Investors are on the hunt for agricultural land. Everyone from governments to corporations to hedge funds is buying up large tracts in developing countries, primarily in Africa and South America. According to estimates, 80% of the world’s reserve agricultural land is found on these two continents. While governments in Africa have largely accepted and supported such foreign investment, a backlash is beginning to take shape in Latin America, where officials increasingly view such acquisitions as land grabs.
Why the rush for agricultural land?
- Food security
- The run-up in agricultural commodity prices
- Concerns over the impact of climate change on the food supply
- An increase in the amount of land devoted to biofuels production
- Population growth and urbanisation
Notably, the above factors are interconnected. Both structural and speculative factors are playing a role in the rising land prices seen across a broad swathe of countries. Brazil and Argentina experienced annual price rises in the double-digits in 2010, according to the Knight Frank International Farmland Index.
The graph below (from Oxfam) highlights the structural factors underscoring the land drive. The share of land devoted to agriculture has peaked, while agricultural land on a per capita basis continues its steady decline.
Source: Oxfam, FAO, UN
However, some – such as Thomas Hoenig of the Federal Reserve Bank of Kansas City – have expressed concern that a bubble may now be underway: “History has taught us that it is nearly impossible to determine how much of the farmland boom may be an unsustainable bubble driven by financial markets.”
African governments have encouraged foreign land purchases
Foreign investors bought almost 2.5 million hectares (the equivalent of 1 million football fields) in Sudan, Ethiopia, Madagascar, Ghana and Mali in 2004-09, according to a UN FAO report. Notably, this only includes deals of over 1000 hectares, meaning the actual amount of land acquired is even larger.
- Gulf countries (Saudi Arabia, Qatar, UAE)
- South Korea
As the UN report notes, dependence on food imports and availability of major official reserves (sovereign wealth funds from oil revenues or trade surpluses) are common characteristics of the countries involved in land deals. The acquisitions take place primarily via state-owned enterprises and privately-owned firms, but they can also take place via sovereign wealth funds and even government-to-government deals.
The UN FAO report notes that there is a trend in the African countries surveyed toward governments easing restrictions on foreign land ownership. “In Mali, Mozambique and Ghana, investment promotion agencies facilitate the acquisition of all necessary licences, permits and authorisations. Their direct role in facilitating land access focuses on helping investors in their dealings with other agencies. A more “hands-on” role is played by Tanzania’s investment promotion agency, the TIC. This is mandated, among other things, with identifying available land and providing it to investors, as well as with helping investors obtain all necessary permits…”
Backlash is beginning in South America toward foreign ‘land grabs’
There appears to be growing unease with foreign purchases of farmland in South America and governments appear less receptive than many in Africa. A recent New York Times article discusses Brazilian officials’ concerns with China’s push for land in their country and notes that in mid-2010, the attorney general reinterpreted a 1971 law, making it more difficult for foreigners to buy land.
A recent Guardian article describes how Argentinian groups are upset by a large deal with China in the province of Rio Negro (larger than the county of Cornwall). In response, the federal government is in the process of drafting legislation to restrict foreign ownership.
Foreign land restrictions: counterproductive nationalism or legitimate response?
The debate over whether foreign land buys should be encouraged or restricted is on. Many see restrictions as a form of protectionism that will hinder development. “The tightening of land purchases by foreigners is really a step backwards into a Jurassic mentality of counterproductive nationalism,” said Charles Tang, president of the Brazil-China Chamber of Commerce.
Others suggest foreign investors do not have countries’ best interests at heart from their potential environmental impact on the land (eg. heavy use of chemicals and poor management of water resources) to a failure to produce the hoped-for economic benefits (eg. jobs and increased productivity). For example, foreigners’ purchase of land does not necessarily mean that they will cultivate it right away, which limits the purported economic benefits. “The most comprehensive research to date suggests that 80% of projects reported in the media are undeveloped, and only 20% had begun actual farming,” says Oxfam.
The debate over whether restrictions should be imposed on foreign purchases of agricultural land echoes aspects of the larger debate over capital controls. How do governments limit speculative investment without choking off ‘good’ investment (eg. those with a long-term commitment to the country who create jobs, transfer know-how and increase agricultural productivity without massive environmental degradation.) The key is carefully crafted restrictions that align investor incentives with those of the host government, but that is much easier said than done.