As the global financial crisis begins to erode away traditional investment opportunities, one new and surprising investment vehicle has Africa as one of the main destinations for inflows of capital, for one of the most prized and sensitive assets, the acquisition of arable land. The insatiable thirst for energy and ensuring food security are two of the main reasons for this new investment strategy, and as those lands become more valuable, the exit strategy will be on the appreciation of the value of the developed land. With the stamp of approval of investment god, George Soros, the land grab has only just begun.
Firstly, to achieve food security, especially for the country of capital origin. The food price spike experienced in late 2007 and most of 2008 has woken up many of the richer countries in the world, especially those with large populations and countries with not much land or water, that they must find ways of achieving food security for their populations. Therefore, there has been large investments in Africa by firms linked to governments such as Saudi Arabia that has US$800m of agricultural investments in Ethiopia linked to the growing of strategic crops such as rice and wheat. China has 1.3 billion mouths to feed (7% of the arable land is being lost in China to desertification and pollution as a by product of rampant economic growth), has invested US$800m into Mozambique agriculture (Mozambique has marked 4 million hectares of land for investment), where they will grow rice, a crop that isn’t staple diet of Mozambique. Speculators and investors have also seen the opportunity to secure primary commodities and with their prices always increasing, the returns are more evident than other investments. This is not only confined to non-African investments, Egypt has secured a deal with Uganda for 840 000 hectares of land which will be used for growing wheat and corn, as the soil in Egypt is not sufficient for their demands.
Secondly, with the reserves of traditional fossil fuels now under pressure, and a search to find more sustainable fuels, the advent of bio-fuels has given rise to finding lands where the plants can be grown in plentiful supply, and Sub-Saharan Africa has nearly 60% of arable land not reaching its potential, thus vast fields that can be used to grow bio-fuels. When compared to land usage in Asia, Africa falls way behind its potential, only 7% of the arable land is irrigated, compared to 40% of Asia land. The price of developing bio-fuels in developed countries such as Germany have become too expensive due to taxes being levied on them, so producing them in Africa has become a more viable alternative.
Thirdly, the price of land in Africa is the cheapest in the world. The average price per hectare in Africa is between US$800-1 000, compared to US$5 000-6 000 in South America, US$7 000 in the USA and US$22 000 in Germany. Allied to the climate, it is obvious why Africa is such a popular destination for investment. As demand for African land increases, and countries begin to get into competition with each other, the price falls for the value of the land in the hope of capturing investment.
Investment firms approach the government they want to buy land from, and the first hurdle that needs to be overcome, what is in it for the hosting country? The normal reward is improved employment opportunities and the introduction of capital goods such as combine harvesters, tractors and development of new farming and planting techniques, which will increase productivity. One of the reasons why the food yield in Africa hasn’t been as high as it could have been,in part is because of low investment in agriculture over the past three decades, and in part is due to the low productivity on the land, improve this, and the yield is increased. The second hurdle to be overcome is the ownership of the land. There are two forms of ownership, the issuing of a 99-year lease of the land, or the short term lease/rent on the land. For investment firms, they would require the former, and allied with that, a government with laws that are in their favour so that they are assured of a return on their outlay. This would include guarantees on facilitating export of produce, even if there is not enough food domestically, and facilitating the removal and compliance of those that will be dwelling on the land that they acquire.
Firstly, land is a very emotive and sensitive political issue, many of the countries in Africa that fought for independence, fought so in the reclamation of land by the former colonial powers. On the one hand whilst an investment firm would propose advantages of their presence, many do not employ labour intensive methods, which would absorb labour and reduce unemployment, but will use capital intensive methods to increase productivity and profits for themselves. Many of those on the land that will have been acquired, are small holding farmers. By having them vacated from the land, they will have their sole livelihood capacity taken away from them, forcing some to move to the urban centres in search of employment. Without being able to grow their own food, they will be more vulnerable to starvation and poverty. Most African countries do not have any safety nets for the vulnerable, and this will further exacerbate this problem.
Secondly, the contentious issue of national sovereignty and domestic food security. The deal between South Korean firm Daewoo and the former Madagascar government for the use of 1.3m hectares of land, on a 99 year lease in November 2008 can be seen as a trigger to the current political problems in the host country. Daewoo were given the land for free, and all produce on the land was to be exported back to South Korea or to other countries, and nothing remaining for domestic consumption. This deal was so unpopular, that is was one of the reasons for the effective coup in March 2009, and the entire deal was revoked by new president Andre Rajoelina. Similarly in south Sudan, investment by American and Arab firms are beginning to export food, but at the same time, the World Food Programme feeds 6.5 million people in the area, which doesn’t make sense for Sudan to export food in large quantities, whilst needing food aid for its own people. Food will no longer be grown by farmers, but by firms intent on a return on investment, profits which may not be attained by selling domestically in the host country.
As commodity prices have escalated, in Europe, prices increased around 5%-10% during 2008, in Africa, it was around 25%-30%, and with already shortages in food, the sale of land used by small farmers for foreign investment, which will export the produce, is likely to lead to further higher food costs for those that need cheaper prices as a necessity for survival
Thirdly, the impact of current trade regimes and productivity. Agriculture in Africa has not flourished as well as it could have, in part because of the current trade regimes. Many domestic markets have been depressed for years because of the importation of cheaper products, heavily subsidized such as US corn and cotton that have decimated the domestic production, making it less attractive to invest in agriculture. African countries have also been hampered with exporting their produce, high tariffs imposed by the USA and the European Unions Common Agriculture Policy that make African products more expensive in those respective markets. Until that regime is ended, there is little chance of making a breakthrough for the domestic producers, and the proceeds of these improvements being felt in the host country.
African governments have been charged by the Food and Agricultural Organization, to find methods of becoming self sufficient and ensuring food security for their peoples. In the time where food prices have been more dear than ever before, they will need to measure the benefits of foreign investment and the impact it has on domestic food supply. Whilst investment may bring in research and technology, without a livelihood, the people cannot earn money to consume products, and similarly if the do hold onto the less productive farms, food security will not be achieved. The crown jewel of any country is the soil, relinquish that, and you put yourself at the mercy of others.