Food and agriculture finance: Investors look to plough cash into farmland
Smallholder efficiency key to addressing shortages; Yield gap must be closed
An increasing number of investors are looking at their feet as they cast around for returns in a zero interest rate environment.
Farmland is likely to become a more and more attractive asset class as food scarcity worsens and land becomes a precious commodity.
The amount of arable land per capita available for agriculture globally has more than halved since 1960 and the UN estimates that food production must increase by 70% during the next 40 years to feed the world’s growing population.
How to address the problem of food security is something that Piet Moerland, chairman and chief executive of the Rabobank Group, has devoted considerable time and resources to. Rabobank has long identified itself as a food and agriculture (F&A) specialist, and 55% of the loans it makes outside the Netherlands are to F&A borrowers.
Moerland is positioning the bank to help bridge the gap between local, regional, national and international producers within the global food value chain but is particularly focused on increasing efficiency at the smaller end. The amount of available arable land can only be increased by 15%, so productivity must be improved.
"In addressing the big problems of food scarcity, you need financing coordination across the value chain," he tells Euromoney. "Smallholders are the weak link in the chain. Worldwide, half a billion smallholders produce only what they need. Food scarcity can be tackled only when smallholders become more efficient. It is absolutely necessary for smallholders to be more efficient."
This will be achieved by aggregating smallholders into closely knit producers’ organizations or co-operatives. The logic is that they will subsequently follow a gradual trajectory towards commercial finance. Moerland argues that Rabobank, as a co-operative itself, can connect the top and bottom of the food pyramid.
The yield gap – the gap between average farm yield and estimated potential yield – becomes more important as the quantum of available land disappears. Only Brazil, Argentina and Australia have more than 5 million hectares of suitable land yet to be brought into crop production. And the volume of institutional investment in farmland remains relatively low.
According to Macquarie, the total global value of farmland is $8.4 trillion, while institutional investment in farmland is estimated at around $30 billion to $40 billion. The investable universe of farmland is around $1 trillion. This asset class will likely attract intense interest.
In December, one London-based asset manager, Valiance Asset Management, announced a partnership with Brazil-based SLC Agricola to acquire, transform, lease and sell agricultural properties. Valiance estimates that a 22% annual return is achievable through farmland development in Brazil..
Moerland takes a far more wide-reaching view of the part that financiers have to play in meeting the challenges of food supply. He is passionately committed to Rabobank’s role as not only a financing provider but also a content organizer: assisting farmers in developing countries with co-operatives and better access to financial services, and participating in the value chains of F&A companies with farmers.
Its 35% investment in the National Microfinance Bank of Tanzania in 2005 has served as a template for how this can be achieved. In addition to providing management services and technical assistance, the Dutch lender also established a Foundation for Agricultural Development to provide training and support to local farmers.
Moerland is optimistic that "the business paradigm is currently transcending from a traditional narrow profit orientation towards a more holistic strategy, in which the contribution to environmental sustainability and basic standards for decent living conditions are incorporated into the return on investment".
This will be essential if his aim of bringing efficiency to the smaller end of the value chain can be achieved. Rabobank invited 50 large multinational farming organizations to Utrecht in June to discuss how a more equal distribution of power can be achieved.
"Many of the huge international firms are at the forefront of thinking about sustainability but the problem is lack of available land," he explains. "There is an 85% yield gap on arable land in Africa, so it is in their interests that smallholders become more efficient. They are the essential link in the whole chain."
Agronomists agree that food price rises and substantial deviations from price norms will be the world that we live in for the next couple of decades but Moerland emphasizes that the food-scarcity problem is particularly worrying due to the lack of capacity to absorb food shortages.
"Price spikes are a tough issue," he says. "Until 12 years ago, food price spikes were not an issue but since China’s diet shifted to meat, milk and eggs, the situation has changed.
"If you have a climate-related disaster – such as the five years of floods in Australia – there is a disturbance in supply and demand. This is an issue because there is far less in reserve than there was in the 1990s. For example, there is only 50 days’ supply of grain – less than two months’ worth."
The implications of this are severe. "In 2010, there were bread riots in north Africa," says Moerland. "Price spikes can mean people missing a meal a day and hungry people engage in revolutions."