From: Berhane Habtemariam (Berhane.Habtemariam@gmx.de)
Date: Thu Jun 04 2009 - 04:45:05 EDT
Buying farmland abroad - Outsourcing's third wave
04/06/ 2009
>From The Economist print edition
Rich food importers are acquiring vast tracts of poor countries' farmland.
Is this beneficial foreign investment or neocolonialism?
EARLY this year, the king of Saudi Arabia held a ceremony to receive a batch
of rice, part of the first crop to be produced under something called the
King Abdullah initiative for Saudi agricultural investment abroad. It had
been grown in Ethiopia, where a group of Saudi investors is spending $100m
to raise wheat, barley and rice on land leased to them by the government.
The investors are exempt from tax in the first few years and may export the
entire crop back home. Meanwhile, the World Food Programme (WFP) is spending
almost the same amount as the investors ($116m) providing 230,000 tonnes of
food aid between 2007 and 2011 to the 4.6m Ethiopians it thinks are
threatened by hunger and malnutrition.
The Saudi programme is an example of a powerful but contentious trend
sweeping the poor world: countries that export capital but import food are
outsourcing farm production to countries that need capital but have land to
spare. Instead of buying food on world markets, governments and politically
influential companies buy or lease farmland abroad, grow the crops there and
ship them back.
Supporters of such deals argue they provide new seeds, techniques and money
for agriculture, the basis of poor countries’ economies, which has suffered
from disastrous underinvestment for decades. Opponents call the projects
“land grabs”, claim the farms will be insulated from host countries and
argue that poor farmers will be pushed off land they have farmed for
generations. What is unquestionable is that the projects are large, risky
and controversial. In Madagascar they contributed to the overthrow of a
government.
Investment in foreign farms is not new. After the collapse of the Soviet
Union in 1991 foreign investors rushed to snap up former state-owned and
collective farms. Before that there were famous—indeed notorious—examples of
European attempts to set up flagship farms in ex-colonies, such as Britain’s
ill-fated attempt in the 1940s to turn tracts of southern Tanzania into a
limitless peanut prairie (the southern Tanganyika groundnut scheme). The
phrase “banana republics” originally referred to servile dictatorships
running countries whose economies were dominated by foreign-owned fruit
plantations.
But several things about the current fashion are new. One is its scale. A
big land deal used to be around 100,000 hectares (240,000 acres). Now the
largest ones are many times that. In Sudan alone, South Korea has signed
deals for 690,000 hectares, the United Arab Emirates (UAE) for 400,000
hectares and Egypt has secured a similar deal to grow wheat. An official in
Sudan says his country will set aside for Arab governments roughly a fifth
of the cultivated land in Africa’s largest country (traditionally known as
the breadbasket of the Arab world).
It is not just Gulf states that are buying up farms. China secured the right
to grow palm oil for biofuel on 2.8m hectares of Congo, which would be the
world’s largest palm-oil plantation. It is negotiating to grow biofuels on
2m hectares in Zambia, a country where Chinese farms are said to produce a
quarter of the eggs sold in the capital, Lusaka. According to one estimate,
1m Chinese farm labourers will be working in Africa this year, a number one
African leader called “catastrophic”.
In total, says the International Food Policy Research Institute (IFPRI), a
think-tank in Washington, DC, between 15m and 20m hectares of farmland in
poor countries have been subject to transactions or talks involving
foreigners since 2006. That is the size of France’s agricultural land and a
fifth of all the farmland of the European Union. Putting a conservative
figure on the land’s value, IFPRI calculates that these deals are worth $20
billion-30 billion—at least ten times as much as an emergency package for
agriculture recently announced by the World Bank and 15 times more than the
American administration’s new fund for food security.
If you assume that the land, when developed, will yield roughly two tonnes
of grain per hectare (which would be twice the African average but less than
that of Europe, America and rich Asia), it would produce 30m-40m tonnes of
cereals a year. That is a significant share of the world’s cereals trade of
roughly 220m tonnes a year and would be more than enough to meet the
appetite for grain imports in the Middle East. What is happening, argues
Richard Ferguson, an analyst for Nomura Securities, is outsourcing’s third
great wave, following that of manufacturing in the 1980s and information
technology in the 1990s.
Several other features of the process are also new. Unlike older projects,
the current ones mostly focus on staples or biofuels—wheat, maize, rice,
jatropha. The Egyptian and South Korean projects in Sudan are both for
wheat. Libya has leased 100,000 hectares of Mali for rice. By contrast,
farming ventures used to be about cash crops (coffee, tea, sugar or
bananas).
In the past, foreign farming investment was usually private: private
investors bought land from private owners. That process has continued,
particularly the snapping up of privatised land in the former Soviet Union.
