The recent Group of Eight (G8) summit in Italy concluded with an agreement to invest US$20 billion (Dh73.46bn) over the next three years to boost agricultural output and fight against hunger in the world in the interests of food security. One of the primary recipients of the funds will be African countries desperately in need of capital to invest in modern farming techniques that enable them to feed their populations. Additional capital will also be deployed to invest in infrastructure to move food for local and export markets.
To date, foreign aid to Africa has mostly been in the form of direct food supplies, rather than investment to help the continent become more self-sustainable. The proposed investment from the G8, if channelled appropriately, should deliver a number of benefits to the continent. The term food security essentially refers to the availability of food and how one secures access to it. However, what this means in practice can differ considerably.
For GCC governments, the topic came to prominence as a result of commodity price spikes last year. While by no means a new issue, export restrictions imposed on key foodstuffs from some countries to try to contain prices in home markets raised the prospect of how to effectively feed a population in times of food scarcity. The disruption raised the real possibility that in the future, food supplies could be restricted in times of global food shortages. Additionally, rapidly rising food prices can cause major socio-economic issues in countries where there are large expatriate populations of relatively low-paid workers.
The growing populations of Asia and Africa are expected to place an ever increasing burden on global food supplies. However, the supply of arable land globally is a finite resource. Droughts and the effects of global warming are expected to make the situation worse. Greater investment is required to improve farming techniques that increase the yield on existing arable land. For regional governments, the topic of food security is highly strategic. The question is how to guarantee food supply for their populations over the next 50 years. Added to this is the challenge posed by growing populations, and rising wealth in developing nations placing further strains on the food chain.
Countries have taken different measures to tackle this issue. Saudi Arabia, for example, tried to grow its own wheat, but this proved unsustainable. The experiment was cancelled recently because of the huge quantities of water required and the impact this was having on underground water sources. Another method is to buy farmland in other countries that can be used to grow primary foodstuffs to be brought back to the region. Governments are looking to deploy capital built up during years of budget surpluses and high oil prices to provide food for future generations. Such investments are not a new phenomenon, with governments having bought land elsewhere, notably the Sudan in Africa.
What appears to be changing is that governments are looking at opportunities across the value chain as diverse as South America, South East Asia and Australasia. Primary areas of interest include land, rice, cereals, dairy and livestock, all of which are critical to guaranteeing food supply for future generations. There is also the opportunity for private investors to get involved. Rothschild has recently formed a co-operation agreement with Rabobank, a leading global food and agricultural bank. The agreement covers co-operation for mergers and acquisitions and the equity capital market across a number of sectors including farm inputs and equipment, farm-based commodities, primary food processing, food processing and beverages.
Opportunities come from the high level of fragmentation in certain parts of the food and agricultural value chain. Over the past 20 years, globalisation has encouraged consolidation in a number of areas of the food chain, especially at the retail and food processing end. However, for a variety of reasons, global food players have not looked to invest in land and upstream operations. This may now be changing, with activity picking up as witnessed by the recent investment by Terra Firma, a UK-based private equity fund, of about $300 million in Australia for land that is currently being used for livestock farming. The Terra Firma deal is encouraging land owners to consider their options. There is likely to be more consolidation of the industry and in many instances they will be seeking external capital to facilitate this strategy.
Local funds and investors are also expected to play an increasingly important role. There are reports that the agriculture ministry in Saudi Arabia is investigating opportunities to acquire agribusiness assets in Latin America, primarily Brazil and Argentina. Latin America is seen as an attractive investment destination because the political risks are perceived to be less than in other areas with significant underdeveloped agricultural land such as Africa and central and eastern Europe.
However, investment by sovereign entities is not without its issues. Recent attempts by a South Korean investment fund to buy land in Madagascar resulted in the collapse of the incumbent government. Similar moves by other funds to buy land in Kenya have been met by fierce resistance from local farmers. One major issue is whether control of investment is required, or alternatively whether minority stakes with an offtake agreement can suffice.
Proponents of the strategy argue that the funds bring needed investment into local farming, as well as the infrastructure that is needed to help countries increase production levels. Critics argue that the moves represent neo-colonialism, motivated by self-interest rather than the development of local economies. The debate is likely to continue. Should a government allow foodstuff to be exported when there are insufficient supplies to feed local populations? Will landowners look to export supplies of renewable water at times of drought in home countries? Will governments seek to appropriate privately owned land at a time of food shortages? Do local populations really benefit from the investment made?
What is clear is that in the medium to long term, the strategy of GCC governments and corporations investing in overseas agribusiness is set to increase. Such investment is likely to be undertaken in a number of jurisdictions to mitigate political and other risks. The challenge for many of these funds will be to ensure that they are seen as responsible long-term investors, motivated by more than self-interest. One of the ways to do this may be for governments locally to form bodies to develop and implement a food security policy globally in a sustainable manner.
Chris Hawley is a director at Rothschild Bank in Dubai