Asia Pacific Dispatch | 31 August 2010
by Mark Wallace
Back in June, Brazil shocked foreign investors when President Luiz Inacio Lula da Silva said he was concerned about Brazilian land falling into foreign hands. Almost immediately foreign purchasers began freezing their plans until they could get further clarity.
Shortly thereafter, Agrarian Development Ministry spokeswoman Denise Mantovani acknowledged remarks published in Valor Economico by Minister Guilherme Cassel, who said, “We do not need foreigners to produce food in Brazil... This is the policy of President Luiz Inacio Lula da Silva. Because of food security, Brazilian lands must remain in Brazilian hands.”
What was really disconcerting about this was the following comment by Mantovani that a Brazilian constitutional amendment, “Could include the revoking of land titles already purchased by foreigners.” Effectively the new law could annul titles, thereby completing destroying the integrity of Brazil's private property laws.
Crops Destined for Somewhere
Minister Cassel went on to say, “We are going to prepare a PEC (Proposal for a Constitutional Amendment) to make it clear to investors that they can invest in any sector except land.” It's clear that nothing will happen this year however, with the transition from the Lula da Silva government imminent.
But, investors in Brazil – the news ain't all bad. Reuter's recently reported that the Brazilian government may be backing off its initial stance on the amendment and nullification. Reuter's said, “The Attorney General published a finding on a 1971 law that closed a loophole allowing foreign investors to open locally registered companies and purchase land without restrictions on the size of land holdings that foreign capital is subject to.”
The 1971 law did not mention retro-activity or annulment of purchases by foreigners.
Currently there are over 4 million hectares of land registered to foreigners, with something like $3B invested in the last decade. This is a lot of land, and according to Minister Cassel, “I am not a xenophobe but our land is finite. The population grows and demands food.” That's it in a nutshell folks!
The world's richest and most populous nations are tripping over each other to literally buy up as much land as they can to secure food (and fuel) for their citizens. Multinationals, seeing the trend clearly, have also been active. Massive, environmentally unpopular agricultural development, including palm oil plantations, millions of hectares of genetically-modified soy, corn and alfalfa, and the conversion of 'food crops' to agro-fuel crops have begun to spur controversy.
It goes to logic that the countries that are most subject to this 'land grab' are located in places like South America and Africa, where industrialization is less prevalent and arable land is inexpensive.
This is a topic that is somewhat dear to me, but I will avoid sharing the full details herein so as not to alienate either side of the issue. Suffice it to say that we have some very tough choices to make in the next few years. We don't have decades to sort this out, some give and take is going to be necessary if we are going to feed the planet, keep our infrastructure powered up and, in the process not make the place uninhabitable.
You may have heard us talk about farmland as a good investment in these pages before (Lies, Damn Lies and Statistics, August 23rd). In that article we talked very briefly about Argentina's agricultural land prices in relation to India. In a nutshell, agricultural land in South America is pennies when compared to most other jurisdictions.
Appreciation on properly chosen land has been nothing short of spectacular, with a recent study by AgraFNP showing that farmland appreciation in the frontier areas in Brazil's northeast over the last three years has ranged from 54% to 70%. Places like Brazil, Argentina, Paraguay and Uruguay represent some of the most fertile agricultural lands anywhere on the planet.
Investors from China, Japan, South Korea, the US and EU have already laid claim to millions of hectares worldwide. We don't know how governments will respond to this land grab. However, we can tell you how the citizenry views it. During the 2008 crisis there were food riots in several developing countries. In Haiti and Madagascar the governments were overthrown as food prices spiraled perilously out of control. An agitated populace, pitchforks in hand, took matters into their own hands. We have a sneaking suspicion we'll see this happen again, soon.
So how do investors navigate in this environment. One way is to rely on competent advisors to guide your strategy for acquiring foreign agricultural land. Fitzroy McLean is putting the finishing touches on this month's Without Borders, wherein he discusses a 'Vulture Fund' that he is putting together to acquire distressed farmland in Uruguay and perhaps elsewhere.
