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Comment: Brazil appears to be moving to ban foreign farmland ownership

Stephen Johnston

HedgeWeek | 1 September 2010

Stephen Johnston, Agcapita Partners

The Brazilian government recently announced an “immediately binding” decision that appears to outlaw all foreign ownership of Brazilian farmland. Stephen Johnston (pictured) of Agcapita Partners outlines the implications.

Food supply questions are even more politically charged than questions of energy sovereignty.  The UN has consistently stated that foreign direct investment into farmland has the potential to generate severe political backlash.

In practice, countries as diverse as New Zealand, Russia, India, Argentina, Indonesia, and Kazakhstan have imposed or are considering restrictions on agriculture ranging from export tariffs to proposals for outright nationalisation.

Further to this, the Brazilian government recently announced a decision that seeks to outlaw  foreign ownership of farmland. President Luiz Inacio Lula da Silva approved a rule that restricts the sale of farmland to foreign investors or a local company with more than a 50% stake controlled by foreign investors, the government said in an August 23rd press release.

Considerable uncertainty surrounds the force of the new rule and how it may be applied.  So much so that some observers believe there is a possibility that all farmland acquisitions since 1988 could be made null and void and some simply think the announcement is pre-election posturing.

The rhetoric coming out of the government however is not uncertain – the Minister of Agrarian Development, Guilherme Cassel, has been quoted that the government did not want foreigners to buy farmland in Brazil and that "Brazilian land must stay in the hands of Brazilians."

This sudden hostility to foreign farmland ownership is ill-timed as Brazil has become one of the world’s most active emerging markets for agriculture investments.  It has been estimated that foreign investors deployed approximately $2.5 billion into the Brazilian agriculture sector between 2002-2008.  Query as to the value of many of those investments today and to the pace of future capital inflows?

At Agcapita, we have always believed that removing political risk from farmland investments is a key element in achieving superior returns.  Events in Brazil seem to be proving this view correct.

The silver lining may be that turmoil in an emerging market like Brazil will be good news for agriculture investors elsewhere.  At the very least it should make farmland investments in developed markets such as Canada - with politically stability, low political risk and first world infrastructure - more attractive.

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