Wednesday, August 17, 2011

Water: The hidden agenda in farm land investments

Commodity Online
Jim Rogers, co-founder of the Quantum Fund recently told Investment U that agriculture prices on a historic basis are still depressed and that is where he sees the next opportunity.


Yes, Jim Rogers is betting on agriculture. But read this too: dating back from 1970, there have at least been four price jumps to the tune of 100% which was followed by thorough declines in the S&P agri-commodity index!


Not everybody is a Jim Rogers! So, investors are betting big on farmlands these days, a safer-than-agricommodities-bet.


The farmlands provide a respite from cyclical price swings of the commodities market. Average value of an acre of farm land tracked by USDA featured mostly a steady climb from $737 in 1980 to $2,350 in 2011, says Bloomberg.


According to Jeremy Bentham, farmland and forestry would outperform all global assets long-term.


“Farmland is the lowest-risk part of the value chain, but it’s also a key part of production,” says Jose Minaya, TIAA- CREF’s head of natural resources and infrastructure investments to Bloomberg.


In fact, hedge-fund manager Stephen Diggle calls farming the ultimate safe haven.‘After all, you cannot eat gold’, he says.


Leasing farm lands


Of course, the farmland frenzy is fuelling so-called land-grabs in Africa and other parts of the world.


“Foreign governments have dipped their toes into African and South American land markets in the hope of securing long-term food supplies…” says an ABN Amro World Agronomy Report.


In several cases the lands were leased:


In eight African countries recently studied, lease terms varied from 20 to 50 years, with renewals often possible up to 99 years. The FAO report on the matter noted: “Most leases involved payment of an annual rental of from less than $2/ha in Ethiopia to $5/ha in Liberia through to $13.8/ha in Cameroon.”


Many business houses, especially from India and China are occupying land at cheap prices in many parts of the world, especially in impoverished African countries.


Water scarcity and farm land buying


There are arguments that water scarcity is propelling certain investors towards land with water surplus.


“It is a particular issue for countries such as China and the Gulf states where water resources are particularly limited. As with land deals in general, little evidence exists which document the rights gained by investors over water. But the evidence which exists indicates that small-scale farmers may suffer greatly. For instance Bues (2011) demonstrated how in Ethiopia, the distribution of water rights within an irrigation scheme changed in favour of the land acquirer and against local farmers, due to the greater bargaining power and resources of the former.” The FAO report notes.


The report predicts:


“Contentious water issues will not disappear and are likely to intensify due to changes in climate. This will further propel and increase the need for investment. As a result, awareness of water issues is paramount and because acquiring water rights is such a key issue in investment projects, they will invariably impact on water management for many inhabitants both up and downstream. This is certainly illustrated in one major land and water deal in Mozambique...”


Hence negotiation of water rights is a question of vital importance in farm land contract negotiations, the agency notes.

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