FAO calls for increased investment in global agriculture
May 2013 | FEATURE | FINANCE & INVESTMENT
Financier Worldwide Magazine
The global discussion surrounding agricultural investment and financing has intensified greatly in recent years. As the world’s population booms, greater pressure is being applied to existing global food producing infrastructure. Indeed, while the global population continues to grow rapidly, the amount of land on which farmers can grow food is shrinking. Already we have seen sharp rises in food prices as demand intensifies.
With a further population explosion due between now and the middle of the century, there have been increased calls for intensive investment in the agricultural sector. Farmers, development advocates and politicians have all led these pleas, noting that greater levels of investment will help fight hunger and poverty globally. Investment campaigners note that as the world’s population is due to reach 9.1 billion by 2050, increasing the sophistication and efficiency of the agricultural sector is imperative. Currently, the agriculture sector desperately requires investment in order to produce more, with less. The UN’s Food and Agriculture Organisation (FAO) supports this assertion in the latest edition of its annual report, ‘The State of Food and Agriculture 2012: Investing in Agriculture for a Better Future’.
The report, which is the organisation’s flagship publication, suggests that a total of $83bn a year must be invested in the agricultural sector of developing nations if there is to be enough food to feed the world’s population in 2050. The report states that $83bn is an estimate of the “level of investment required to meet growing demand for food in 2050 – not to eliminate hunger”. Currently, around 870 million of the world’s poorest have inadequate access to food, the majority of whom live in the rural areas of developing nations.
Farmers to play a central role
The report says that despite recent foreign direct investment (FDI) and official development assistance, the world’s one billion farmers – notably in 76 of the world’s low and middle income countries – are still the most prolific investors in the agricultural sector in developing nations. These farmers invest more than four times as much capital into their own farms than their governments do. It is estimated that smallholders invest more than $170bn a year, a figure which equates to roughly $150 per farmer. This investment is three times that of all other types of agricultural investment combined – four times the existing contribution by the public sector and more than 50 times official government investment. It is clear that farmers’ investment into their own land dwarfs the investment strategies of all other international donors and foreign private investors.
According to the FAO, on-farm investment is central to any strategy aimed at improving agricultural investment. The organisation hopes that the quantities of food produced and the effectiveness and efficiency of the farms can be increased by providing additional assistance to farmers. “A new investment strategy is needed that puts agricultural producers at its centre,” said FAO director general Jose Graziano da Silva at the Rome launch of the report. “The challenge is to focus investments in areas where they can make a difference. This is important to guarantee that investments will result in high economic and social returns and environmental sustainability,” he added.
It is vital that governments do more to foster an enabling environment for agricultural investment in developing nations. There are a number of factors which stifle the flow of investment into these regions, and these reasons are often ignored by policymakers. The FAO notes that “poor governance, absence of rule of law, high levels of corruption, insecure property rights, arbitrary trade rules, taxation of agriculture relative to other sectors, failure to provide adequate infrastructure and public services in rural areas and a waste of scarce public resources” all drive up the costs and risks associated with the agriculture sector, and are prohibitive to investment. These issues reduce incentives for would-be investors. Government agencies must invest in infrastructure projects and help develop the human capacity required to support an environment which will facilitate agricultural investment.
For the poorest farmers in developing nations, among the biggest hindrances to providing additional farming investment themselves are the restrictively high cost of food production, as well as rising food prices which are contributing to high levels of malnutrition and starvation. According to the FAO’s report, consumer food prices have risen more rapidly than overall consumer prices since 2000 in all but six of the 166 countries for which data is available. Food price inflation exceeded overall consumer price inflation by up to 10 percentage points in 73 of those countries; also it was up 20 percentage points in 55 countries and by more than 30 percentage points in 12 countries.
Additionally, urban migration and extreme weather conditions, such as those experienced in the US in 2012, when the country endured its worst drought since the 1930s, have all contributed to a marked increase in food prices.
The regions where hunger and extreme poverty are most widespread, namely South Asia and sub-Saharan Africa, have seen moribund or declining rates of agriculture investment over the last three decades. These struggling regions are the global focal points of poverty and hunger. “Recent evidence shows signs of improvement, but eradicating hunger in these and other regions, and achieving this sustainably, will require substantial increases in the level of farm investment in agriculture, and dramatic improvements in both the level and quality of government investment in the sector”, the report suggests.
