Wednesday, April 7, 2010

Spectator UK article on farmland investing

Dominic Midgley looks at funds investing in farmland that will feed a population explosion

Food security is the new energy security. So says Susan Payne, chief executive of Emergent Asset Management, a Surrey-based company which claims to run the biggest agricultural fund in Africa following the launch of its first fund less than 18 months ago.

Payne, a Canadian who cut her teeth as an emerging-markets expert first at JPMorgan and then at Goldman Sachs, attracts investors by conjuring up the Malthusian devil. The world’s population is set to grow by 2 billion to 9.1 billion over the next 40 years; feeding the children of tomorrow will require a 50 per cent increase in farm output by 2025 and a doubling by 2050.

Meanwhile, the price of staple crops has risen by more than 80 per cent since 2005, pushing 100 million people into poverty, according to the World Bank. And Payne is fond of pointing out that there were food riots in 15 countries during a period of soaring prices in 2008. This scenario, coupled with a growing demand for biofuels, means — Payne and others argue — that there has never been a better time to invest in agricultural land.

In December, Dixon Boardman, chief executive of Optima, a New York fund-of-funds business, announced plans for a $100 million fund to invest in American farmland. In the same month, the London-based Agro-Ecological Investment Management announced that it is raising $60 million to buy land in New Zealand. Others already established in this market include Deutsche Bank (pig breeding and chicken farming in China) and Russia’s Renaissance Capital, with 100,000 hectares of farmland in the Ukraine.

Emergent, meanwhile, specialises in countries where land is cheap. ‘A number of factors made sub-Saharan Africa optimal,’ says Payne. ‘It offers fertile soil, secure and plentiful water resources and very good, technically trained farmers, particularly in Zimbabwe, South Africa and Zambia. It also offers large tracts of inexpensive agricultural land — one seventh the price of Brazilian or Argentine land and a fraction of the cost of land in Europe. Land in sub-Saharan Africa is under $1,000 a hectare whereas it’s $25,000 per hectare in Denmark and $20,000 per hectare in the UK. We are active across sub-Saharan Africa — we’ll soon be in 10 countries.’

The minimum investment for private investors is E500,000 and for institutional investors, E5 million, with a projected return ‘in excess of 25 per cent per annum over the fund’s five-year term’, according to Emergent’s website. Such returns are to be achieved partly through generating higher yields. This involves the planting of GM crops, a revolutionary technique called ‘no-till farming’ which helps to conserve soil nutrients and reduce erosion, and the use of a sort of farmer’s satnav that helps optimise the use of fuel and seed by mapping the gradient of the land and the position of trees.

Payne comes across as almost messianic in her quest. ‘My father was a senior director at the UN Food and Agricultural Organisation in Rome and he used to say that giving aid outright to Africa was a little like spitting on a fire,’ she recalls. ‘The real answer lay in the education of local populations to learn the best available techniques to feed and sustain themselves. His ideology resonates continually with me. It’s exactly what we are trying to do: go to a country like Mozambique, war- ravaged and with a decimated economy after 25 years of civil war, acquire land, and hire and train hundreds of Mozambicans.

‘In one case, we have, in a sense, “adopted” a local village of 3,000 and hired its citizens to help clear 2,000 hectares of greenfield land and then farm it with us. We expect soon to build a farm school in the village, as well as a clinic. This model we are repeating elsewhere, which is why governments are supportive of what we do. We represent private pools of capital that make a positive impact across various countries. Africa is currently a net importer of food, and this should — and can — cease. It could be a breadbasket for itself and others.’

Listening to Susan Payne you could be forgiven for thinking land funds are a holy grail for the ethical investor: money-making opportunities with a sanctifying air of do-goodery. But critics of the less scrupulous investors in this sector argue that all too often the land acquired is confiscated from small farmers who may not have formal title to it but have farmed it for generations. Doubters also predict long-term damage in the form of over-fertilising, deforestation, over-consumption of water, and reduction in eco-diversity.

The presence of investors such as the Saudi Arabian government and New York fund Jarch Capital in famine-ridden countries such as Ethiopia and southern Sudan also raises uncomfortable questions about what would happen in the event of drought. The Saudis are expected to take delivery of their first rice harvest from Ethiopia in the spring. Will the fields be surrounded by electrified fences and will armed escorts accompany shipments for export? Pakistan has already announced plans to deploy 100,000 members of its security forces to protect foreign-owned agricultural land.

There are risks for investors too. Last March, the emergence of a new president in Madagascar led to the cancellation of a deal that had given Daewoo Logistics a 99-year lease on half the country’s arable land — 1.3 million hectares. It was a popular move in a country where 70 per cent of the population depend on agriculture for income. The multinational conglomerate charged with securing the food security of its native South Korea by growing corn and palm oil, however, now finds itself back at square one.

Developing nations are not the only growth areas. Unlike Emergent, Agro-Ecological is investing in a developed country with a view to exploiting a niche market. It will buy conventionally managed farms in New Zealand — the homeland of the company’s managing director Geoff Burke — and convert them to organic production.

The conventional view is that yields suffer when farms go organic, but Burke disputes this. ‘I don’t think there’s much yield difference and it becomes more financially viable because there’s not the same vulnerability to fossil fuel prices that nitrogenous fertiliser has,’ he says. ‘If you’re not using fertilisers, chemicals and feed, you’re not exposed to those inputs as their prices increase. There is a very tight correlation between oil and fertiliser prices.’

The global market for organic produce is growing at a rate of around 15 per cent a year and Burke expects to earn that level of return for his investors. ‘This is a medium- to longterm asset and we’re looking at a return in the mid-teens in terms of capital appreciation and cash yield,’ he adds. ‘We would certainly look to exit after seven to ten years. We could list the portfolio, sell to pension fund investors, or sell to farmers we’re partnering with at the moment.’ Within a year to 18 months he expects to launch a second fund, possibly in Uruguay.

A growing global population means rising demand for fertile land on which to grow food: it’s a simple investment proposition that could become an arable Klondike.
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