IWEP | 29 March 2016
Why are foreign investors interested in Kazakhstan’s agricultural sector?
There has been a marked surge of interest of foreign investors in Kazakhstan’s agricultural sector lately. Many large agricultural corporations, especially Italian (Cremonini, Granorolo) and Chinese (Rifa, CITIC, COFCO) have stirred up negotiations regarding the building of full-scale production facilities.
There are several reasons for the interest in the country's agriculture on the part of foreign investors: 1) increasing global demand in food products and fodder; 2) low land lease in Kazakhstan; 3) development of transport infrastructure in Kazakhstan and the region.
Demand for ecologic products
It is predicted that global demand for food will increase by 30 percent by 2030. This could mean higher prices and a corresponding increase of profitability, despite the fact that the agricultural business is considered to be subsidiary even in developed economies. Certainly, agricultural products do not have a high added value like IT or pharmaceuticals. However, the interest of multinational corporations is focused on the long-term "anchor" investments, and thus on the creation of stable economic ties in Kazakhstan, which means the interest in the long-term presence in the market.
Another factor is the growth of the middle class in the developing countries. This directly affects the structure of the consumption of products by increasing the demand for organic products.
In the 20th century the increase in the supply of food products was achieved through artificial increase in crop yield, which made it possible to cover for the needs of the huge masses of the population in the conditions of the limited farmland.
The food culture trends in the 21st century are fundamentally different from those of the last century. With the general increase of welfare in the densely populated countries, consumer preferences are increasingly shifting toward more expensive, organic products, i.e. the products manufactured in the most natural environmentally friendly way. This process has been on for two decades in the developed countries of Europe and North America.
Accessible land lease
In connection with this, there is a question of availability of areas suitable for ecological agricultural business. The problem is that the production top natural products requires considerable expanses of farmland, and the developed countries face the problem of severe shortage thereof. Accordingly, the rent of land there is very high, as well as it is privately owned.
That is the reason a number of large agricultural corporations in Europe and the US with established production technologies and management are in search of stable markets for long-term investment.
The cost of land lease in Kazakhstan is almost as low as in African countries. They (with a few exceptions) are characterized by an adverse socio-political background, which does not promote investments in their agricultural sector. While Kazakhstan compares favorably in this respect as it remains a stable state, strengthening partnerships with its neighbors.
A marked improvement of the transport network in Kazakhstan and its integration with the international supply chain is an important factor in increasing the interest of transnational corporations to the agricultural sector of Kazakhstan. For a long time, geographical remoteness and related overhead costs (travel expenses, etc.) of exporting the finished product were a constraining factor to foreign investment in Kazakhstan.
The rapid growth of infrastructure investments in the transport sector of Kazakhstan, as well as the policy of integration into the international transport network, may give confidence to investors that they will be able reduce costs in the near future.
All these factors provide Kazakhstan with a serious investment attractiveness, which largely explains the intensification of agricultural TNCs in Kazakhstan.
Undoubtedly, the increase in direct foreign investment in the agricultural sector of Kazakhstan is the immediate result of active government policies aimed at attracting the foreign capital. The above factors are also a national competitive advantage, requiring special attention of the state to this sphere.
Despite its vastness, Kazakhstan farmlands differ in their properties (fertility, proximity to transport junctures, access to water, access to the labor force). At the same time, the land market in Kazakhstan is quite liberal, for example, the lease period for foreign companies has increased from 10 to 25 years. This readily explains the interest of foreign investors in the most attractive areas of farmland.
This will probably require new approaches to the procedure of land lease based on land quality (class), taking into account national interests and based on the residence principle.