To level the playing field between larger firms and smallholders, governments should also provide easier access to available credit facilities. Clear routes to available, affordable credit would undoubtedly help encourage impoverished famers to invest further in the sector. Any additional support which can be provided to smallhold farmers would obviously be beneficial for the agriculture sector.
Investments, responsibility and sustainability
The FAO’s report notes that investment is sorely needed for the conservation of natural resources and the transition to sustainable production. Over the coming years the demand for agricultural products will continue to grow, applying yet more unsustainable pressure to the existing natural resource base, which in many developing nations is already becoming depleted.
However, in an interview with the Financial Times, Bryan Agbabian, manager of the Allianz Global Agricultural Trends Fund, claimed that “While an argument can be made that current methods of agricultural production are not sustainable, it is also true that the world cannot sustain its current population without them.” He added “The focus should be first and foremost on growing production today to help feed today’s hungry.”
Mr Agbabian also stated that “Much can be done to ensure fertilisers, genetically modified seeds and crop protection technologies are used in a more sustainable manner.” This is a widely held and popular perspective. For many analysts an over-reliance on fertilisers and other technology can ultimately leadto the damaging industrialisation of the sector, causing lasting environmental and social damage to some of the world’s poorest regions. Widespread fertiliser-dependent practices will degrade soil quality and push smaller farmers even further into poverty.
It is clear that investment is sorely needed in agriculture in developing nations, as many challenges lie ahead for the sector. Chief amongst those challenges is the ever increasing food demand from a burgeoning world population. If the sector is to meet this demand, widespread investment is desperately needed from all quarters. Investment in the sector should help to ensure that agriculture and food systems are less at risk, more equitable, more efficient and more environmentally friendly. However it is not only the quantity of investment which needs to improve, it is also the quality. In recent years governments and financial sponsors have begun to increase their levels of investment in the sector, and as the flow of private, international capital towards developing nations has increased, it has become clear that the risks associated with such investment must be managed appropriately.
While the level of investment is still relatively low at the moment, and its potential impact on agricultural production is comparatively marginal, the future impact of FDI must be considered. Large-scale investment might offer opportunities to increase production and export earnings, generate additional employment and encourage technology transfer, but the risks are still very high for existing smallholders. Although large scale investment in low income farming communities would have significant advantages, the negative social and environmental impact of such investment cannot be ignored. The report states that “Alternative and more inclusive business models for large-scale investors that offer opportunities for greater direct involvement of local farmers in agricultural value chains should be promoted”.
Boosts to productivity are also required, which means investment in better, more sophisticated farming techniques is needed. These techniques must be sustainable and environmentally friendly if agriculture is to eliminate hunger and malnutrition, and preserve the world’s dwindling natural resources, on which the sector depends. The FAO notes that “Demand for agricultural products over the coming decades will put increasing pressure on the natural resource base, which in many developing regions is already severely degraded. Investment is needed for conservation of natural resources and the transition to sustainable production”.
It is crucial that farming smallholders are provided with the assistance they require from governments and private investors in order to overcome the difficulties they face which prevent them from producing more food. Saving, investing and coping with the pitfalls and risks related to climate change, for example, are all issues which must be overcome if smallholders are to continue their investment in the agriculture sector. The report suggests that “Smallholders often face particularly severe constraints to investing in agriculture because they operate so close to the margins of survival that they are unable to save or to tolerate additional risk”. The FAO suggests stronger producer organisations, such as cooperatives, as viable alternatives for smallholders. Cooperatives would help farmers to manage risks and achieve “economies of scale in accessing markets. Social safety nets and transfer payments may help them accumulate and retain assets, either in agriculture or in other activities of their choice”.
Public and private investment in “productivity enhancing agricultural research, rural roads and education, have consistently higher payoffs for society than spending on fertiliser subsidies”, reports the FAO. Fertilisers are “often captured by rural elites and distributed in ways that undermine private input supplies”. By investing in education programs as well as sustainable, conservational projects and by removing the barriers which hinder further smallholder investment, private investors and governments can help to reinforce the global fight against hunger and poverty, and strengthen the global agriculture sector.
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