Countries Are Renting Farmland Abroad
As food crisis worsens, some nations are desperate for arable land
The Persian Gulf may be flush with money from oil, but it is desperate for food. Many of the richest countries in the region, including Saudi Arabia, are handicapped by a dry, unforgiving climate and a shortage of farmland; thus they must import more than 60 percent of their annual food supply. Existing water stores are expected to be exhausted in 30 years, and yet, food demand is growing. Population growth in the region is more than double the world average, the prices of some staples are up more than 30 percent this year, and civil unrest is mounting.
It is, in short, a daunting situation, and conventional responses appear inadequate. Continuing to rely on food from other countries, many government leaders believe, is not only risky but shortsighted in an era of tight trade restrictions and projections of even higher prices. And so officials have begun laying the groundwork for a new approach: buying or renting farmland in other countries—sometimes thousands of miles away.
In recent weeks, officials and businessmen from Saudi Arabia have met with representatives of Thailand and South Africa to talk about buying farmland. The United Arab Emirates has looked at arable land in Sudan, Egypt, and Yemen and is pursuing a $3 billion deal in Pakistan with several private companies to build large corporate farms for growing rice, wheat, sugar cane, and fruits. Abu Dhabi has reportedly signed a deal with Sudan to develop 70,000 acres there.
Looking to Asia. The Persian Gulf states have been the most aggressive in these pursuits, but they are not alone. In April, the president of South Korea, Lee Myung-Bak, expressed interest in renting farmland in eastern Russia or Southeast Asia. Chinese firms, many with close government ties, have recently pursued deals in the Philippines and Africa and are rumored to be eyeing land in Australia.
Even individual farmers from the United States and Australia have started looking in larger numbers to overseas farmland, particularly in South America. "We have certainly seen an increase [here]," says Andy Duff, a Rabobank International analyst based in Brazil. "There are the investors who see land as the root of all commodities and believe land may be an interesting investment, and we have also seen bona fide farmers who are looking to expand their operations from other parts of the world."
Globally, farmland is disappearing at an alarming rate. According to estimates, approximately 50 million acres vanish each year to urbanization, population growth, and economic and industrial development. In Iraq, where the Tigris and Euphrates rivers have nourished riverbanks since the start of civilization, farmland is expected to shrink 30 percent because of upriver damming in Turkey. Vietnam lost 1.2 million acres of farmland from 2001 to 2007; 123 golf courses, among other developments, have gone up since.
A few developing countries have tried to slow or halt the turnover. China, after seeing its farmland dwindle by tens of millions of acres in the first part of the decade, has imposed tight restrictions on land conversions and, in January, began prosecuting thousands of alleged offenders. But, says Chietigj Bajpaee, an analyst for Global Insight, a forecasting company, "t rying to stop the conversion of land is the exception rather than the rule."
From a historical perspective, land grabs are nothing new. Imperialism and colonialism were defined to a large extent by efforts to acquire power through land. These campaigns, how-ever, were characterized not by diplomacy or money but by violence and force. What's happening now is different, although it raises old questions about sovereignty and workers' rights.
Though the terms of the deals vary—some involve land pur-chases, others, large investments in existing farms—most will result in the employment of local workers and require negotiations about where the food goes after harvest. In Sudan, for instance, where food riots broke out last month, officials don't want to create the impression of helping others and not their own.
Some observers see the potential for large and enduring benefits on both sides. The reported sellers of under-developed farmland, Pakistan and Sudan, for example, are poor and lack the resources to make their own land productive. Foreign investment is meant to help the investor, but in these cases it might also help the host countries by improving roads and irrigation and, of course, providing cash. The question is ultimately one of balance: wooing the big spenders without ceding too much land or control at home.
Reader Comments
Canadian Farmland
The equity and bond markets have benefited from a long period of low inflation, but ongoing and massive central bank liquidity injections point to a far less benign environment of elevated inflation ahead. Research by our firm, Agcapita Farmland Investment Partnership (Calgary, Canada based agriculture private equity firm) shows investors must be prepared to rotate into asset classes with different characteristics. During the last commodity bull market & high inflation period in the 1970’s, equities materially underperformed farmland.
- Western Canadian farmland went from around $100/acre to $550/acre (550% total return and 176% in inflation adjusted terms);
- Cash held in a money market account barely kept ahead of inflation (6% inflation adjusted return); and the
- S&P 500 index returned less than 2% per year (a loss of almost 50% in inflation in adjusted terms)
We believe the world is still in the early stages of this current commodity bull market. When agriculture commodities prices are compared against their previous inflation adjusted highs they are significantly discounted implying scope for further increases:
- Corn is US$ 4/bushel currently compared to US$16/bushel in 1974,
- Wheat is US$ 6/bushel currently compared to US$27/bushel in 1974
- Canadian farmland is C$ 660/acre currently compared to C$1,100/acre in 1981
Another interesting metric is the long-term average ratio of the Commodities Research Bureau Index versus the S&P 500 which is currently around 1.5 times. Simplistically, this ratio indicates how much S&P 500 stock you can buy with a fixed basket of commodities. Some important points:
- During the commodity bull market of the 1970s, the ratio was consistently higher than 2 times for over 10 years – it peaked at almost 4 times.
- The ratio is currently at around 0.5 times - significantly below the 1.5 times long-term average, just slightly above the 0.15 all time low reached in 1999/2000 and still very far below the almost 4 times multiple reached in the last commodity bull market. We still appear to be at an all time low relative valuation between “hard assets" versus "stocks.”
- If history is a guide, the ratio of hard assets to stocks will have moved much higher before this commodity bull market is over.
- How? Stocks will continue to fall and/or commodities will continue to climb – most likely a serious combination of both as investors, fearing inflation, rotate out of stocks into commodities – the cycle of “inflation, rotation, hard assets”.
Agcapita allows farmland investors to cost effectively allocate a portion of their portfolios to hard assets in the form of Canadian farmland via its professionally managed Agcapita Farmland Investment Partnership. Agcapita Farmland Investment Partnership is the third in a family of private equity funds which has grown to almost $100 million in assets under management. Agcapita’s investment team has over 40 years private equity and fund management experie
Thoughts seem off topic
I was speaking with a professor at LSU about composting and land reclamation (or reforestation, as you will). He told me a story about the midwest during the Great Depression and how, after a generation of farming and cutting down all the trees, that area had started a process of desertification. Part of the New Deal had been to have the civil conservation corps go back into that region and plant windbreaks to stop the spread of desert (the dust bowl) and to reclaim those farmlands. Part of the CCC program had been to plant the wind breaks and then to water the trees by hand until they took root. Driving through that region, now, I can't compare present day with the pictures I have seen of the area from the 30's.
I wonder if there is an application of this manner to be put to use in the desert, like the Israelis have in the Negev. Combined with hydroponics as Goldie mentioned above, that may turn the tide on trend.
Also, perhaps we need to look at stopping the spread of our people into unpopulated regions that were once used for farmlands. Instead of growing out, like a swarm of locusts, we might push our growth vertically, like the Japanese. That way, the farm lands and forests, critical for our survival as a global ecology, might be left intact. (See the Green Belt in Boulder, CO for an example.)
Willing Farmer
I would love to meet up with these people who need farmland. We are a small family farm and have invented technology that grows organically AND saves water while giving excellent produce hydroponically. Seems odd to be hydroponic and save water, but we have done it for 10 years. We also grow biointensively growing more produce on less land. Lack of land and water has not been a major concern for most Americans up to this point, but until that point, we would love to help those in need with the capital to do something with the technology instead of putting it on a shelf when it can save the world.
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