Last year a Swedish company called Alpcot Agro bought 128,000 hectares of
Russia; South Korea’s Hyundai Heavy Industries paid $6.5m for a majority
stake in Khorol Zerno, a company that owns 10,000 hectares of eastern
Siberia; Morgan Stanley, an American bank, bought 40,000 hectares of Ukraine
in March. And Pava, the first Russian grain processor to be floated, plans
to sell 40% of its landowning division to investors in the Gulf, giving them
access to 500,000 hectares. Thanks to rising land values and (until
recently) rising commodity prices, farming has been one of the few sectors
to remain attractive during the credit crunch.
The great government grab
But the majority of the new deals have been government-to-government. The
acquirers are foreign regimes or companies closely tied to them, such as
sovereign-wealth funds. The sellers are host governments dispensing land
they nominally own. Cambodia leased land to Kuwaiti investors last August
after mutual prime-ministerial visits. Last year the Sudanese and Qatari
governments set up a joint venture to invest in Sudan; the Kuwaiti and
Sudanese ministers of finance signed what they called a “giant” strategic
partnership for the same purpose. Saudi officials have visited Australia,
Brazil, Egypt, Ethiopia, Kazakhstan, the Philippines, South Africa, Sudan,
Turkey, Ukraine and Vietnam to talk about land acquisitions. The balance
between the state and private sectors is heavily skewed in favour of the
state.
That makes the current round of land acquisitions different in kind, as well
as scale. When private investors put money into cash crops, they tended to
boost world trade and international economic activity. At least in theory,
they encourage farmers to switch from growing subsistence rice to harvesting
rubber for cash; from growing rubber to working in a tyre factory; and from
making tyres to making cars. But now, governments are investing in staple
crops in a protectionist impulse to circumvent world markets. Why are they
doing this and what are the effects?
“Food security is not just an issue for Abu Dhabi or the United Arab
Emirates,” says Eissa Mohamed Al Suwaidi of the Abu Dhabi Fund for
Development. “Recently, it has become a hot issue everywhere.” He is
confirming what everyone knows: the land deals are responses to food-market
turmoil.
Between the start of 2007 and the middle of 2008, The Economist index of
food prices rose 78%; soyabeans and rice both soared more than 130%.
Meanwhile, food stocks slumped. In the five largest grain exporters, the
ratio of stocks to consumption-plus-exports fell to 11% in 2009, below its
ten-year average of over 15%.
It was not just the price rises that rattled food importers. Some of them,
especially Arab ones, are oil exporters and their revenues were booming.
They could afford higher prices. What they could not afford, though, was the
spate of trade bans that grain exporters large and small imposed to keep
food prices from rising at home. Ukraine and India banned wheat exports for
a while; Argentina increased export taxes sharply. Actions like these raised
fears in the Gulf that one day importers might not be able to secure enough
supplies at any price. They persuaded many food-importing countries that
they could no longer rely on world food markets for basic supplies.
Panic buying
What to do instead? The obvious answer was: invest in domestic farming and
build up your own stocks. Countries that could, did so. Spending on rural
infrastructure is the third largest item in China’s 4 trillion yuan ($585
billion) economic-stimulus plan. European leaders said high prices showed
the protectionist common agricultural policy needed to be preserved.
But the richest oil exporters did not have that option. Saudi Arabia made
itself self-sufficient in wheat by lavishing untold quantities of money to
create grain fields in the desert. In 2008, however, it abandoned its
self-sufficiency programme when it discovered that farmers were burning
their way through water—which comes from a non-replenishable aquifer below
the Arabian sands—at a catastrophic rate. But if Saudi Arabia was growing
more food than it should, and if it did not trust world markets, the only
solution was to find farmland abroad. Other Gulf states followed suit. So
did China and South Korea, countries not usually associated with water
shortages but where agricultural expansion has been draining dry breadbasket
areas like the North China Plain.
Water shortages have provided the hidden impulse behind many land deals.
Peter Brabeck-Letmathe, the chairman of Nestlé, claims: “The purchases
weren’t about land, but water. For with the land comes the right to withdraw
the water linked to it, in most countries essentially a freebie that
increasingly could be the most valuable part of the deal.” He calls it “the
great water grab”.
For the countries seeking land (or water), the attractions are clear. But
what of those selling or leasing their resources? They are keen enough, even
sending road shows to the Gulf. Sudan is letting investors export 70% of the
crop, even though it is the recipient of the largest food-aid operation in
the world. Pakistan is offering half a million hectares of land and
promising Gulf investors that if they sign up, it will hire a security force
of 100,000 to protect the assets. For poor countries land deals offer a
chance to reverse decades of underinvestment in agriculture.
In developing countries as a whole, the average growth in cereal yields has
fallen from 3-6% a year in the 1960s to 1-2% a year now, says the World
Bank. This reflects, among other things, a decline in public investment. In
the 14 countries that depend most on farming, public spending on agriculture
almost halved as a share of total public spending between 1980 and 2004.
Foreign aid to farming also halved in real terms over the same period.
