Derek Byerlee Investment in Agriculture FAO, Dec 12-13th, 2011

Private Investment and Corporate Farming

WB—Land acquisition study Rise of Large Farms in Land Abundant

Countries: Do They Have a Future?, World Development (with Deininger)

Field visits and interviews with LS Farms Historical review of FDI in agriculture

(under construction)

FAMILY FARMING OVERLAPS MANAGEMENT AND OWNERSHIP

CORPORATE MODEL SEPARATES FACTOR OWNERSHIP WITH CONTRACTS WITH MANAGEMENT

Family-management

Land

Capital Labor

Management

Land

Capital Labor

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

% farms % sales

Farm ownership USA

Other

Nonfamily corps

Family partners and corps Family ownership

0

2

4

6

8

10

12

14

0

20

40

60

80

100

120

140

160

180

200

1900 1920 1940 1960 1980 2000

Trends in USA, 1900s Farm size (ha)

Manufacturing wage ($1992/hr)

Gardiner, 2002

0 5

10 15 20 25 30 35 40 45

% Value added % Market cap 0.2%

Integrated companies not included

300 Publicly Listed Companies in the Agricultural Value Chain

Developing Developed Agric Production • 1989-91 0.6 0 • 2005-07 3.3 0 Food and beverage • 1989-91 2.4 4.8 • 2005-07 6.8 34.1 0

1,000

2,000

3,000

4,000

5,000

6,000

1990

19

92

1994

19

96

1998

20

00

2002

20

04

2006

Flow of FDI in Agriculture ($US M) Flow of FDI ($US B/yr)

Source: UNCTAD, 2009

Plantation crops—often large scale Coordination of production and processing Need for quick processing, bulky raw material favor LS

Often high upfront investments—tree crops, mills Year round labor demand—permanent labor Risky markets—export oriented, tree crops

Food crops (grains and oilseeds)—traditionally family farms

Investments for land development, settlement, and land speculation (not covered here)

Sugar cane

Tea Rubber Bananas Oil palm

Grains/oilseeds

Coordination harvest & processing

H H L H H L

1st stage processing K

M-H L-M L L M L-M

Production front-end K

M-H M-H L-M M-H M L

Year round labor

M H H H M L

Risk relative to grains

L M H L-M M

H=High, M=Medium, L=Low

Historical bête noire of plantation agric Was highly labor intensive processing Slave labor, later indentured migrants Contract farming in higher population density

Recent vertical integration to energy: economies of scale in processing + mech, biofuels +

standards Initial investment $ 1+ B and 70K ha. (Cosan 600+K

ha; Shell 2x) Early family-companies, now regional going

global (Brazil, China, South Africa)

Historically large scale for export Highly labor intensive (harvesting) and startup K

Emergence of global VI companies (brands) Institutional innovations for greater equity Kenya top exporter with 2/3 smallholders, who also

own factories and KTDA (with donor/gov support) Also growing employee equity ownership in

companies (India, Rwanda, Tanzania)

Wild to cultivated crop initially plantations Labor and some land issues

Global VI companies early responding to strategic industrial input Also spectacular failures (Fordlandia 1 M+ ha)

Early emergence of smallholders although uneven playing field (on-farm processing) Asia 40% smallholder by 1940, now 90% Africa—large scale but smallholders emerging

0%

20%

40%

60%

80%

100%

Est

ate

Est

ate

Est

ate

Est

ate

Sm

allh

olde

r

Sm

allh

olde

r 1922 1963 1978 1995 1964 "1995"

Rubber in Malaysia

Capital

Labor and management Land

Source: Barlow, 1997

Bete noire of the 20th century Export industry by few large scale VI

companies Land issues dominated (disease buildup and large

tracts for shifting plantations) United Fruit ownership of 1 M ha+ in CA

From 1960s, largely moved to contracted medium scale family-based farms Political backlash on land and powerful interests New varieties for disease

Efficient unit for mill 10K ha and overall establishment costs of $40 M

Global companies then Asian Very large VI companies with 600K+ ha, $1 B rev,

8 of top world’s top 25 agric prod companies Asian companies investing in Africa and LA

Smallholders increasing 30+ % of Indonesian production

No historical examples of sustained corporate investment in LS farming State driven often for food security (UK post-war

Africa and Aust , Sudan mechanized scheme, Saskatoon on the savannah, FSU Universal failures

Private—”Bonanza farms” in US but soon converted to family farms

Rise of corporate grain/oilseed farming only since 1990

Russia, Ukraine, Khaz(RUK)—historical legacy of LS

Emergence of “superfarms”. Ukraine: Top 40 companies manage 4.5 M ha; Russia: Top 30 companies 6.7 M ha (mostly home grown but listed companies, some FDI)

Highly variable performance—Ivolga 1 M+ha?

