whether investment by Kuwait or anyone else is in Cambodia’s long-term interest. It is whether the terms of the particular deal are beneficial. Alas, it is far from clear in this case whether Cambodia’s rulers have been influenced by economic development—or by the prospect of another quick payday.

Financial Times reported this morning that according to Niu Dun, China’s deputy agriculture minister, Beijing will distance itself from nations such as Saudi Arabia and South Korea by choosing to depend on its own land for self-sufficiency in grain.  China is the world’s biggest agricultural economy and its largest consumer and producer of cereals.  The growing trend by some to snap up foreign farmland is seen as a response to last year’s spike in agricultural commodity prices and trade restrictions which lead some to question the long term viability of the global food market and to proactively seek alternatives.  For example, Pakistan is now offering 1m acres of farmland, to be protected by a special security force, for lease or sale.  Gulf Arab nations, heavily reliant on food imports, have reportedly expressed interest.

The planet is facing a topsoil crisis, meaning that the greatest commodity of them all one day could be farmland. That potentially makes Cresud Inc. (NASDAQ: CRESY), which owns large swathes of farmland in Argentina and also has a growing presence in both Paraguay and Brazil, a sound long for punters. Additionally, the firm is currently involved in a variety of other projects including crop production, cattle raising and milk production, not to mention real estate accumulation (several shopping centers in Buenos Aires, for instance). In fact, while it is estimated that the firm owns about a million acres of farmland and 50,000 head of cattle, Guy Bennett of Q1 Publishing, an investment research firm, mentioned that Cresud’s executives consider themselves to be primarily a real estate development company. But all this diversity may not necessarily be a positive. Per one commentator:

“A significant component of Cresud’s net asset value lies in its stake in IRSA, owner of commercial real estate in Argentina and stakes in a few other affiliated real estate companies. IRSA has a lot of debt which poses a risk of a dilutive debt refinancing or potentially even bankruptcy, either of which would erase a significant portion of Cresud’s NAV. If Cresud were only a farmland owner, it would be much more attractive.”

On Thursday, the expansion of operations continued. The company reported to the Argentine Comision Nacional de Valores and to the Buenos Aires Stock Exchange that it agreed the purchase of approximately 7,600 ha of farmland in Bolivia at USD 17,501,359.99. The company has paid 43% of total amount while the rest remain to be paid in two annual consecutive payments, the first one to be paid during calendar year 2009. These transactions were made according to what was stipulated in the Company plans made public upon the Equity Follow on of last March, regarding international expansion.

One way to think about Cresud could simply be the Asia factor. The company produces many of the food staples that China, for example, will need more and more of as income per head rises. Corn, soybeans, sunflower (oil), and beef are some of the firm’s major products. Of course, there’s always that pesky problem of export taxes, but if you listen to insiders, a more business friendly government could be in store for the country in the coming years.

JGW

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