Farming has done worst of all in Africa, where most of the largest land
deals are taking place. There, agricultural output per farmworker was the
lowest in the world during 1980-2004, growing by less than 1% a year,
compared with over 3% a year in East Asia and the Middle East.
The investors promise a lot: new seeds, new marketing, better jobs, schools,
clinics and roads. An official at Sudan’s agriculture ministry said
investment in farming in his country by Arab states would rise almost
tenfold from $700m in 2007 to a forecast $7.5 billion in 2010. That would be
half of all investment in the country, he said. In 2007, agricultural
investment had been a mere 3% of the total.
China has set up 11 research stations in Africa to boost yields of staple
crops. That is needed: sub-Saharan Africa spends much less than India on
agricultural R&D. Even without new seed varieties or fancy drip-feed
irrigation, investment should help farmers. One of the biggest constraints
on African farming is the inability to borrow money for fertilisers. If new
landlords just helped farmers get credit, it would make a big difference.
Yet a certain wariness ought to be maintained. Farming in Africa is hard. It
breaks backs and the naive ambitions of outsiders. To judge by the scale of
projects so far, the new investors seem to be pinning their hopes on
creating technologically sophisticated large farms. These have worked well
in Europe and the Americas. Paul Collier of Oxford University says Africa
needs them too: “African peasant farming has fallen further and further
behind the advancing commercial productivity frontier.”
But alas, the record of large farms in Africa has been poor. Those that have
done best are now moving away from staple crops to higher-value things such
as flowers and fruit. Mechanised farming schemes that grow staples have
often ended with abandoned machinery rusting in the returning bush.
Moreover, large farmers are often well-connected and spend more time
lobbying for special favours than doing the hard work.
Politics of a different sort poses more immediate problems. In Madagascar
this year popular hostility to a deal that would have leased 1.3m
hectares—half the island’s arable land—to Daewoo Logistics, a South Korean
company, fanned the flames of opposition and contributed to the president’s
overthrow. In Zambia, the main opposition leader has come out against
China’s proposed 2m-hectare biofuels project—and China has threatened to
pull out of Zambia if he ever came to power. The chairman of Cambodia’s
parliamentary foreign-affairs committee complains that no one has any idea
what terms are being offered to Kuwait to lease rice paddies.
The head of the UN’s Food and Agriculture Organisation, Jacques Diouf, dubs
some projects “neocolonialist”. Bowing before the wind, a Chinese
agriculture-ministry official insists his country is not seeking to buy land
abroad, though he adds that “if there are requests, we would like to
assist.” (On one estimate, China has signed 30 agricultural co-operation
deals covering over 2m hectares since 2007.)
EPA Chinese neocolonialism going down well with Mozambique’s elite
Objections to the projects are not simply Luddite. The deals produce losers
as well as winners. Host governments usually claim that the land they are
offering for sale or lease is vacant or owned by the state. That is not
always true. “Empty” land often supports herders who graze animals on it.
Land may be formally owned by the state but contain people who have farmed
it for generations. Their customary rights are recognised locally, but often
not accepted in law, or in the terms of a foreign-investment deal.
So the deals frequently set one group against another in host countries and
the question is how those conflicts get resolved. “If you want people to
invest in your country, you have to make concessions,” says the spokesman
for Kenya’s president. (He was referring to a deal in which Qatar offered to
build a new port in exchange for growing crops in the Tana river delta,
something opposed by local farmers and conservationists.) The trouble is
that the concessions are frequently one-sided. Customary owners are thrown
off land they think of as theirs. Smallholders have their arms twisted to
sign away their rights for a pittance.
This is worrying in itself. And it leads to so much local opposition that
some deals cannot be implemented. The Saudi Binladin Group put on hold a
$4.3 billion project to grow rice on 500,000 hectares of Indonesia. China
postponed a 1.2m hectare deal in the Philippines.
Farms control
Joachim von Braun, the head of IFPRI, argues that the best way to resolve
the conflicts and create “a win-win” is for foreign investors to sign a code
of conduct to improve the terms of the deals for locals. Various
international bodies have been working on their versions of such a code,
including the African Union, which is due to ratify one at a summit in July.
Good practice would mean respecting customary rights; sharing benefits among
locals (ie, not just bringing in your own workers), increasing transparency
(current deals are shrouded in secrecy) and abiding by national trade
policies (which means not exporting if the host country is suffering a
famine). These sound well and good. But Sudan and Ethiopia have famines now:
should they be declining to sign land deals altogether? Many of the worst
abuses are committed by the foreign investors’ local partners: will they be
restrained by some international code?
There are plenty of reasons for scepticism about these deals. If they manage
to reverse the long decline of farming in poor countries, they will have
justified themselves. But like any big farming venture, they will take years
to reveal their full impact. For the moment, the right response is to defer
judgment and keep a watchful, hopeful but wary eye on their progress.
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