Exporting Farmland to Feed Global Demand

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The Wall Street Journal | 11 July 2008

By TOM WRIGHT in Jakarta, MARIAM FAM in Cairo and PATRICK BARTA in Bangkok

Emerging nations are trying to cash in on the global food crisis by getting big importers of crops to effectively lease their farmlands -- a new trend that is already sparking complaints from farmers in some countries who are concerned about their own food supplies.

The latest example: a plan by the Indonesian government to develop a Connecticut-sized farming tract on the remote province of Papua to grow rice, sugar cane and soybeans. Promoters of the project have met with Saudi investors in the hopes of receiving hundreds of millions of dollars in return for dedicating part of the crops to the Middle East nation.

Saudi Arabia and other Gulf nations are scouring the globe for agricultural investments to lock in supply of key crops like wheat, corn and rice, much as countries like China have invested billions to secure a steady stream of oil.

There is a big risk in the new trend. Nations such as Indonesia have had to contend with protests at home as food prices have risen this year. The idea of attracting investment in return for exporting politically sensitive crops like rice could stir further discontent and prompt accusations that rich nations are being favored over the domestic market.

That proved a contentious issue last year when leaders in the Philippines announced a series of deals with Chinese investors covering about $5 billion in investments to grow crops including corn, rice and sorghum. Filipino farmers in remote areas have been struggling to feed their families in recent years due to a chronic lack of investment in agriculture, and they balked at the idea of allowing Chinese investors to control land and send food overseas.

The key is to ensure that foreign investments in agriculture also serve the local population. Chinese investors need to develop production "not just for the tables of the Chinese, but also for the tables of the Filipinos," says Sen. Edgardo Angara, chairman of the Philippines Senate's agriculture committee.

The Saudis are also aware of potential backlash. Khalid Zainy, a Saudi businessman who is involved in his country's efforts to look for agricultural investments, says that farm deals with foreign governments will likely allocate a percentage of crops for sale in the local market. "This is to ensure that these projects will go uninterrupted and so that the countries and the people there don't cause us problems," he says.

Such deals are likely to spring up in the next few years. Investors from China, which imports huge amounts of soybeans and crude palm oil, are purchasing farm land in Africa and Southeast Asia. South Korea, too, is considering investing in a 270,000-hectare farm project in eastern Mongolia.

As world food prices have risen, Saudi Arabia's food import bill has grown by an average 19% annually over the past four years to $12 billion in 2007, making it the Middle East's largest food importer, according to a recent study by Saudi bank SABB.

Saudi officials are looking at setting up an investment vehicle -- a partnership between the government and private sector -- to search for agricultural projects in nations with large tracts of fertile land. Saudi investors are also eyeing agriculture projects in the Philippines, Senegal and Sudan.

Supporters of such deals say an influx of capital and technical know-how into places like Africa and Southeast Asia where agricultural yields are relatively low could help boost production and benefit the entire local agricultural industry beyond the production that goes overseas.

Abdul Rahim Hamdi, Sudan's former finance minister and a member of a government body promoting investments there, says foreign investment in farming creates jobs and boosts local supplies of food even if most of the crop is exported. "In Sudan, we have no worries about having these projects export crops overseas," he says. "I don't see this bothering people at home."

Still, as Indonesia's recent experiences show, exporting food while at the same time making sure enough is left for the domestic market can be a tricky balancing act.

Earlier this year, protests erupted in Jakarta over shortages of cooking oil. Indonesia is the world's largest producer of crude palm oil, used to make cooking oil, but companies prefer to sell most of their output abroad, where prices are higher than in the domestic market. The government responded to the protests by slapping high tariffs on palm-oil exports.

Even if Indonesia and other countries can get that balance right, it will take years and large investments before projects in remote areas like Papua get off the ground.

Papua, on the western half of the island of New Guinea, is the size of California yet has only 2.5 million inhabitants. The province is one of Indonesia's poorest, with few roads, and travel is largely by boat or airplane.

Last year, the local government in Merauke, a low-lying, swampy district on the southern coast of Papua, came up with a plan to make the sparsely populated area a food-production hub. In recent years, Indonesia has become a net importer of rice due to lack of investment and a loss of agricultural land to urbanization on its main island of Java. Officials in Merauke hoped to fill the gap.

As food prices rose earlier this year, Medco Group, an Indonesian conglomerate with oil and gas interests, offered to financially back Merauke's plan and help find foreign investors. In addition to crops, Medco proposed also setting up ethanol production facilities.

In April, Medco executives promoted the idea in a meeting with Indonesian President Susilo Bambang Yudhoyono. Medco proposed that the central government, which has the final say on land use, allocate at least one million hectares in Merauke to produce sugar cane, sweet sorghum, rice, soybeans and maize. The Merauke government wants the central government to set aside a total of 1.6 million hectares.

Mr. Yudhoyono promised to market the plan with overseas investors. Although officials have yet to put a dollar figure on the investment needed, it will clearly be a massive undertaking: 2,200 kilometers of roads, three ports, 400 kilometers of irrigation systems and a 500 megawatt power plant are all on the drawing board.

An official Indonesian delegation held meetings last month in the Middle East with Saudi investors, including Mr. Zainy. He confirmed talks with the Indonesian side but says they have yet to finalize any agreement.

Indonesia's agriculture ministry estimates the project could boost domestic rice production by six million metric tons per year. (Total output for 2008 is estimated at 33 million tons, all of which is consumed domestically.) In the future, local needs will be met before any rice is exported, says Hilman Manan, director general of the ministry's land and water management division. "Indonesia must come first."

Others say the project could wreak havoc on the environment, including the destruction of Merauke's pristine eucalyptus forests. The region's swamps also store huge amounts of carbon dioxide; drainage for agricultural purposes is likely to lead to large emissions of CO2, the heat-trapping greenhouse gas, environmentalists say.

Getting Papuans to agree to the project may not be easy, either. Most Papuans still rely on forests to hunt wild animals and have tribal claims to the land which often overlap with Indonesian law. Medco is proposing Indonesia follow policies implemented in Brazil, where long land leases are recognized by law and individual owners benefit from agricultural investments through profit-sharing arrangements.

Unless the plan for Papua raises local living standards -- about 40% of people in the province live on less than $14 a day -- it will likely be a failure, says Rizal Ramli, a former Indonesian economics minister. "From the business model it looks realistic," Mr. Ramli says. "But the key is how can Papuans benefit from this investment.

Original source: Wall Street Journal
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