Although the initial focus of Middle East-based investors in agriculture was the acquisition of land assets in developing and middle-income countries, a careful analysis of the sector reveals that the best investments may actually be located within highly-developed economies.
Growth in Land Investment
The agricultural land investment sector has grown in prominence in recent years, due to concerns about food security in the Middle East and North Africa, but also because investments in land provide a good hedge against inflation, provide income, diversify portfolios and are resilient across economic cycles. However, early investments in poor and middle-income countries have often disappointed.
Additionally, GCC-based investors who focused their investments on less-developed countries received a significant amount of bad publicity from the global media, due to concerns about the potential impact on local ecosystems and the ability of local populations in target locations to achieve positive gains from these investments.
There’s a strong argument for examining opportunities for agricultural investment in developed countries, rather than seeking fertile farm land at bargain basement prices in developing countries.
An analysis of the key factors for success in agricultural land management include a study of risk, climate, finance and management.
The country risks include factors such as political stability, which is often less certain in lower-income countries. For example, some early investors in Egyptian land found that their investments were not secure when the government changed. Other country risks include the extent to which communications systems, financial systems and government support are available in the target investment country.
Industry risk relates to the state of development of the industry on a local and regional level and whether it has potential to grow at a significant pace, providing a return that is attractive to investors, who are investing in an emerging sector in an unfamiliar region.
Figure 1: The status of GCC backed land deals by in less developed regions. Investments in Africa and Asia have a higher propensity to fail.
Source: Land Matrix/Farrelly & Mitchell
Legal risk encapsulates the security of land ownership and tenure, as well as the security of leasing and sharing agreements. The incorporation and acquisition requirements of emerging economies are likely to be less mature than those of developed countries. Finally, it is important to consider financial and tax factors, such as the repatriation of profits and corporate tax rates.
Investors also need to give careful consideration to climate risk, in terms of rainfall patterns, soil types, as well as the availability and accessibility of land, water and infrastructure. The countries that have the most developed infrastructure also tend to have the most available and reliable research data.
The financial risk for farm land investment has to be carefully calibrated to ensure that it meets the needs not only of the promoters, but also of the investors. In order to reassure investors, it’s important to do a feasibility study relating to the specific project, by compiling a business plan that covers the entire farm to fork process. Environmental impact and social impact assessments are also key considerations when establishing the viability of an opportunity for some institutional investors.
The funds for the project should include a mix of donor, institutional and private equity funds to ensure sustainability and the funding models should be geared towards medium to long term investment priorities. Understandably, investors often expect an above-average return on investment, due to the additional risk of investing in unfamiliar markets. Having a high equity contribution from the opportunity owners is helpful as this decreases investor risk, which could attract additional investments.
Another key factor in putting together a viable agricultural investment project is the availability of suitable management on site, with the right skills and expertise to manage and execute on the business. Finding upper to middle tier management is particularly challenging in less-developed economies and in some cases it can be hard to find management that understand the commercial realities of running a business.
Such managers would also need to be able to identify the most suitable – not necessarily the most advanced – technology available for animal husbandry, horticulture, cash cropping and aquaculture. For example, in less developed countries it is important to choose technology that is durable and requires little maintenance when operating remotely from major urban areas.
Finally, it’s important to decide what success would look like.
This requires promoters to set a wide standard for the investment outcomes, including capital appreciation, current income yield and non-agricultural returns, such as mineral rights and land use change.
All of these factors build a strong argument for examining opportunities for agricultural investment in developed countries, rather than seeking fertile farm land at bargain basement prices in developing countries.