Wednesday, June 8, 2011

Hedge Fund Investments in African Land are Leading to Food Price Volatility - Or Are They?

According to a private think tank, hedge fund involvement in African agriculture is leading to higher food price volatility.

I can understand their line of reasoning. The legal system and what regulatory agencies exist in Africa are notoriously opaque about investment processes to begin with. Many deals have traditionally been bilaterally struck between foreign investors and high ranking government officials on an individual basis. There is a marked danger of a "land grab" by foreign investors accumulating the choicest pieces of the pie.

However, the article goes too far in blaming hedge funds for increasing food risks. Investment in agriculture requires a long term time frame with many plant growing seasons measured in years - if not decades - for crops to become fully mature. There are heavy sunk costs associated w/developing physical infrastructure and transportation networks that require an equally long time horizon. All of this economic activity is largely beneficial for native populations - particularly in employment but also the development of technical expertise.

Then there is also the possibility of nationalization - an African nation can simply renege on the terms of a deal w/foreigners and seize the farms outright. It has happened before w/other industries - namely cocao, rubber, and cattle farms.

There is also another participant in the African land investment arena that is not mentioned in the article - foreign sovereigns. Foreign governments, particularly cash rich but land poor Middle Eastern nations, have been investing heavily in East Africa for almost a decade in an effort to diversify their food stocks. Given the sparse amount of arable land in the desert and a booming demographic it is no surprise that nations such as Saudi Arabia, Kuwait, and the Gulf States have chosen to invest heavily in sub-Saharan Africa.

Talking Points Hedge Fund Africa Land Investments Increasing Food Risks -Think Tank
Increased foreign investment into agriculture land in Africa could lead to greater food price volatility and food insecurity, think tank Oakland Institute said.

The California-based group estimates that in 2009 roughly 60 million hectares of land across the continent were either leased to, or purchased by, foreign entities, many of them asset managers or other speculative-type investment houses.

Oakland Institute executive director Anuradha Mittal said many of the deals are not very transparent, are causing displacement, and mean governments are giving up control of their land.

"It's like the food land bubble," Mittal said. "In the short-run people are displaced. The long-term impact is that resources are being controlled by outside investors because these are long leases."

The think tank focused on cases in Ethiopia, Mali, Sierra Leone, Mozambique, Tanzania and South Sudan.

There has been a lot of research into so-called land grabs in Africa, where the price of land is cheaper compared with the U.S., Europe and South America.

At the beginning of the year the World Bank published a report on the rise in agriculture land purchasing interest, saying large farmland acquisition by big investors does raise concerns about the long-term benefits to local populations.

Food price rises and inflation risks have been cited as contributing to the unrest in Northern Africa and in other parts of the continent, such as Mozambique.

Source: CME News for Tomorrow

The Bottom Line: Western hedge funds are investing heavily in sub-Saharan Africa in the agricultural space. Their contribution has some impact on food price but not as volatile as others may claim.
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