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As global stock markets fluctuate wildly, both individuals and institutions are increasingly looking to alternative investments to provide balance and stability to their portfolios. Given the rapid run-up in agricultural commodities and food pricesrecently, farmland investments are becoming an increasingly attractive asset class.
In the UK for example, over the last 10 years, agricultural land has appreciated roughly13% per year in the according to Investment Property Databank (IPD). The United States and other Western countries have seen similar farmland investment returns. Farmland prices have therefore skyrocketed, reaching as high as £17,300 (approximately $30,000) per hectare in the northwest of England to take just one example.
As a result, investors are increasingly turning their attention to areas of the world where farmland prices are starting from a much lower base, thereby providing much greater upside potential. One area where this has been particularly prevalent is Africa, where hedge funds and other large institutions have been making large agricultural farmland investments. Hedge funds alone, for example, have purchased 148 millionacres of farmland in just the last three years.
Given the long history of colonial exploitation in Africa, there has been increasing resistance to what is perceived by many western Non-Governmental Organizations as well as Africans as a “foreign land grab.” Whilst some of these feelings may be based on old stereotypes rather then current conditions, there is no question that some abuses have occurred.
In an article in Businessweek, for example, the authors noted one example of a large US agribusiness firm that invested in Kenya. According to many local Kenyans, hundreds of people have been displaced from ancestral farming lands, and promised investments in health clinics and hiring of local staff have not materialized.
What is undoubtedly true is that frequently large institutional investors make deals directly with the central governments of African countries. Given the amount of corruption and generally poor governance that still exists in Africa, the investment dollars frequently disappear into the pockets of corrupt local officials whilst local farmers are forcibly removed from their homes and lands.
By the same token, it is far from true that all foreign investments in African farmland are predatory and exploitive. Leading global consultancy McKinsey recently produced a report on the future of Africa which noted that the continent had over 25% of the globe’s arable land yet produced only 10% of agricultural output. McKinsey recommended that up to $50 billion/year of African agricultural farmland investment would be needed to bring the sector up to global standards.
Given the need for investment in African agriculture, there is no reason that foreign farmland investment on the continent cannot be structured as a win-win for both investors and the host country populations. Below are some standards that could be used:
1. The investment should be directed at completely unused land, and none of the local population has been removed from any of the land since it was not in use as a food source.
2. The farmland investment negotiated directly with local villagers and tribal chiefs, so there was no chance for corruption at the senior government levels.
3. All of the crop produced is being should be sold locally within the host country. This promotes food security internally.
4. The entire workforce should be locals and should be paid at a minimum of 300% of country's per capita GDP.
5. Finally, there should also be a community re-investment program with strict benchmarks to be achieved.
Indeed, while many farmland investments in Africa are predatory, it is actually a disservice to those concerned with food security in Africa to simply paint all farmland investment on the continent as inherently bad.
Josh Cohn is a partner at http://www.greenworldbvi.com/.
For further information, please contact:
Josh Cohn
GreenWorld (BVI)
[email protected]
http://www.greenworldbvi.com/