Latin America Emergence of very large farming companies mostly national (El

Tejar, Los Grobos, Adecoagro, Cresud, SLC Agricola, Maggi) Argentina: Top 30 companies total 2.4 m ha (mostly rented).

Brazil Cerrado: 20% of the farmland foreign owned

Operate regionally, some FDI and many raise international capital

0

50

100

150

200

250

300

350

400

Cos

t (U

S$/t)

Comparative Production Costs, Soybean, 2007-08

Other

Inputs

Land

0

20

40

60

80

100

120

140

160

180

200

Cos

t (U

S$/t)

Comparative Production Costs, Maize, 2007-09

Inputs

Other

Land

HISTORY OF FAILURE OF LARGE-SCALE FARMS IN AFRICA

UPLAND RICE INVESTOR IN LIBERIA, 2009?

1940s—British groundnut scheme in Tanzania • Overlooked smallholders

1970s—Sudan mechanized

schemes

1980s--Saskatoon on the savannah—wheat E Africa

2000s—Non-traditional investors

Technology

Size (ha)

Yield (t/ha)

Cost ($/t)

Existing Company 8000 0.5 277

Large farm 400 0.4 495

Smallholder 20 0.5 204

Zero tillage, fertilizer and others

Large farm 400 4.0 125

Smallholder 20 3.0 143

Source: Min of Agriculture, 2009

-1.25% pa

0.76% pa

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

Yie

ld (t

on

s p

er H

a)

Sorghum Sesame

Mechanized rainfed system, Sudan; Lose-lose investments

Source: Gov of Sudan, 2009

Factors favoring large scale Opening new lands (need K, lack L) Standards and certification—fixed costs

Able to overcome diseconomies of size at level of operating units: New technologies (ZT, GMOs, ITs) Institutional innovations

Specialized management companies combine production factors • Argentina—”Pools de

Siembra” Lease land and machinery Raises funds Assets—Human capital-

management • State of art IT systems

Diversified portfolio—spatially and by product Smooth covariance of risks

Market imperfections and transactions costs Access to cheaper finance in global markets Argentinean companies 10-20% price discount inputs in

monopsonistic markets Vertical integration to overcome poor logistics Own intensive livestock operations Own rails and ports (Brazil, Ukraine)

Distorted capital markets such as subsidized interest rates e.g., Brazil

Regulations that promote mechanization Labor laws that add transactions costs

Low or zero land prices that encourage risky investments and LS farming Mozambique $0.60/ha Forest governance (Indonesia, Brazil)

A MAJOR OPPORTUNITY WITH SIGNIFICANT RISKS

Fills a huge investment gap

Transfer of technology and know-how

Export development New industries--biofuels Employment generation Opening of remote

regions

Lack of land markets—rights of users

Enclaves with few local benefits

Negative environmental impacts (forests)

Risks of highly unequal agrarian structure • Governance, services

State of markets

Example Risks Policy needs

A Land and other markets function well

Australia, Argentina, Sth-C Brazil

Few Transparency--registry of foreign purchases

B Land and other markets still emerging

RUK Amazon Indonesia

Significant Strengthen property rights, contracts, information

C No formal land markets

sub-Saharan Africa, Cambodia

Major Transparency, careful screening, formalize property rights

Smallholders/ communities with

land rights

Land

Labor

Local knowledge

“Good” Companies

Capital and risk

Access to markets and technology

Specialized knowledge

Not new– surge in FDI and SWFs strongly relate to commodity booms But big shift from N-S to S-S investments Speculative elements—access land but not used

No easy generalizations and often major changes over time LS at frontier then smallholder after infrastructure,

technology established High failure rates and significant social and env

issues in short term but in long term, often seen as successes (also CDC review)

Historically labor issues (supply, standards, supervision) more of an issue than access to land Incentive to outsource, smallholder advantage

Indigenous land rights recognized early Good practices—prior surveys, auctions,

consultations etc However, implementation failures and corporate

powers often prevailed at local level to subvert regulations Implications for RAI

Both old and new drivers toward large scale Emerging evidence that large-scale farms can be efficient

for food crops as well Economic and social impacts highly variable Big investment gap--Need to exploit a variety of institutional

models to attract private K that might involve range of farm sizes

Family farming still more efficient and equitable in most circumstances Priority to level the playing field + incentives for SS But new tech, markets, institutional innovations favor LS